Identifying and Addressing Hidden Supply Chain Costs
Working within the transportation industry can involve substantial expenses, including transportation costs, inventory storage expenses, procurement, and more. Identifying cost overruns and reducing them is critical to manage your costs and ensure your business’s profitability. Many companies lose money because of hidden costs in their supply chains. Since reducing costs is likely a key performance indicator (KPI) for your business, finding how to identify and address hidden costs can help to improve your profit margins.
While you likely understand the importance of supply chain monitoring to watch for common costs related to transportation, procurement, quality control, and inventory, you also need to understand the hidden costs that can build within these expense categories. The interconnectedness of the supply chain can make this process even more difficult since a bottleneck at a single point can cause a ripple effect that is not apparent until later. However, if you deal with hidden costs the right way, they might also provide you with additional opportunities.
Identifying Transportation Costs
Transportation costs can be a major driver in your supply chain expenses and can affect procurement costs based on the location of where you are purchasing products. Some of the factors that might influence your transportation costs include the transportation mode you use, how quickly the goods need to be delivered, how much cargo can be transported per load, and bottlenecks in various ports. Some of the hidden costs involved with transportation might include the following:
- Trying to expedite delivery by using a mode of transport that is more expensive because of an unexpected supply chain disruption’s impact on your original delivery schedule
- Relying on a single mode of transportation instead of choosing multi-modal transport options
- Load packing inefficiencies that do not optimize your use of capacity per load
- Not analyzing the whole transportation picture and failing to understand that cheaper options might be too slow, increasing the costs of storing and maintaining inventory
Working with a freight broker can help to avoid some of the hidden transportation costs in your supply chain. A freight broker can help to plan more efficient routes and modes of transportation at the best prices. Since a broker must secure a freight broker surety bond, you can also file a claim if your broker fails to perform as contracted.
Identifying Procurement Costs
Some costs involved with procuring products are obvious, but some nuances can be involved that could drive up your procurement costs. For example, a designated employee might be responsible for finding suppliers, securing contracts, monitoring the supplier’s performance of their contractual obligations, and ensuring that they receive payment according to your agreed-upon terms. This might involve hidden costs in terms of salary, technology, and infrastructure changes to facilitate these functions.
Many hidden costs can be involved with unexpected disruptions in the supply chain that can also cause overlapping costs in other areas. For example, something such as poorly maintained roads can affect the supply chain and your procurement costs. Other areas that can create supply chain barriers include transport infrastructure, telecommunications infrastructure, the business environment, access to markets, and how borders are administered.
To identify hidden costs in each of these areas, you will need to be prepared to ask questions about regulatory agencies that control how goods move in and out of your market, how borders are administered and the potential for losses caused by spoilage due to inefficiencies, processing delays because of poor telecommunications infrastructure, and whether the local government encourages and supports the business environment or not.
Identifying Inventory Costs
Many businesses fail to properly track inventory, leading to substantial hidden costs. Some of the types of costs that can be involved in inventory include the following:
- Costs of storing inventory in multiple locations at different price points, including some that charge high fees
- Interest charges for borrowed funds used to pay for inventory storage when the products aren’t generating revenue
- Employee salaries for moving products within a storage facility
- Maintenance expenses for storage facilities and their necessary equipment
- Losses caused by thefts, damage, or lost products
- Shrinkage caused by inventory that becomes obsolete or expires while being stored
Identifying Quality Costs
There can also be costs that are hidden within your quality assurance process based on the type of product that is being supplied or purchased. For example, some products might require inspections based on the locations from which they are sourced. Substandard product quality can cause negative impacts on your brand, so hidden quality costs should be anticipated as your organization strives to ensure its products meet your quality standards.
Some examples of hidden quality costs include the following:
- Products that fail inspections and have to be sent back to the supplier
- Failures to ensure a product’s quality before it arrives, resulting in disruptions in manufacturing and distribution
- Discoveries of product quality problems after the product is delivered, resulting in costs caused by reputational damage
- Quality problems resulting in product recalls and drops in revenue
How to Minimize Hidden Risks in Your Supply Chain
Hidden supply chain risks in these different categories tend to be interconnected with each other, meaning that unaddressed hidden costs in one category can lead to higher costs in others. This makes it important for organizations to take a comprehensive approach and implement strategies to manage costs across the supply chain. Without a comprehensive approach, you might fail to reduce your hidden supply chain costs while also missing out on opportunities you might discover during the cost management process.
The following are some strategies you might take to reduce hidden supply chain costs:
- Analyze your workflow to identify inefficiencies.
- Implement streamlined ordering processes.
- Monitor ordering patterns on an ongoing basis.
- Create key performance indicators and monitor your progress.
- Reorganize to use space more efficiently.
- Use technology to automate your supply chain.
- Diversify your carriers and reach with the help of a freight broker.
- Use predictive analytics to help with demand forecasting.
- Reduce the amount of packaging used.
Identifying hidden costs in your supply chain and taking steps to reduce them can help to protect your profit margins. When you analyze your supply chain and implement smart strategies to address hidden costs, you might also discover opportunities that would otherwise remain hidden.