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Reducing Costs through Production and Supply Chain Management by Vinod Lall
Executive Summary
• There are numerous drivers of production and the supply chain, and there are several processes under each driver. These processes are associated with high overheads and offer opportunities for cost reduction. Cost reduction requires a complete knowledge and mapping of all costs, cycle times, purchases, inventories, suppliers, customers, logistics, and other service providers throughout the supply chain. Cost reduction in the supply chain often requires trade-off analysis amongst conflicting alternatives using the total cost approach. Successfully achieving supply chain cost savings requires the use of cross-functional teams with representation from marketing, design, procurement, production, distribution, and transportation employing an organized approach.
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Introduction
IKEA, the Swedish home products retailer, is known for its good-quality, inexpensive products, which are typically sold at prices 30–50% below those of its competitors. While the price of products from other companies continues to rise over time, IKEA claims that its retail prices have been reduced by a total of 20% over the last four years. At IKEA, the process of cost reduction starts at product conception and continues throughout the process of design, sourcing of materials and components, production, and distribution. For example, the “Bang” mug has been redesigned many times to realize shipping cost savings. Originally, 864 mugs would fit into a pallet. After redesign a pallet held 1,280 mugs, and with a further redesign 2,024 mugs could be squeezed into a pallet, reducing shipping costs by 60%. Organizations today are looking for opportunities to improve operational efficiencies and reduce cost without having a negative effect on customer service levels. Production and supply chain management can help to reduce costs by connecting every unit in the supply chain, fostering collaboration among
Executive Summary
• There are numerous drivers of production and the supply chain, and there are several processes under each driver. These processes are associated with high overheads and offer opportunities for cost reduction. Cost reduction requires a complete knowledge and mapping of all costs, cycle times, purchases, inventories, suppliers, customers, logistics, and other service providers throughout the supply chain. Cost reduction in the supply chain often requires trade-off analysis amongst conflicting alternatives using the total cost approach. Successfully achieving supply chain cost savings requires the use of cross-functional teams with representation from marketing, design, procurement, production, distribution, and transportation employing an organized approach.
• • •
Introduction
IKEA, the Swedish home products retailer, is known for its good-quality, inexpensive products, which are typically sold at prices 30–50% below those of its competitors. While the price of products from other companies continues to rise over time, IKEA claims that its retail prices have been reduced by a total of 20% over the last four years. At IKEA, the process of cost reduction starts at product conception and continues throughout the process of design, sourcing of materials and components, production, and distribution. For example, the “Bang” mug has been redesigned many times to realize shipping cost savings. Originally, 864 mugs would fit into a pallet. After redesign a pallet held 1,280 mugs, and with a further redesign 2,024 mugs could be squeezed into a pallet, reducing shipping costs by 60%. Organizations today are looking for opportunities to improve operational efficiencies and reduce cost without having a negative effect on customer service levels. Production and supply chain management can help to reduce costs by connecting every unit in the supply chain, fostering collaboration among