Digging In

With the economy in the pits, companies are leaving no stone unturned in their efforts to cut supply-chain costs.

Welch Foods Inc., a $700 million Concord, Massachusetts-based cooperative that produces fruit juices and jellies, tackled the burgeoning cost of shipping its goods by investing in transportation and logistics reporting software (from Oco Inc.). The software pulls together data from three existing software systems the company uses to create a data warehouse yielding reams of real-time information about customer orders and shipping patterns. Implemented in six weeks and brought online earlier this year, the new system has allowed the company to load and route outbound trucks more efficiently, says Bill Coyne, Welch’s director of purchasing and logistics. “We’ve probably identified several hundred thousand dollars in savings already,” he says, “and we are still gaining additional insights into our structure.”

Companies can also reduce their shipping costs, says Steve Crowther, CFO of Transplace Inc., a privately held third-party logistics provider in Plano, Texas, by negotiating lower core hauling rates with trucking companies that have seen business slow with the economic downturn, and by encouraging their own drivers to drive more conservatively. The typical long-haul driver logs about 120,000 miles a year, and by some estimates a driver could save about $100,000 over that period by going easier on the accelerator and adopting other conservative driving techniques.

Rethinking Everything

Companies need to be more creative in looking for ways to streamline supply chains, says Frank Burkitt, head of supply chain and operations service for Deloitte Consulting. For example, his firm is working with a number of companies that are developing differing tiers of service for customers based on their profitability, which can translate into holding less inventory for less-profitable customers. Other companies are rethinking their product lines, jettisoning slow-moving items that add costs not only in the form of additional inventory but also production capacity, which can negatively affect order-to-fulfillment cycles for more-profitable products.

Some companies are rethinking the conventional view that producing goods in low-wage countries is preferable to producing them in the developed markets where customers buy them. In some industries, Burkitt says, shipping costs from China now exceed the cost of the goods being shipped. Some experts believe this will give further impetus to the “reverse outsourcing” trend, in which jobs (mostly in manufacturing) return to the businesses’ home countries. In other cases, such as with automakers, companies may build factories closer to customers; witness Toyota’s recent decision to begin building Prius hybrids in the United States.

Amid all the cost-cutting activities aimed at streamlining the supply chain, companies must be careful, of course, that they don’t jeopardize their ability to deliver the goods and services customers want when they want them. The finance function can assist in that effort by helping operating personnel analyze the trade-offs that supply-chain decisions present. “That risk-management expertise is exactly where our finance function comes in, and it helps me in my operational role,” says Dow’s Zavitz. “They help me understand the longer-term risks and opportunities associated with supply-chain management.”

Alfred Lin, CFO and COO for Zappos.com Inc., an $840 million online retailer of shoes and other goods based in Henderson, Nevada, says CFOs and finance organizations can also help by setting targets for supply-chain improvements and by demonstrating that those targets are achievable, whether through traditional analysis or by benchmarking against best-practice competitors. Or, put another way, it’s time for CFOs to acknowledge that they are, in fact, critical links in their companies’ supply chains.

Randy Myers is a contributing editor of CFO.


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