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This chapter is from the book

Leveraging the Supply Chain

Because supply chain costs represent a significant portion of a company’s sales, it isn’t difficult to see why there is such a focus on it. This results in a “leveraging” effect, as any dollar saved on supply chain contributes as the same to the bottom line as a much larger and often unattainable increase in sales (will vary based on an individual company’s profit margin).

Table 1.1 illustrates this through an example of a business that is evaluating two strategic options: 1) reduce its supply chain costs by approximately 6.5% through more effective negotiations with a vendor, or 2) increase sales by 25% (which will most assuredly also add to sales and marketing costs). You can see the leveraging effect of the supply chain as the relatively small cost decrease contributes as much to the bottom line as the 25% sales increase (which is pretty difficult to accomplish in any economy).

Table 1.1 Supply Chain Leveraging Effect

Current

Supply Chain Improvement Option

Sales Increase Option

Sales

$1,000,000

$1,000,000

$1,250,000

Cost of material

$650,000 (65%)

$600,000 (60%)

$812,500 (65%)

Production costs

$150,000 (15%)

$150,000 (15%)

$187,500 (15%)

Fixed costs

$100,000 (10%)

$100,000 (15%)

$100,000 (8%)

Profit

$100,000 (10%)

$150,000 (15%)

$150,000 (15%)

The supply chain cost reduction in this example has impressive results, but you have to keep in mind that “you can’t get blood from a stone.” That is where Lean techniques, which are discussed later, can have a significant impact. Through Lean, a team-based form of continuous improvement that focuses on the identification and elimination of waste, we can create a “paradigm shift” that can make process (and cost) improvements that were previously thought impossible.

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