Supply chain cost-modeling in Design for Excellence

When organizations are looking for cost-down opportunities, they sometimes overlook the great potential that supply chain cost modeling offers. Whether you use it within a comprehensive value-chain reorganization trajectory or just to focus on supply chain optimization, such cost modeling can deliver significant cost savings.

The Design for Excellence (DfX) approach continues to gain traction in the business world. And with good reason. When you take all the factors that can add value or reduce costs into consideration at the very start of a design or (re-)development process, you greatly increase your chance of achieving the best results at the lowest investment.

A winning methodology

Today, DfX methodology is being put to use not only across product families, but also supply management and even complete value chains with great outcomes. Exactly how the approach is (or can be) applied varies from case to case. But in general, a comprehensive DfX project will reduce landed cost anywhere from 4% to 40%. Within this spectrum, the savings that supply chain cost modeling delivers – either in an overall DfX trajectory or in a supply-chain focused project – is up to 4% of landed cost.

Supply components of landed cost

Obviously, most companies already pay close attention to supply-chain management in order to operate as economically as possible. The problem is that the factors involved are highly numerous and complex. They go far beyond where you produce or how you transport. Lead time, invested capital, insurance, custom duties, warehousing, brokerage costs, currency conversion, packaging and handling – these are just some of the many supply-chain components that impact landed cost.

The calculation challenge

It is extremely difficult to calculate all these determinants in an integral way. Especially since they all have to work together within the parameters imposed by a last, dominant factor: customer requirements. The structure and costs of a supply chain that offers the same service level from a factory in Asia or Europe will differ enormously. Most companies, therefore, are unable to get a clear and comprehensive picture of all the supply-chain scenarios available to them.

Baseline for comparison

So how do you go about getting truly complete insight into supply-chain options and costs? It begins with clearly establishing the service level you must be able to guarantee to customers. What is the minimum performance that the market requires for commercial success? This establishes a sound and solid baseline for evaluating all supply-chain structuring options.

Aligning and optimizing

Once the service level has been defined, the next steps are to quantify all (potential) costs, and identify ways in which they could best be combined and aligned. This not only requires deep expertise in supply-chain-related areas such as manufacturing, transport and the cost of capital, but also keen insight into how such factors impact each other. It is not difficult to gather raw data and pricing from all kinds of sources. The challenge is to give this information real meaning in the context of the customer’s situation.

Developing clear options

Philips Innovation Services is extremely competent in delivering such meaning, thanks to extensive experience in supply-chain evaluation. We’re supported by a complex and powerful cost-model tool that has been expanded and refined over the course of decades. What would be the result if you increase your stock, outsource your warehousing, and move production facilities abroad? The right cost modeling experience and tools easily allow such complex calculations. This makes it possible to clearly develop – and price – diverse supply-chain scenarios that will meet the needs and goals.

When to re-evaluate?

The most strategically useful time to re-evaluate a supply chain model is at moments of disruptive change, such as when there is a sharp increase or decrease in demand. Should your stock volume go up or down? Is the number of distribution centers still good? Or is shortening lead time the best way to go forward? By searching for ways in which things can be done smarter or better in the new situation, you can minimize the negative impact of downturns, and maximize that of upturns.

Time to redesign

Another very productive time to take a close look at your supply chain is when product architecture will be changing. If you are going to redesign a product anyway, do so in tandem with an evaluation of supply chain structuring and opportunities. This can lead to great leaps forward. You might, for instance, be able to redesign both the product and supply chain in a way that makes it possible to configure the product at the last minute.

Clear insight and choices

Over the years, we’ve applied supply-chain cost modeling to optimize supply chains in various DfX trajectories with solid results. For instance, in a product market that is strongly declining by 20% each year, restructuring made it possible to remove millions in cost from the supply chain. And in cases involving rapid growth, we’ve seen it’s possible to make a 1-3% difference in landed costs by making different choices. The key enabler in such cases is always having clear insight in the first place into all the choices that are actually available to you.

Rethinking your business – together

Philips Innovation Services delivers expertise in supply-chain cost modeling, as well as overall DfX trajectory project management. Would you like more information on how we could use it to help improve the efficiency of your business? Feel free to contact us.

jan dikker

Jan Dikker
Senior Supply Chain Consultant
Philips Innovation Services, Industry Consulting

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