How to Reduce the Types of Costs in Supply Chain Management

A supply chain consists of everything that goes into the development, production, and delivery of a product until it reaches the customer. The supply chain is discussed more frequently because products often have much larger supply chains than they used to. People are also trying to be more aware of where their products come from and how they are made

Over the course of the supply chain, there are several types of costs that will add up. A company will generally need to outsource several parts of a product’s journey. Each step of that product’s life cycle from raw materials, to storage, to delivery, is a part of the supply chain – and that makes it a part of the cost.

How do you use supply-chain costing to get a handle on the numbers? Here is a guide on how to reduce the different types of costs in supply chain management:

Transportation costs in supply chain management

Frequently, the biggest types of costs in supply chain management will be the transportation costs. Every stop that a product makes, along with the raw materials that are used to produce it, is an added cost. Drivers need to be paid, gas needs to be covered, and many other fees and wages are involved in these processes. All of these fees will be factored into the product’s final cost.

If a company imports their raw materials, and exports their product to another storage facility, that will increase transportation costs. The world is very small, in the sense that companies will consider any option worldwide, as opposed to the local suppliers of old. For an accurate indicator of your freight costing, a freight audit company will help to identify all the costs associated with the transportation in your supply chain.

How to reduce transportation costs

In order to decrease your transportation costs, you may want to explore more local options. See if there is a way to cut out any transfers, or bundle transfers so you have fewer trips. It may even be possible to collaborate with other companies nearby who have similar supply chains. Sharing transportation costs is a good option to explore if you can find another company to work with.

Production costs in supply chain management

Your production processes will have a big part on the types of costs in your supply chain management. How much does it cost you to make your product? Your production costs include anything that is involved in producing the final product. The labour, the machines that are involved, any consumable production supplies – ink or glue perhaps – all of these things are a part of your production costs.

How to reduce production costs

Increasing the productivity of your workers is an efficient way to cut production costs. By not over-working employees, which can decrease efficiency and quality of work, and by properly managing your people, a big portion of your unnecessary production costs can be decreased.

You may also be able to automate certain tasks, reducing the cost of labour even further. In addition, see if you can find a way to save on the cost of materials either by finding a more economic option, or by decreasing any waste that may be occurring – don’t be so stingy as to decrease quality, but avoid excess.

Procurement costs in supply chain management

The procurement of land, raw materials, and other supplies needed to produce your goods are filed under procurement costs. These are the major types of costs in your supply chain management. These costs are affected mostly by the suppliers themselves.

How to reduce procurement costs

One of the most important parts of decreasing procurement costs is to ensure that the supplier’s values are aligned with those of your company. Sure, you can look at the cost of the materials you are acquiring from them, and see if you can find a company that can offer them cheaper. However, you’ll also want to make sure the company is going to deliver the right amount, on time, all the time.

You want to know that they take your business seriously, and that mistakes are a rare occasion. Any downtime caused by missing materials from your suppliers is money out of your pocket.

Inventory costs in supply chain management

If you’re offering a product, you need stock so that you don’t run out, which could cost you customers, and ultimately, money. Your inventory costs include any warehouse or storage costs that you have. It also includes your stockpile of goods – it’s money spent that has yet to be made back, because those things are just sitting there.

How to reduce inventory costs

Try to find the happy medium between having too many goods stockpiled up, and not having enough. Trying to gauge future demand is difficult, but you don’t want to interrupt your cash flow by overstocking, and risking those goods getting damaged or destroyed.

If you can keep stock onsite instead of transporting it to a warehouse, or if you can organize your stock so that it takes up less space, this will ultimately save your storage costs as well.