“In a downturn most companies immediately focus on cost reduction. That could be a mistake.” –Frank Burkitt, principal, Deloitte Consulting LLP
Here’s a radical thought to consider, courtesy of the brains at Deloitte Consulting – do NOT cut supply chain spending in this economic downturn. That advice runs counter to almost everything we’re seeing in the business world right now, with layoffs, plant closings, and discretionary spending cuts across the board.
Yet Frank Burkitt, a principal with Deloitte, believes that when it comes to supply chain operations, such “slash and burn” tactics could backfire – and truckers and other supply chain service providers can use some of his reasoning, along with that of other Deloitte experts, to bolster their efforts to retain if not expand business in this period of economic upheaval.
“To make smart cuts to your supply chain, you should first understand which elements represent the core of your business,” said Burkitt in a recent paper called It’s Time to Circle the Supply Chain Wagons. “Which customers are the most profitable and which are expendable? Which products do customers truly care about and which are just window dressing? What level of service quality do key customers need and expect?”
Think on that last point, because that’s where trucking companies can make a play for shippers today. Focusing on serving the customer’s customer may be a good way to solidify your value in the minds of shippers during these tough times.
“Unless they improve their supply chain capabilities, consumer packaged goods (CPG) companies probably will have trouble maintaining profitability and market share,” added Adam Mussomeli, principal and consumer products supply chain leader at Deloitte.
“They may also struggle with other fundamentals, such as commodity volatility, environmental sustainability, food and product safety, health and wellness requirements, and conversion of grains into energy,” he explained. “CPG companies must focus on cost reduction to maintain profitability and fund initiatives that address trends that are reshaping the industry and marketplace.”
Ironically, Burkitt thinks one of the best ways shippers can start cutting costs may be to start cutting revenue – specifically, the “bad” revenue that undermines profitability.
“Decide which revenue streams are not worth preserving, and then target cost reductions accordingly,” he pointed out. “The idea of cutting revenue in a downturn might seem a little crazy. But simply put some customers aren’t worth serving – and some products aren’t worth selling. The shrinking margins that accompany an economic slowdown often only make the problem worse. Executives need to use top-down revenue cutting and bottom-up cost cutting approaches.”
He said it’s also crucial to remember that businesses derive most of their profits from a relatively small number of customers and product offerings. “That’s the 80/20 rule,” Burkitt stressed. “Protecting your profitable core is the key to surviving and thriving in a downturn. Once you know which customers and products are most critical to your business, you can start ruthlessly cutting fat out of your supply chain without fear of hitting muscle or bone.”
That’s when it becomes your job, as a trucking company, to make sure you become part of that “muscle and bone” within your customer’s supply chain – the part they can’t live without.