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Transportation Cost Reduction in Supply Chain Management

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Companies looking to improve efficiency and reduce costs can gain significant ground in the Supply Chain Management function by incorporating Lean Management and Six Sigma techniques.

Reason this area has gone under the radar is that companies do not consider Supply Chain to be their core competency.

Not only Warehousing but Transportation also has almost the same potential in terms of opportunities for Cost Reduction and Process Improvement.  The approach to Transportation Costs Reduction, though, is different to that of Supply Chain Cost Reduction in Warehousing.  This is in part due to the complexity in Transportation Costs, as the costs come from numerous widely distributed individual operations every year.

The approach to Supply Chain Cost Reduction in Transportation encompasses 2 phases:

  1. Understand the Baseline
  2. Identify and Implement Opportunities

Let us delve a little deeper into the 2 phases.

1. Understand the Baseline

Improvement in Transportation operations is hindered, in most cases, by enormous variability in operations, diverse service levels being demanded by various customers, and a multitude of transport providers delivering services in a variety of ways.

Transportation Costs of between 20-30% can be saved by compiling a complete perspective of the overall Transportation operations of an organization.  The evaluation will also reveal essential service categories that have a skewed effect on Cost.

2. Identify and Implement Opportunities

Identification of the Cost Drivers is imperative for the companies to develop a systematic approach to Transportation Cost Reduction.  This systematic approach involves observing 4 main levers of Cost Optimization opportunities:

  1. Compliance with Contracted Price
  2. Negotiated Price
  3. Contract Terms
  4. Customer Breakpoints and Behavioral Changes

The 4 levers of Cost Reductions help in countering the issues impacting Transportation Costs and enabling significant savings.

Significant Cost Reductions can be gained by identifying mutual benefits and risks for both companies and suppliers in addition to understanding customer breakpoints that enable Customer Centric Design.

Let us consider a few instances where Cost Reduction can have a quick impact.

  • Companies, often, have to pay substantial fuel surcharges for waiting time or late payments—caused by variance in actual delivery patterns and the delivery pattern specified in the contract.
  • Suppliers usually charge a higher rate to compensate for inefficiencies in their operational structure. Understanding those inefficiencies helps identify significant savings potential.
  • Logistics Service Providers either increase their rates or add fuel surcharges in order to protect themselves from the effect of fluctuating fuel prices. A fixed rate benefits the customer when fuel prices go up, but creates needless high fuel bills when prices are down.
  • Ordering habits of certain customers add to the Transportation Costs. For example, unknowingly ordering early next-day deliveries, without an absolute necessity for it, causes significant (20% in some cases) extra cost than a delivery at noon.  A 24-hour delivery time costs even less than the noon delivery.

Interested in learning more about the phases and cost drivers of Supply Chain Cost Reduction in Transportation?  You can download an editable PowerPoint on Supply Chain Cost Reduction: Transportation here on the Flevy documents marketplace. 

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Supply Chain Management (SCM) is the design, planning, execution, control, and monitoring of Supply Chain activities.  It also captures the management of the flow of goods and services.

In February of 2020, COVID-19 disrupted—and in many cases halted—global Supply Chains, revealing just how fragile they have become.  By April, many countries experienced declines of over 40% in domestic and international trade.

COVID-19 has likewise changed how Supply Chain Executives approach and think about SCM. In the pre-COVID-19 era of globalization, the objective was to be Lean and Cost-effective. In the post-COVID-19 world, companies must now focus on making their Supply Chains Resilient, Agile, and Smart.  Additional trends include Digitization, Sustainability, and Manufacturing Reshoring.

Learn about our Supply Chain Management (SCM) Best Practice Frameworks here.

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Integrated Cost Management: An Organization’s Prescription for Lower Cost

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There is a general belief among organizations that a large percentage of a product’s costs are locked in by design.  It is assumed that little can be done once the pic1 Integrated Cost Managementdesign is set.  This assumption has influenced cost management programs across diverse products’ life cycles. As a result, the focus during the design phase is Cost Reduction and Cost Containment during the manufacturing phase.

Yet, organizations that operated in a highly competitive market and demanded aggressive cost management showed that costs can be aggressively managed throughout the product life cycle.  Various cost management strategies or techniques may be used to increase the program’s overall effectiveness. One of them is the Integrated Cost Management.

A Purview on Integrated Cost Management

Integrated Cost Management is every organization’s prescription for lower cost and higher profits. It is the 21st business approach to achieving Cost Management efficiency.

Integration is necessary for Strategy Development as it can promote the achievement of the company’s profit objectives. In fact, there are major benefits to Integrated Cost Management. One of which is lowering of overall costs throughout the product life cycle.

Integrated Cost Management can facilitate a steady decrease in costs all the way to discontinuance.  In fact, it can result in an annual cost reduction of about 17% during manufacturing, savings that exceed 30$%, and a designed-in cost of below 70%.

Achieving this requires an understanding of the Integrated Cost Management Approach.

The Integrated Cost Management Approach

The Integrated Cost Management Approach focuses on the integration of cost management techniques which can lead to higher levels of cost reduction and superior overall performance.

The Integrated Cost Management Approach takes into consideration 5 Cost Management Strategies.

  1. Target Costing. This is the technique used or applied during the design stage.  It is a feed-forward mechanism that enables the retooling of the design of new products to reduce costs while maintaining the desired level of product functionality and quality.
  1. Product-Specific Kaizen Costing. This is a technique that enables the rapid redesign of a new product during the early stages of manufacturing to correct any cost overruns.  (Note: Kaizen is the general term for Continuous Improvement and often associated with Lean Management.)
  1. General Kaizen Costing. General Kaizen Costing is a technique that focuses on the way a product is manufactured with the assumption that the product’s design is already set. It is generally effective in addressing manufacturing processes that are used across several product generations.
  1. Functional Group Management. This is a technique that is used to break down the production process into autonomous groups and treat each as a profit center.
  1. Product Costing. Product Costing is a technique that coordinates the efforts of the other four (4) techniques by providing important, up-to-date information.

The 5 Cost Management Strategies enable organizations to better manage costs throughout the product life cycle, with just one (1) technique taking place during the product design and the rest during manufacturing.

The Key Takeaways

The application of the 5 Cost Management strategies has its key takeaways. These can be used as a guidepost in its application and a model of general concepts that organizations may consider.

One key takeaway is significant savings can still be achieved with short life cycle products and aggressive cost management focused on product design.   Taking to note this key takeaway, we have to consider that as the length of the manufacturing phase of the product’s life cycle increases, the opportunity for cost reduction increases.  Further, there is a need to explore the value of integrating multiple cost management during manufacturing.

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When Physical Office Becomes Passe, Are We Ready for Virtual Teams?

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Richard Branson, British business and philanthropist once said: “One day, offices will be a thing of the past.”pic 1 Virtual Teams Challenges & Benefits

While organizations still need to travel to reach their physical offices, the rapid changes in the world are requiring business

Virtual Teams work well for an organization and is effective even from a communication perspective. In fact, it is known to complement well the Lean Management approach used by organizations. Studies from previous years have shown that well-managed, widely spread, Virtual Teams have been outperforming those that share office space. In fact, it has shown that using Virtual Teams can improve employee productivity by 45%.es to form Virtual Teams. A Virtual Team refers to a group of individuals who work together from different geographic locations and rely on communication technology such as email, voice conferencing services, fax, etc.

In today’s highly competitive global economy, to be able to work smarter, organizations must be able to leverage the manifold benefits of a remote workforce. Likewise, organizations must also be able to manage challenges that come with working with Virtual Teams.

The 4 Core Challenges of Going Virtual

More organizations are opting to work with virtual teams. Virtual teams may have their benefits but it also has its challenges. Being able to manage these challenges will enable organizations to seize the benefits of remote workers.


There are 4 core challenges that organizations face when working with Virtual Teams. Let us take a look at the 2 core challenges.

  1. Virtual Communication. Having different time zones can be a challenge. This can lead to layers of complexity to the logistics of everyday communication. When time zones do not match, it can lead to less and less information being transmitted and can cause miscommunication. When working in a different time zone, there is a tendency to exchange information using email or instant messaging. But these may not be enough as it cannot convey as much meaning compared to vocal tone, facial expression, and physical gestures.
  1. Virtual Project Management. When working with virtual teams, the business must have a proper system and people in place. Virtual Project Management may cause some confusion and even delays. While digital tools are in place to facilitate remote project management and collaboration, it can be difficult at times to tell what each person is contributing. In fact, organizations need to put up a system to track whether the members of the virtual team are doing their required tasks.

In this digital era, Virtual Teams are becoming the new face of business operation and aligning itself with Digital Transformation. This is a global reality that businesses must accept. However, working with Virtual Teams brings a lot of challenges not only in Project Management and Virtual Communication but also in Talent Development and Technology Support. Talent Development and Technology Support are two other core challenges that can make an impact on the Virtual Team. How it is managed will define the success of your Virtual Team.

In hindsight, Virtual Teams can also bring so many benefits. Hence, it is not surprising that despite the challenges, a lot of businesses still prefer to work with Virtual Teams.

One core benefit is increased access to top talent. The world has become a global market for expertise and talents. Businesses can extend their reach to other countries in their search for needed expertise. In fact, working with virtual teams will open opportunities for businesses to work with experts in various fields with various experiences. Being able to employ the best and the brightest is more than enough for businesses to continue working with Virtual Teams and conquering challenges. Businesses just need to have appropriate support programs to give Virtual Teams a home-field advantage.

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Making it Right the First Time: The Road to Operating Model Transformation

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Lean Management plays a significant role in putting in place processes, capabilities, and tools to improve how businesses operate. But, the pic 1 Digital TransformationDigital Age has increased both the opportunities for businesses who know how to react and the difficulty of getting it right.

Tasks performed by humans are now more complex be it accessing information in multiple formats from multiple sources or responding to changing market and customer dynamics at an ever-increasing speed. As an increasing number of tasks become automated or taken over by cognitive-intelligence capabilities, companies need to learn from lean management. Like a sprinter who needs all her muscles to be finely tuned and working in concert to reach top speeds, fast-moving institutions must have a system to continually synchronize strategies, activities, performance, and health.

Many organizations understand the need to change how they work and have embarked on numerous initiatives, yet few have been able to get beyond isolated success cases or marginal benefits. Most companies recognize the need for a Next-gen Operating Model to drive their business forward their Digital Transformation initiatives. But, how they develop it makes a big difference.

The Next-gen Operating Model

There are 4 core pillars of a Next-gen Operating Model. Putting these in place will ensure its successful implementation.

pic 2 Digital Transformation

  1. Autonomous, Cross-functional Teams. The first pillar is focused on empowering the team to own products, services, or journeys. Having autonomous, cross-functional teams, organizations can become nimble in building skills across their teams. They make anchor hires for key roles, set up rotational and train the trainer programs, and commit to ongoing capability building and training for key roles.
  1. Flexible, Modular Platform. The second pillar is focused o supporting a faster deployment of products and services. Having Flexible, Modular Platforms will enable technology teams to better collaborate with business leaders in assessing which systems need to move faster.
  1. Connected Management System. The third pillar focuses on driving a culture of continuous improvement that cemented on customer needs. A Connected Management System will ensure that Management systems are evolving to create feedback mechanisms with and between various operations and teams.
  1. Agile, Customer-centric Culture. The fourth pillar is focused on speed and execution over perfection. Having an Agile, Customer-centric Culture is critical to success. It leads the change from the top and builds new ways of working across organizational boundaries. When functions and teams collaborate, effective time to market to reduced as well as operational risk.

The path to building up the Next-gen Operating Model follows well-defined approaches to guide organizations. These approaches will be every organization’s guide to operating model transformation during the first 12 months.

Following the 4 Critical Approaches to Operating Model Transformation

The 4 critical Approaches to Operating Model Transformation works well when there is a broad and top-down organizational mandate for change. Before anything else, organizations must make sure that the change mandate is in place so that the entire organization is aligned with the proposed change.

One of the 4 Critical Approaches is the Innovation Lab. The Innovation Lab is a dedicated unit set up to be entirely separate from the historical culture, decision-making bureaucracy, and technical infrastructure of the main business. It hatches new business models in an informal setting. It is best used when there is a need to move very quickly in response to market pressures.

Mastering these various approaches will enable organizations to better go through the Operating Model Transformation in the most effective way to achieve Operational Excellence.

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Are You Interested In Transforming Your Traditional Warehouse into a Lean Warehouse?

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Warehouse 3As the last decisive step in customer service, a warehouse ensures cost effective distribution.  Latest technological innovation has turned warehousing into a competitive advantage.  It offers untapped potential for improvement. However, warehousing is a hugely neglected part of global supply chains.  There is inconsistency in picking, packing and shipping orders, storing receipts, and managing inventory and logistics operations.

These and the following roadblocks in the way of smooth warehousing operations and Lean Management exist in every traditional warehouse:

  • Lack of focus on acquiring technology to facilitate in improving efficiency and quality.
  • Inability to utilize a structured approach to ascertain the reasons for poor performance.
  • Lack of a big picture viewpoint pertaining to processes, costs, or external supply chain partnerships.
  • Absence of a continuous improvement culture to achieve warehouse operations excellence.
  • Lack of communication, organization, and proper training of resources.

These shortcomings call for implementing Lean Warehousing methodology to unlock improvement opportunities and savings in operational, efficiency, and maintenance related costs.  First initiated by Toyota, the Lean Warehousing approach has a deep emphasis on eliminating 3 basic limitations: waste, variability, and inflexibility. The Lean Warehousing methodology focuses on the following 3 improvement areas:

  1. Cost Reduction
  2. Customer Quality
  3. Service Levels

Cost Reduction

The Lean Warehousing methodology concentrates on increasing productivity and reducing operating costs.  This is achieved by:

  • Cutting undue walking and searching
  • Preventing needless replenishment, reworks, waiting times, and double handling
  • Upgrading demand and capacity planning and manpower allocation

Customer Quality

A Lean Warehouse seeks to take the customer quality to the next level by avoiding:

  • Order deviations
  • Picking errors
  • Damaged goods

Service Levels

Improving service levels is at the center of a Lean Warehousing methodology, which involves:

  • Reducing lead times
  • Enhancing on-shelf availability

Lean Warehousing Transformation

Lean Warehousing Transformation entails streamlining operations to identify waste, know how to increase service levels, implement standardization and innovative ideas, and learn to evaluate and manage performance.  Such transformation becomes a reality in an experiential learning environment and by developing organizational capabilities in 3 critical areas:

  1. Operating System
  2. Management Infrastructure
  3. Mindset and Behaviors

Operating System

The organizational capability to configure and optimize all company physical assets and resources to create value and minimize losses.  The focus areas under operating systems include eradicating variability, encouraging flexibility, and promoting end-to-end design.

Management Infrastructure                                                                   

The organizational capability to strengthen formal structures, processes, and systems necessary to manage the operating system to achieve business goals.  The focus areas under Management Infrastructure are performance management, organizational design, capability building, and functional support process.

Mindset and Behaviors

The organizational capability to manage the way people think, feel, and act in the workplace individually as well as collectively.  The target areas to focus on here include a compelling purpose, collaborative execution, up-to-date skills, drive to improve, and committed leadership.

Model Warehouse Implementation

Lean Warehousing Transformation necessitates developing a “Model Warehouse,” which presents facilities for supply chain people to practically experience state-of-the-art warehouse operations in a modern warehouse and shop-floor environment.  The Model Warehouse incorporates newest technology and systems, and offers real-life conditions for building capabilities—i.e., optimization of storage, pick and pack, and dispatch processes.  Newest technologies—e.g., Smart Glasses and HoloLenses—available at the facility help improve the performance of pickers significantly and execute multi-order picking efficiently.

Such a setting allows people to observe and analyze the performance of an exemplary warehouse and implement this knowledge at their own premises.  Leading organizations organize a week-long rigorous knowledge sharing workshop—in an experiential learning environment of a Model Warehouse—for their people to have a hands-on experience to learn Lean Warehousing, actual picking, packing, root cause analysis, and performance management.  The participants of the Model Warehouse Knowledge Sharing Workshop are excellent candidates for “change agents” to implement Lean Transformation.

Interested in learning more about Lean Warehousing, Model Warehouse Implementation, and Lean Warehousing Transformation?  You can download an editable PowerPoint on Lean Warehousing Transformation here on the Flevy documents marketplace.

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Introducing Operational Excellence Frameworks

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This week, LearnPPT added a new section to their site: Operational Excellence.

What exactly is Operational Excellence?

Operational Excellence is a set of business principles, tools, and frameworks aimed to achieving sustainable improvement of key performance metrics. Much of this management philosophy is based on continuous improvement methodologies, such as Lean Management (or Lean Enterprise), Six Sigma, Kaizen, Hoshin Kanri, 5S Workplace Productivity, and PDCA. The focus of Operational Excellence goes beyond the traditional event-based model of improvement toward a long-term change in organizational culture.

The page is currently divided into 4 main sections:

Questions, thoughts, concerns?  Go to my site (learnppt.com) and shoot me an email.

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