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Since cost reduction is one of the most common key performance indicators (KPIs) for supply chain monitoring, likely your organization is focused on uncovering hidden costs that may be creating a dent in the bottom line.

Known supply chain costs related to procurement, transportation, inventory, and quality are typically tackled head-on. However, the sneaky costs that accumulate within these categories can be more troublesome.

Even more challenging, since the supply chain is so interconnected, addressing one can have a ripple effect that may not be apparent until it’s too late. However, the good news is that hidden costs may also be hidden opportunities to boost profitability if dealt with in the right way.

Here, we’ll take a look at hidden costs that may be lurking within each of these four major categories and what can be done to manage them.

Procurement Costs

While the costs of procuring products from suppliers may seem clear, there are many nuances involved beyond negotiating a better price.

For instance, someone in your organization has to do all the legwork of finding the right supplier, securing contracts, tracking whether the supplier is holding up their end of the deal, and making sure they get paid according to the terms you agreed on. In that light, hidden costs can include those related to the organizational infrastructure needed to make all of that happen—like staff salaries and technology systems.

Experiencing unexpected supply chain barriers can lead to all kinds of hidden costs, which often overlap among the major categories described here. A Bain & Company analysis conducted in collaboration with the World Bank took a look at the business implications of supply chain barriers, describing them as “…anything that obstructs the easy movement of goods from one link in the supply chain to the next: subpar roads, outmoded border policies, restrictive local-content rules.”

The four main categories of supply chain barriers identified in the report are market access, telecom and transport infrastructure, border administration, and business environment. Report authors recommend looking for hidden costs within each of these categories by asking a few key questions.

The full list can be found in the report.

Here are a few examples:

  • Market access: “Do you know how many regulatory agencies you have to deal with as you move goods into or out of your chosen market?”

  • Border administration: “What is the typical delay time at a particular border or port, and what will that cost in terms of spoilage, theft or the need to stockpile additional inventories?”

  • Telecom and transport infrastructure: “Does the country have an electronic system at the border allowing shippers to declare goods in advance, speeding up processing? Are those systems reliable and used consistently?”

  • Business environment: “Do businesses enjoy the support and encouragement of government officials, or is there a history of random taxation, excessive fees or other attempts to extract value from the private sector?”

Transportation Costs

Although a separate category, transportation costs can have a big impact on procurement costs—depending upon the location of the products being purchased. Factors that impact transportation costs include the mode of transportation being used, the speed of delivery to your chosen location, and the amount of product that can be transported in each load. In that context, hidden costs can be created by things like:

  • Using a more expensive mode of transport to expedite delivery for some reason—such as a disruption in the supply chain that unexpectedly impacts the original schedule.

  • Putting all of your eggs in one basket—by relying on single rather than multi-modal transportation to move a single product.

  • Failing to optimize capacity utilization through packing inefficiencies—like not packing enough products into each load.

  • Failing to take a comprehensive look at transportation decisions—since the seemingly more affordable option may also be slower, which will increase inventory and the costs needed to maintain it.

Inventory Costs

Since 43% of small businesses track inventory either manually or not at all, there can be a lot of hidden costs when it comes to inventory management.

These can include:

  • Storage costs for warehousing in various locations—including those in ports or locations that may charge higher fees.

  • Interest fees on money borrowed to pay for the products sitting in storage that aren’t generating any revenue.

  • Salaries for employees who are moving inventory within a warehouse or other location.

  • Costs related to maintaining company-owned storage facilities and the equipment needed to run them.

  • Shrinkage costs related to damaged, lost, or stolen products—and those which sit so long they expire or become obsolete.

Quality Costs

Depending upon the type of product being purchased or supplied, you may also incur costs related to various quality assurance processes—like location-specific inspections that may be required. When you consider all the ways substandard quality issues might impact an organization’s brand, it’s no wonder there may be hidden costs lurking within this category.

For instance:

  • If a product fails to meet inspection standards prior to leaving a region, there may be inventory and transportation costs to send it back to the supplier.

  • If quality assurance is overlooked prior to the product arriving at your site, this can create a major disruption to manufacturing and distribution plans—and will create new costs to deal with them.

  • If a quality issue is discovered after product delivery, there may be new costs incurred to meet customer service needs and maintain brand reputation.

  • If quality issues require a recall of a product, the costs associated with reverse logistics can really throw a wrench in profitability.

Reducing Hidden Supply Chain Costs

Since the various categories of supply chain costs have such an interconnected relationship, one way to reduce hidden costs is by designing and implementing a supply chain strategy that provides a more comprehensive approach to cost management and helps the supply chain work more synergistically.

Companies that fail to take this type of comprehensive approach may not only fail to reduce hidden costs—but also fail to make the most of hidden opportunities that are revealed in the process. If that sounds daunting, the good news is that CLN Worldwide can help by co-managing the international side of your business.

We offer direct collaboration with our in-house International Transportation Management experts who work diligently with clients facing complex logistics issues.

Middle market and emerging growth companies are faced with difficult logistics planning and are unaware of their need for strategic solutions implemented in an efficient and consistent manner.

We provide an industry specific and knowledgeable team to proficiently audit, engineer, and customize plans to streamline your logistics and develop an optimized supply chain. [Excerpt taken from ‘Outsource Your Logistics Department to the Experts’]

We’re a passionate group of professionals with expertise in areas that include transportation, customs and compliance, distribution, legal and finance. Logistics can be a labyrinth. One question leads to three others. Our team will help you through the maze.

Our focus is not on an individual product or service offering but rather a comprehensive approach to effectively managing and optimizing your supply chain.

If you would like a free consultation with the president of our company, or would like more information on how you could immediately increase the valuation of your current supply chain, reach out to us here today.

We look forward to working with you.

CLN Worldwide

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