The last few years of the global recession compelled European companies to find newer, more innovative ways to continue to substantially reduce their supply chain costs. As a result, many companies have adopted a strategic focus designed to better align supply chain costs with customer service demands. Subsequently, customer segmentation has come into the limelight, playing a major role in distinguishing different customer requirements (e.g., cost-effective, flexible, short lead time, etc.) to then define supply chain networks efficiently around the different segments.
To better understand the impact of various global and regional trends on supply chain networks' cost efficiency and long-term resiliency, Chainalytics brought together senior European supply chain executives for a dynamic roundtable discussion. On the agenda: The results of a recent Chainalytics' study of European supply chains, which shows that supply chain and distribution costs vary significantly by product type and industry. (Figure 1)
Figure 1: Cost drivers vary by industry
Below, we explore how these main cost drivers (inventory, logistic facility, inbound transportation and outbound transportation) can influence and affect each other.
- Manufacturing lot size. Typically manufacturing likes to increase the lot size to reduce set-up/change-over times and waste. The trade-off? This activity results in high-cycle stocks.
- Demand variability. In the case of high-demand variability, the finished goods inventory (in a make-to-stock environment) or components/raw materials (in make-to-order environment) will be higher due to high safety stock levels to offset the uncertainty.
- Product proliferation. When a company's product portfolio grows (for example, due to more demanding customers requesting customized products), inventory increases due to higher product level variability. In an environment with constantly expanding product portfolios, it is crucial to review and optimize the customer order decoupling point as well as instituting a formal product portfolio management process.
- Replenishment lead time. A longer lead-time for stock replenishment typically increases the volume of pipeline stocks. One trend impacting this trade-off is that weaker emerging market currencies are driving up imports, resulting in longer inbound supply chains.
As the group of supply executives discussed during the roundtable, all the above trade-offs are impacted by the interest rate and weighted average cost of capital (WACC) applied. As the interest rate is currently at a very low level, the aforementioned trade-offs are skewed in favor of towards holding more inventory. However, other factors like obsolescence costs and reducing product lifecycles will bend the trade-off toward holding less stock.
Logistics facility costs
Within logistics facility costs, Chainalytics distinguishes between fixed costs (e.g., fixed assets) and variable costs (e.g., labor force). The following trade-off factors impact these facility costs.
- Level of automation. Global revenue for warehouse robots is projected to show a steady increase over the coming years (Figure 2). As the costs of "cobots," (i.e., human-assist robotics) quickly decline, the technology will lower the entry point for automating some distribution centers and warehousing activities, reducing logistics facility costs as a result. Note that the current low interest rate environment facilitates greater capital investment as well.
Figure 2: Increased level of automation
- Industrial real estate rental costs. Real estate costs differ strongly across the European countries as the data provided by CBRE shows below. (Figure 3)
Figure 3: Prime industrial rents in Europe
- Labor costs.European labor costs are projected to increase, due to a shrinking workforce as a consequence of aging population and low birth rate. Still there are large differences on labor costs between the different European countries (Figure4)
Figure 4: Annual Labor cost per European country (USD)
- Off-shoring versus reshoring/near-shoring. As labor costs and quality standards in China increase dramatically, more and more companies are deciding whether to reshore/near shore. As a consequence the inbound transportation costs reduce when shortening the distance.
- AVT and fuel costs. Automated vehicle technology (AVT) will reduce over-the-road costs and further enable long-haul transportation. This combined with the very low fuel prices also naturally result in lower overall transportation costs.
- Currency difference. Weaker emerging market currencies can drive up imports resulting in longer inbound supply chains and higher transportation costs.
Outbound transportation costs
- Changing consumer preferences and technology: Consumers want more convenience (e.g., in-home delivery) and are turning to ecommerce to do more and more online shopping. These smaller, more frequent orders reduce required lot sizes and increasing the quantity and frequency of shipments.
- Fuel Costs. Very low fuel prices can lower transportation costs if contract allows.
As we continue to find ways to reduce supply chain costs, consider that these decisions should not be made in a siloed manor. Every strategic decision made in one area will inevitably have a trade-off or chain reaction to another area in different ways. Global and European supply chain network success rests on balancing cost reduction initiatives with complex supply chain network trade-offs—from inventory management to transportation costs—and making those trade-offs and their ripple effects transparent.