Supply Chain costs too complex to analyse? Start with process design

Companies have no visibility of where to find cost-saving opportunities if Supply Chain costs are too complex to analyse. How can companies with complex supply chain cost structures get better visibility to drive saving projects? In this blog post, a case for better process flows to drive better visibility.

WHAT DRIVES COMPLEXITY IN SUPPLY CHAIN COST?

The first common mistake that most executives make when analysing Supply Chain costs is to start the analysis from the end-result – the target costs - instead of starting from the source of the data. This approach to cost analysis carries high risks of missing critical information right at the beginning, the data collection phase.

Effective costs analysis returns the best results when done using standard data analysis steps:

  1. Define objectives

  2. Collect data.

  3. Sanitize Data.

  4. Calculate and summarise.

  5. Produce insights.

The data required to perform cost analysis must exist, even if in a raw format, in the collection phase. If cost data is not captured at the beginning of the process even the most thorough of the analysis will result is an estimate and guessed data.

Supply Chain and Operations executives tend to approach costs analysis like demand forecasting or supply planning. Both processes have elements of data analysis but different in one critical element: costs analysis is about measuring what exists to generate insights while demand forecasting focuses on analysing what is known to generate a guess of what is not certain.

There is no room for estimates In Supply Chain costs analysis, good analysis must measure all data that is relevant and not trying to estimate costs based on other details.

These are the main drivers of missing or bad Supply Chain data:

  • All-inclusive purchase prices

  • Poor Supply Chain visibility

  • Limited system capabilities

HOW PROCESS DESIGN AFFECT SUPPLY CHAIN DATA

Business processes and procedures affect Supply Chain data because the quality and quantity of the data captured depend on the process that teams use to carry out their tasks.

These are the main reasons why companies lose costs data:

Oversimplification of processes: When teams operate under oversimplified processes the risk is to skip important steps in collecting critical data

Low usage of IT tools: Companies that do not make the best of their IT tools in Supply Chain have a common problem: The data captured is not entered in the company core systems but kept in spreadsheets; this often results in data being incomplete, inaccurate or lost.

Misalignment between Supply Chain and Finance requirements: Another common cause of poor Supply Chain data is when the finance and the supply chain departments are not aligned. Costs targets should be agreed with the two departments and both teams should be aware of what is required to be measured.

When there is no clarity about what must be measured and why data is often captured and managed incorrectly.

HOW TO DESIGN PROCESSES TO HELP CAPTURE BETTER DATA

The first step to start capturing better data for Supply Chain cost analysis is to design processes that focus on the key tasks, where data is generated and shared.

Process design varies depending on the company strategy, budget requirements and the overall value chain. As a rule, the following elements must be defined and should always be considered when designing data-centric business processes:

  • Purchase & payables costs targets by supplier’s type

  • Sales & receivables costs targets by customer type or sales channels

  • Inventory costs targets by product type (most companies divide inventory as finished goods, raw materials, and packaging)

  • Logistics costs target by region or shipping method

  • Handling and fulfilment costs by the customer, customer type or sales channel

  • Inventory wastage value target

  • Returns and refunds target

SET SMALL MILESTONES TO MEASURE DATA OFTEN AND HELP TRACE DATA QUALITY

A common mistake that companies make when managing Supply Chain data is to gather data only before an analysis is required. Supply Chain data can be complex to gather and, if companies operate across different countries, with multiple locations and sales channels, the amount of data to manage can be overwhelming.

Breaking down processes into small milestones is a tool that helps reduce the risk of losing data during the collection phase.

HOW OFTEN SHOULD SUPPLY CHAIN COSTS BE CHECKED?

Supply Chain costs should be checked regularly, not just when month-end is approaching. Companies that gather costs only once a month can easily lose valuable data.

While closing the accounting period is a task that belongs to Finance there is a lot that Supply Chain teams can do to ensure the figures are accurate.

  • Systems and technology: Set up the company system to record budgets associated with every cost that is relevant to the company: Check costs at the point of receiving data.

  • Processes and Procedures: include checkpoints within the processes that allow the team to verify the accuracy of the data captured. I.E. Create a cost checkpoint when users input suppliers’ invoices in the system.

  • Teams and Skillsets: Train the Supply Chain team and close any gap about costing including budgets and charges. There is no need for users to become experts in accounting, but effective Supply Chain teams can and must understand costs related to their work.

HOW GRANULAR SHOULD SUPPLY CHAIN COST ANALYSIS BE?

Do you need to see the freight charge and the fuel surcharge in two separate lines in an invoice? And should you have a separate budget? it depends on why the analysis is conducted.

It is normal for a company to consolidate two or more costs when these belong to the same category like freight charge and fuel surcharge, but there is a big difference in how and when the charges are consolidated that will make some analysis unviable:

If the two charges are consolidated when the data is captured the total costs of the category will give the same results but such analysis cannot tell if an increase of the freight costs is due to the carrier increased mileage – therefore a matter of efficiency – or because of the actual price of the fuel.

Companies that manage their costs efficiently are very accurate and capture data which is as granular as possible. Data can be consolidated in the calculation phase to eliminate complexity in data visualisation while be drilled down to the smallest components if needed.


SET UP AN ACCURACY TARGET TO AVOID ANALYSIS PARALYSIS

The problem with data analysis is that a simple job can get stuck in a never-ending loop of improvements, resulting in delays and missing deadlines.

Perfectionism is procrastination in disguise

There is almost no limit to the improvements that a cost analysis exercise can be subject to. More cross-checks and validation, better formatting, rounding of decimals; the list is long and simple jobs meant to be delivered in hours can easily become matters of weeks. Costs analysis should have a target accuracy – or tolerance – that both the Supply Chain and the Finance team should agree and commit to.

HOW TO AUTOMATE COSTS DATA ENTRY WITH NO-CODE APPLICATIONS

Data entry is tedious, error-prone and time-consuming, fortunately, some technology tools can help automate data entry.

No-code applications can be set up and managed by users with no coding skills and are a great tool to automate repetitive tasks. Common applications of no-code technology are:

  • OCR: software that can get data from pdf or word documents and push it to an ERP

  • Data models: Logic designed in spreadsheets that performs a set of calculations

  • EDI: Standard document exchange protocol largely used by retailers that enable the transmission of data between companies in a standard format

I talk more about No-code in this article here

TECHNOLOGY TOOLS TO USE FOR SUPPLY CHAIN DATA ANALYSIS

There are two main approaches to Supply Chain data analysis:

  1. Having everything integrated into one core system or

  2. Use different software for different tasks but connected

There are pros and cons with both of those approaches. Integrated software is more robust, reliable and easy to manage and maintain; the risk of losing data is very low but such solutions are expensive. Option No.2 is more agile, easy to implement and more convenient. The maintenance of different applications can be time-consuming and, if not set up correctly these networks of applications can return incorrect data

CONCLUSION

Monitoring Supply Chain costs is not an easy task. There is complexity in capturing what data to capture, how and how often. Companies that keep their cost under control use a pragmatic approach to data analysis, have both Finance and Supply Chain team aligned on what to measure and use technology to help with speed and accuracy of cost data.