Bain & Company: Supply chains at risk from cost inflation
Analyzing data holistically across silos could be key to identify opportunities
Deflation allowed companies to improve their margins in recent years, without significantly cutting costs. However, with inflation back on the rise, supply chain costs will start to increase. If companies want to continue to meet their productivity targets, then stronger measures must be taken.
In their analysis, Bain recommends that companies take an integrated approach to cost management to double their typical savings from silo based initiatives.
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The traditional silo approach to cost-cutting
The standard approach of most companies when facing a rise in inflation is to seek savings in procurement, manufacturing, transportation and warehousing. Due to the specialized nature of many of pharmaceuticals’ manufacturing, transport and storage needs, cost savings are limited. Bigger companies will also tend to have gone down this route previously, so it may only be impactful for those smaller companies who have yet to exhaust traditional routes.
Companies who have implement cost initiatives year after year in each silo will have to redouble their efforts to generate new productivity targets. They will likely find it even harder to hit their set cost efficiency targets in light of rising inflation.
Many companies overlook the excess costs than span silos as there is no one directly responsible for the task. One example Bain offers is that of the cost generated by multiple product model variations. Sales and marketing teams often propose products with slight variations to address specific market niches. However, increasing the number of product models can lead to significant excess costs in purchasing, manufacturing and supply chains.
A number of companies, including pharmaceuticals, rely on silo-based organizational structures. So focusing their attention on the gaps between individual business units is not something they are used to. Often, individual silos can hoard data with the data relevant to a singular function only considered in a vacuum. By taking a holistic view of the full process, it can be better understood how costs flow across the different functions and where opportunities exist to increase efficiencies.
An integrated approach to cost management
To help companies delvier cost savings beyond the traditional silos, Bain offers three guidelines.
1. Establish clear ownership and accountability
Cross-functional teams can offer the missing accountability for cost outcomes throughout the organization. These teams can develop programmes and weigh the trade-offs of cross-functional cost initiatives.
Bain use the example of a global healthcare company who were facing growing pressures to improve their cost base. After years of acquisitions, the company was suffering from an inefficient manufacturing network. The leadership team took action, setting tough targets and empowering cross-functional teams to search for savings across silos, including manufacturing and distribution.
Through this focus, the company is on track to deliver in-silo savings of $500 million over four years and $300 million in integrated savings. This represents a 60% gain above what the company would have achieved with only in-silo savings.
Having this holistic view of all silos across the supply chain can allow teams to identify and resolve costly practices.
2. Create incentives to identify savings between silos and functions
Misaligned incentives can make it difficult for savings to be made. Although pharmaceuticals require the highest standards in both manufacturing and transport, there are still elements that could see further cost efficiencies. If the focus is solely on quality, there may be excess costs across the silos. It requires a careful balance and a focus on being efficient where possible to identify opportunities to save.
3. Use data and analytics to make the business case
Individual silos lack data and analytics showing how costs flow across the organization. This means the company could be missing out of key areas of savings.
As Bain notes, by developing and analyzing data holistically across silos you can begin to identify opportunities within individual functions and build an integrated cost initiative.
Bain looks at the example of a large technology company that was aiming to reduce the cost and time required to build new manufacturing facilities. Through rigorous cross-functional analysis, they discovered that more than 50 per cent of the opportunity to improve construction costs and time was outside the construction function’s control and instead required close partnership with research and development teams.
Pharmaceutical companies frequently encounter the problem of silos across the business and wider supply chain. Better communication and teams targeted to look across the silos could lead to radical and effective solutions.
While most companies have made significant progress in reducing costs within individual silos, inflation will erode these gains and make it tougher to improve net productivity. As Bain recognize, by taking an integrated approach to cost management, companies could gain a new tool to battle costs and keep their productivity gains on track.