Shortsighted cost cutting may be doing untold damage to the future well-being of your supply chain.
As newspaper headlines attest, the U.S. economy's productivity figures over the past couple of years have been phenomenal. The increase in productivity has come despite reductions in the work force and capital spending and record low levels of inventory. Some of the productivity gains have come at the expense of supply chains supporting the manufacturing and service sectors. The squeeze has been felt across the board — from supply chain technology vendors to manufacturing firms and logistics companies.
In keeping with the times, some supply chain management (SCM) technology vendors have simplified and streamlined their features to showcase "spend management," which seems to be a euphemism for cost cutting and budget control. Although cost cutting across the board was long overdue after the profligate spending of the late 1990s, I fear that the pendulum now has swung too far the other way.
Preparing for Marathons
I've written numerous columns reiterating the point that enterprisewide supply chain technology initiatives should be like marathons: Companies need to prepare for the long haul. Companies seeking to gain strategic advantage from supply chain technology initiatives need to spend time on re-engineering business processes — reducing the delivery and manufacture cycle times while increasing customer choice and convenience — to span not only internal departments but supply-chain partners. Supply-chain technology initiatives rarely succeed unless these business processes have been re-engineered first.
Over the past few years, however, these fundamental drivers of supply chain initiatives have given way to cutting costs — at all costs! Companies have positioned themselves for running sprints and have shed too much human and technical capital needed to prosper once the growth cycle marathon starts.
The cost-cutting measures of the past few years, while positively impacting the bottom lines of corporations, may have damaged the supply chain collaborative mindset beyond repair in certain industries. As the economy rebounds, the focus of SCM technologies will shift from "spend management" to reducing manufacturing cycle times and increasing customer choice and convenience. Corporations that have cut too deep and alienated their supply chains will find themselves unable to gain any significant benefit from SCM technology initiatives.
Squeezing The Supply Chain
Over the past few years, supply-chain partners of the giant corporations and original equipment manufacturers (OEMs) in the manufacturing, retail, and service sectors have been squeezed on prices like never before. Supply-chain partners had to meet unilateral cost reduction targets for goods and services mandated by the dominant OEM. SCM technology initiatives that would have improved visibility and reduced waste, cycle time, and costs across the supply chain were the first victims of the cost-cutting spree. Tangible benefits from these types of SCM technology initiatives take time to measure and validate. The urgency of cost cutting and the need for quick results killed most long-term initiatives.
Those companies that continued with their SCM initiatives found that the supply-chain partners who had to implement a portion of the SCM technology initiative frequently negotiated putting a stop to their portion in exchange for meeting OEM-mandated cost-reduction targets. Unfortunately, this had the inadvertent effect of rolling out an SCM initiative with major technology gaps across the supply chain. Obviously, increased visibility and improved supply-chain response-time goals are impossible to achieve with the missing supplier components. A vicious cycle results, as the OEM further mandates new supplier cost cuts as a way to meet the promised return on investment (ROI) from past SCM investments. Those supply-chain companies that aren't dominant or lack OEM power have been forced to cut to the bone or have gone out of business.
There's a silver lining to this black cost-cutting cloud: A few "enlightened" companies are cutting costs while maintaining a collaborative spirit across their supply chains. It is these companies, in my opinion, that will be primed to take advantage of the rebounding economy.