Almost every business decision comes down to the bottom line. What will it cost? What will it save? What is the return on investment (ROI)? For global supply chains, the formula to define cost is incredibly complex, driven by a myriad of factors and considerations, some of which are unpredictable. Long lead times, multiple levels of suppliers, layers of regulations, and thousands of miles in transit can each affect the bottom line. Without a clear picture of the supply chain, however, it can be difficult to see the factors contributing to product cost. How can companies leverage today’s technology to better determine cost and exceed expectations.
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| A fully-digital supply chain is efficient by reducing paperwork and manual error, placing all of the data in a single system accessible by all required parties and removing redundant tasks. |
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Determining Cost
The first step to meeting profit expectations is determining the product cost. Global supply chains have evolved over the past several decades, integrating economies and bringing the world closer together through commerce. But this complexity comes with pitfalls. In international commerce, the purchase price of a product generally does not reveal the complete landed cost. The calculation of the hidden costs requires acknowledgement of the expenses necessary to purchase goods from one country and import them into another. Determining the total landed cost of an item involves at least three main elements: the actual cost of the goods, transportation and insurance costs, and, of course, all duties, taxes and governmental fees assessed on the goods.
Costs are incurred from the start of planning for each global supply chain throughout its execution and, therefore, are incurred along the entire end-to-end chain, from the supplier's supplier to the customer's customer. A non-exhaustive list of factors involving cost include:
- Net materials costs
- International taxes, customs duties, and tariffs
- Manufacturing labor & plant overhead
- Bill of material changes
- Financial risks – over/under payments, duties, compliance, access to working capital; receivable discounting facilities, etc.
- Foreign exchange costs – direct and indirect, local currency costs vs. input costs (i.e., dollars or euros, etc.)
- Site inspections/certifications
- Returns and reverse logistics
- Inventory carrying/working capital
- Storage and handling
- Costs of import/export customs compliance and documentation
- Duty drawback/restitution
- Transportation
- Supply chain disruptions – labor, weather, etc.
- Cycle time (order to delivery)
Some costs, such as raw materials, labor, and taxes are predictable and controllable to a certain extent. Much of the shift to more global sourcing is spurred by the search to lower costs in these areas. Some costs, on the other hand, are mostly out of a company’s control. These include costs due to delays and detentions, duty drawbacks, returns, and natural/geopolitical disasters, among others. Technology solutions that track and analyze each and every expense point help create a complete picture of the total cost. With the ability to simulate changes at any point in the supply chain, these solutions offer the opportunity to reduce costs in areas such as raw materials, and duty savings through preferential trade agreements. A holistic, end-to-end solution is needed to tie everything together, increase speed and visibility, and reduce cost.
Reducing Costs Through Automation
The 2016 YouGov survey found that the number one concern of chief supply chain officers is reducing costs, with 41 percent listing that above other concerns such as boosting operational efficiency, visibility, and transparency. Luckily, one of the best ways to reduce cost is to automate the supply chain, which comes with the added benefits of improving efficiency, speed, visibility, and transparency.
A fully-digital supply chain is efficient by reducing paperwork and manual error, placing all of the data in a single system accessible by all required parties and removing redundant tasks. This in turn increases the speed of commerce, making it easier and quicker to go from raw material to delivery by removing impediments to global commerce. Automating the supply chain with global trade management (GTM) software results in a glass pipeline, with visibility from start to finish, making it easy to identify and resolve pain points, and mitigate areas of risk. Finally, a transparent supply chain meets the expectations of global consumers and governments in today’s world, reducing the risk of a major PR disaster and building social capital and good will.
Automation brings together a complete picture of the supply chain, making each cost point easy to identify, and allowing for comparisons and simulations that will pinpoint specific areas of cost reductions. Automation can even help mitigate those uncontrollable costs. Detentions can be swiftly resolved by getting the correct information into the officials’ hands immediately, or avoided altogether with proper restricted party screening (RPS) and complete customs documentation. Rising environmental or geopolitical concerns can be mitigated through shifts in sourcing or vendors that have been previously flagged in the GTM system.
Supply Chain Holy Grail: Total Landed Costs - Identify and Reduce
The search for the Holy Grail has gone on for centuries and has proved to be very elusive. The search for the global supply chain holy grail – the actual total landed cost of a product – has also proven to be just as elusive. For sure, implementing a digital global supply chain GTM solution can reduce overall costs, but it also helps in identifying the total costs. Perhaps this Holy Grail is finally within reach.
Download our eBook, The Digital Global Supply Chain, to learn how digitization helps transform your internal processes and achieve these four competitive advantages: Collaboration, Automation, Analytics, and Flexibility.
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