In these uncertain times, with many economic challenges ahead, the need to contain costs across the business is as strong as ever. As the world emerges from the economic downturn, there are worrying signs that input costs, particularly raw materials, are on the rise again. Against this backdrop, the search for cost reduction opportunities is intensifying.

By Martin Christopher

The problem of containing costs in the supply chain is that, after many previous programmes to ‘lean down’ the business, there are fewer low hanging fruit left.

However, there still remains one last major opportunity to take out costs – not from inside the business per se, but rather from the interfaces with other partners in the supply chain. The rationale behind this assertion is that for most of their existence, firms have focused on seeking internal efficiency improvements and have often failed to recognise the significant layer of cost that exists at supply chain interfaces – a cost that is there because those interfaces have not been well managed in the past.

Supply chains compete, not companies

It has often been the case that relationships with suppliers, and even customers, have been at best at arms-length and at worst adversarial. It is still the case today that some companies will seek to achieve cost reductions or profit improvement at the expense of their supply chain partners. Companies such as these do not realise that simply transferring costs upstream or downstream does not make them any more competitive.

The reason for this is that ultimately all costs will make their way to the final marketplace to be reflected in the price paid by the end user. Smart companies recognise the fallacy of this conventional approach and instead seek to make the supply chain as a whole more competitive through the value that it creates and the costs that it reduces overall. They have realised that the real competition is not company against company but rather supply chain against supply chain.

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