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Variable vs. Fixed Costs for the Supply Chain: A Sound Approach to Future Growth
As the economy begins to improve, a myriad of benefits can be gained with a strategic 3PL partnership to facilitate upticks in demand and volume
By Antony Francis and Irv Grossman
Cutting costs without compromising service is a standing challenge for any manufacturer, regardless of industry. While the economy has been challenging, to say the least, in recent quarters, there are glimmers of hope that the beginning stages of a potential recovery could be on the horizon. Even though there is still caution, experts from the Manufacturers Alliance (MAPI) stated in their June industrial production analysis that "we believe a turning point is near for the beleaguered manufacturing sector." In addition, the Institute for Supply Management's "Manufacturing Report on Business" cited encouraging trends, with seven of 18 industries reporting growth in June 2009.
While firm indicators of a recovery remain somewhat elusive, there are promising indications of a reversal of current trends. The state of the economy, and potential rejuvenation, presents an opportunity for manufacturers to be well positioned when markets return to full strength. Beyond recovery, the challenge remains to keep costs lean, even with an uptick in demand.
With the lessons learned from recent hardships, now more than ever, manufacturers should look to outside relationships for non-core operations to reduce costs and increase cash flow. This is especially true for companies that have reduced expenditures on personnel and resources because of shrinking demand. Scaling back might have saved money in the short term, but when consumers begin to reengage the marketplace, some companies might be left behind without the capacity to meet this surge.
Even so, enlightened companies should seek to keep costs low going forward while still preparing to meet demands. This can allow manufacturers to weather storms without enduring harsh reductions in force or "fire sales" of assets to generate revenue. To become market leaders, companies need to keenly focus on improving core capabilities, such as research and development, managing sales channels and maximizing customer loyalty. Committing resources beyond these core areas can serve as a distraction from the most critical operational issues.
Supply chain management is an extremely complex function that commands a significant amount of resources, requiring sophisticated equipment and technology processes, backed by skilled labor that is cost prohibitive for many organizations to retain internally. In order to have a strategic supply chain operation that is cost effective, a qualified third-party logistics (3PL) partner with specific industry expertise should be closely considered by forward-thinking organizations.
With a 3PL partner, the supply chain cost structure can be transitioned from primarily fixed to variable, avoiding the fixed investment in material handling equipment, real estate and IT systems that are inherent to an "in-sourced" operation. Plus, the expense of labor, along with overhead, can be reduced without compromising the ability to fulfill customer obligations.
Leveraging a 3PL for expert workforce, equipment, facilities and advanced technologies can eliminate fixed costs and dramatically reduce variable operational expenses, thus vastly improving a manufacturer's bottom line. This cost transition can increase shareholder value and offer a company the flexibility to react to a dynamic economy and consumer demand.
The Variable Model Defined
Implementing an advanced closed-loop supply chain operation mandates an extensive time commitment, coupled with large CAPEX that can take months to realize ROI. As such, corporate supply chain executives should embrace an "outsource vs. build" mentality that places the investments required for this infrastructure squarely upon a 3PL. A well-suited partner will have the capacity to offer workforce, equipment, facilities and technology that can be almost immediately available, when compared to instituting these resources internally. This allows for all the benefits to be gained without the time and capital outlay.
The "two views of a supply chain" as shown in the illustration at right demonstrates this concept, featuring two approaches to the same project. The first is the variable cost model approach, featuring the capabilities offered by a 3PL, including labor, facilities and technology. The second option represents the same functions performed internally. The merits of the concept are clear. A 3PL offers all the benefits of a comprehensive supply chain operation in a far condensed timeframe, with less investment, to preserve cash flow.
Reliable Labor and Knowledgeable Leadership
Highly skilled supply chain professionals from the distribution center to the executive suite require extensive overhead investment to retain, from recruitment, to training, to salaries and benefits. This spending is typically not cost effective for manufacturers to maintain on a full time basis. Supply chain expertise may only be necessary on a periodic basis. When demand and volume inevitably fluctuate, the reduced capacity and associated downtime can lead to a drain on operating costs.
Rather, a 3PL offers the ideal amount of labor based on current market conditions, allowing workforce to be utilized only when needed. The 3PL also provides qualified management oversight to maximize production and output, while keeping the operations as lean as possible. In addition, labor resources of a 3PL can provide manufacturers with capacity in the event of internal reductions.
The benefits of a 3PL will differ based on the size and scope of a manufacturer. Smaller organizations, with a limited internal supply chain operations can potentially leverage a full suite of services, including order management, order fulfillment, inventory control, channel distribution, returns processing, planning, transportation, etc. Companies that are larger, with an existing internal supply chain resource, can selectively choose the exact services that complement current operations based on their unique needs, such as seasonal surges for situations such as "Black Friday." Mid-market manufacturers can use a mixture of both approaches. Regardless of the situation, there is a 3PL match that can benefit any sized company.
Cutting costs without compromising service is a standing challenge for any manufacturer, regardless of industry. While the economy has been challenging, to say the least, in recent quarters, there are glimmers of hope that the beginning stages of a potential recovery could be on the horizon. Even though there is still caution, experts from the Manufacturers Alliance (MAPI) stated in their June industrial production analysis that "we believe a turning point is near for the beleaguered manufacturing sector." In addition, the Institute for Supply Management's "Manufacturing Report on Business" cited encouraging trends, with seven of 18 industries reporting growth in June 2009.
While firm indicators of a recovery remain somewhat elusive, there are promising indications of a reversal of current trends. The state of the economy, and potential rejuvenation, presents an opportunity for manufacturers to be well positioned when markets return to full strength. Beyond recovery, the challenge remains to keep costs lean, even with an uptick in demand.
With the lessons learned from recent hardships, now more than ever, manufacturers should look to outside relationships for non-core operations to reduce costs and increase cash flow. This is especially true for companies that have reduced expenditures on personnel and resources because of shrinking demand. Scaling back might have saved money in the short term, but when consumers begin to reengage the marketplace, some companies might be left behind without the capacity to meet this surge.
Even so, enlightened companies should seek to keep costs low going forward while still preparing to meet demands. This can allow manufacturers to weather storms without enduring harsh reductions in force or "fire sales" of assets to generate revenue. To become market leaders, companies need to keenly focus on improving core capabilities, such as research and development, managing sales channels and maximizing customer loyalty. Committing resources beyond these core areas can serve as a distraction from the most critical operational issues.
Supply chain management is an extremely complex function that commands a significant amount of resources, requiring sophisticated equipment and technology processes, backed by skilled labor that is cost prohibitive for many organizations to retain internally. In order to have a strategic supply chain operation that is cost effective, a qualified third-party logistics (3PL) partner with specific industry expertise should be closely considered by forward-thinking organizations.
With a 3PL partner, the supply chain cost structure can be transitioned from primarily fixed to variable, avoiding the fixed investment in material handling equipment, real estate and IT systems that are inherent to an "in-sourced" operation. Plus, the expense of labor, along with overhead, can be reduced without compromising the ability to fulfill customer obligations.
Leveraging a 3PL for expert workforce, equipment, facilities and advanced technologies can eliminate fixed costs and dramatically reduce variable operational expenses, thus vastly improving a manufacturer's bottom line. This cost transition can increase shareholder value and offer a company the flexibility to react to a dynamic economy and consumer demand.
The Variable Model Defined
Implementing an advanced closed-loop supply chain operation mandates an extensive time commitment, coupled with large CAPEX that can take months to realize ROI. As such, corporate supply chain executives should embrace an "outsource vs. build" mentality that places the investments required for this infrastructure squarely upon a 3PL. A well-suited partner will have the capacity to offer workforce, equipment, facilities and technology that can be almost immediately available, when compared to instituting these resources internally. This allows for all the benefits to be gained without the time and capital outlay.
The "two views of a supply chain" as shown in the illustration at right demonstrates this concept, featuring two approaches to the same project. The first is the variable cost model approach, featuring the capabilities offered by a 3PL, including labor, facilities and technology. The second option represents the same functions performed internally. The merits of the concept are clear. A 3PL offers all the benefits of a comprehensive supply chain operation in a far condensed timeframe, with less investment, to preserve cash flow.Reliable Labor and Knowledgeable Leadership
Highly skilled supply chain professionals from the distribution center to the executive suite require extensive overhead investment to retain, from recruitment, to training, to salaries and benefits. This spending is typically not cost effective for manufacturers to maintain on a full time basis. Supply chain expertise may only be necessary on a periodic basis. When demand and volume inevitably fluctuate, the reduced capacity and associated downtime can lead to a drain on operating costs.
Rather, a 3PL offers the ideal amount of labor based on current market conditions, allowing workforce to be utilized only when needed. The 3PL also provides qualified management oversight to maximize production and output, while keeping the operations as lean as possible. In addition, labor resources of a 3PL can provide manufacturers with capacity in the event of internal reductions.
The benefits of a 3PL will differ based on the size and scope of a manufacturer. Smaller organizations, with a limited internal supply chain operations can potentially leverage a full suite of services, including order management, order fulfillment, inventory control, channel distribution, returns processing, planning, transportation, etc. Companies that are larger, with an existing internal supply chain resource, can selectively choose the exact services that complement current operations based on their unique needs, such as seasonal surges for situations such as "Black Friday." Mid-market manufacturers can use a mixture of both approaches. Regardless of the situation, there is a 3PL match that can benefit any sized company.
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