Supply chain costs are set to rise, managers warn

7 July 2004
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08 July 2004 | David Arminas

Years of continuous cuts to supply chain costs are coming to an end, according to a new survey by consultancy AT Kearney and the European Logistics Association.

Supply chain managers at more than 100 European firms reported that, as a percentage of sales, supply chain costs today are 65 per cent lower than in 1987. But more than three-quarters of respondents said costs would probably increase.

They blamed rampant logistics costs, the complexity of business and the demand for value-added services. These three trends were common to all the firms, a broad cross-section of industries and countries.

AT Kearney vice-president Charles Davis said there was a limit to how far costs could be reduced. "When you move production to China, it also has huge logistics costs," he said.

"Offshoring to the Far East in certain situations has proved been the wrong thing to do. You lose flexibility, you extend the supply chain and the benefits are not there."

Shaun Green, commercial director at the Independent Manufacturers' Alliance, said: "Margins are thin through the supply chain, so it is becoming harder to get improved terms.

"It's a balance between driving down the costs and allowing the supply base to invest for innovation and new products."

The survey found that leading companies separated their supply chains according to goods or services concerned, and depending on clients' needs. A commodity has a different supply chain from consumer goods or IT products. Companies that do this enjoy 22 per cent lower lead times and 15 per cent lower logistical costs, the survey found.

Leaders show better collaboration with customers and suppliers by sharing information, thus improving timely and damage-free delivery, the report noted.

Mindy Wilson, head of the business performance unit at the Confederation of British Industry, said "tightening the thumbscrews on cost" wouldn't produce as many supply chain savings as seeking mutual benefits with suppliers.



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