Make no mistake: companies are still enthusiastically implementing supply chain cost-reduction strategies. After all, at least half of many companies’ costs typically reside in the cost of goods sold (COGS). Yet most are seeing little sustainable impact on their bottom lines.
Companies across industries are stuck in a downward spiral with respect to supply chain cost reduction. They constantly try to eke out 3% to 4% reductions year after year, but often they see minimal or no change in their COGS-to-revenue ratios over time. The challenge is so dire that only one-third of operations executives say they see the results of cost-reduction initiatives in their P&L statements.
Supply chain leaders may be delivering single-digit savings in some cost categories only to find costs ballooning elsewhere. And yet, companies continue to chase incremental savings when they could be radically adjusting their cost curves, while boosting performance across the supply chain and creating new value to fuel sustained growth along the way.
Companies can find a way to break this costly cycle by applying zero-based principles across their supply chain (“zero-based supply chain” or ZBSC) and integrating this approach with their continuous improvement programs. This strategy is one core pillar of a more holistic form of zero-based budgeting that we’ve termed “ZBx” (or zero-based mindset) — an organization-wide approach to profitability that enables companies to gain forensic visibility into spend and constantly funnel savings back into growth initiatives.
While zero-based budgeting is usually associated with tense corporate shakeups, ZBx encourages integrating zero-based financial planning into routine organizational processes and ongoing operations instead of ad-hoc spikes of restructuring. ZBx isn’t just about seeing fragile companies through times of disruption and change; it’s meant to engage companies in a proactive exercise aimed at optimizing costs and spending on a continuous basis to bolster growth and strength.
ZBSC enables companies to reduce COGS and dramatically shift supply chain cost curves. Analysis by Accenture Strategy found that ZBSC approaches can drive rapid COGS savings of 5% to 10% and a COGS-to-revenue ratio of up to 600 to 800 basis points over time.
Traditional supply chain cost-optimization methods rely on past performance or even first-quartile benchmarks. Instead, ZBSC marks a sustainable reset of a company’s cost baseline. It accounts for change and improvements of top performers and technology to determine “should costs” and develops a path to realize them.
With ZBSC, companies create visibility and optimize price and performance, allowing them to break internal, functional, and geographical barriers as well as apply digital technologies and sustainability practices that drive future shifts in performance.
ZBSC starts with an analysis of what the company’s costs should be, rather than relying on incremental reductions based on current cost performance. It highlights cost-reduction opportunities across three levers: price, performance, and value engineering. It leverages internal, external, and future technology opportunities while optimizing product value and minimizing service complexity.
This new visibility into the supply chain baseline is then used to build a forward-looking view into future supply chain capabilities and costs, with bold new approaches and levers to cost reduction and targets that can help meet or exceed industry-leading performance. Companies can start with these fundamentals:
- Create true visibility. Leverage financial and operational data to achieve visibility at a granular level to understand the current state against internal and external practices.
- Focus on the intersections. Identify and target opportunities at intersections of the business where best practices and emerging trends are often hidden.
- Stretch past incremental improvements. Embrace technology, analytics, and sustainability opportunities to set zero quartile goals and future-proof the supply chain.
- Embed a change mentality. Drive support from the top all the way through the organization.
Take the case of a global products company that recently adopted ZBSC while under cost pressure. The company expanded existing zero-based principles to COGS, with an initial focus on logistics. It broke down barriers across business units and regions for granular visibility into cost and operational performance across transport and warehouse operations. Automation and predictive analytics then helped the company reset targets. In the first 12 months, the organization identified a cost-reduction opportunity of more than 20% across the network, and captured 12%.
Companies cannot afford the ad-hoc supply chain trade-offs of years past. For too many, cost optimization, technology growth, and sustainability have been mutually exclusive. ZBSC is a starting point to harmonize these goals.
Looking ahead into 2018 and beyond, ZBSC marks a new way to deliver superior supply chain performance at the right cost, while fueling growth and increasing agility in an increasingly competitive and crowded business landscape.
Andrew Corr is managing director for Accenture Strategy, supply chain & operations strategy.