Cost optimisation for more profit in business
Vikash Khatri, Founder, Aviral Consulting, enlightens on cost optimisation and business transformation project initiated by his company that can help customers reap more gain in the logistics industry.
Logistics and supply chain is becoming complex day by day on the other hand competition is intensifying. In such a scenario, each organisation tries to innovate to improve efficiency and reduce their cost of supply chain by way of redesigning the network, optimising warehouses and transportation, alignment vendor base, introduction of automation and technological tools, etc. But at the same time logistics service provider also need to look their cost models and optimise them. The benefit can be passed on to customers as a win-win collaborative approach.
Cost optimisation and efficiency improvement in a logistics service is a structured and scientific exercise, which require a transformative approach towards business. Some of the organisations directly go for straight cost cutting without proper analysis in order to reduce final pricing or improve EBITA, may get short-term relief but in longterm, it creates problem in some way.
For a logistics service provider, the nature of business is not centralised or concentrated within four walls, logistics is a business of spread and reach. Due to which, there are high chances of revenue leakages, poor efficiency and cost controls. In a business transformation exercise for EBITDA improvement, organisations need to have a deep dive evaluation of both - revenue and cost stream.
REVENUE LEAKAGES Revenue leakage is a direct loss for any organisation. In logistics industry excluding few very large and processoriented organisation, it’s quite a prevailing problem. For an organisation revenue leakage can happen in multiple ways, some of which are as follow:
Weak Commercial processes: Maturity of commercial processes not only have impact on pricing and revenue leakages, it has impact on customer retention also. In mature processes, organisation take pricing and contracting decision based on detailed understanding and analysis.
Improper contract entry: After having right contract and right pricing in place next probability of revenue leakage exist in mapping of contract for invoicing. In logistics field all contracts with customers are not uniform of vanilla contract. Many of them have customer specific terms, condition and commercials. Mapping these commercials in right way is very important. Any time a small error in entering contract in ERP may lead to deviation in realised revenue. Whenever revenue captured is higher, customer catches the vendor immediately but on the other side if revenue captured is low it becomes loss for the LSP.
Wrong capturing of activities: Post right mapping of contracts, the next probability exist in capturing of correct activities and data in system. For example, in transportation capturing of wrong volumetric weight or in supply chain capturing of incomplete VAS leads to revenue leakages in the industry. Any activity or dimension not captured in ERP will definitely lead to revenue loss.
Weak Invoicing, submission and accounting processes: Last but not least is poor accounting practice or deviating from defined norms lead to delayed collection or sometimes to bad debts. In most of the contract payment norms are defined from the date of submission of invoice. Even a single day delay in submission means incremental working capital requirement in business. In most of the logistics organisation we find it one of the weak link. COST OPTIMISATION For a logistics company operation contributes the largest part of cost stack followed by personnel and administration cost. Optimisation process require substantial detailing and analysis of each cost line item and challenging the existing process in order to find better process if any. The literal meaning of challenge is to explore better process, automated process, elimination of few activities or introduction of few activities instead of remaining in status quo. In this process, each cost header can be evaluated as separate business case for optimisation. Some of the cases can show scope of optimisation, which can be validated with statistics. Post scope study process, intervention can be identified to improve cost and efficiency both. Then the organisation can go for a pilot roll out in a selected domain or area before full blown implementation. Based on result of pilot study the optimisation initiative can be rolled out across the organisation. Some of the major cost items for optimisation can be as follow:
Network cost: Supply chain network includes transportation, production, inventory and distribution. So, network optimisation considers end-to-end activities and then perform optimisation in order to determine the scope of efficiency and cost improvement. For a transportation service provider a transportation network is the largest cost and which can be fixed or variable or hybrid. In case of fixed or hybrid cost model, weak network may lead to significant losses.
Infrastructure cost: For a supply chain company infrastructure cost may be Capex or Opex. Selecting a right mix is the first step of the process. Most of the LSP go for opex in major categories and that is recommended as well, considering the nature of business. Second step in infrastructure acquisition is the quantification of optimal size. Sub optimal infrastructure lead to operation in efficiency while excess infrastructure lead to wastage of resource. Third step in infrastructure acquisition is commercial process. which must be well defined with clarity of delegation of authority.
Vehicle Hiring cost: For most of the LSP spot vehicle hiring is a challenge, As market price of hiring keep on changing and vehicles are required across the geography based on customer’s requirement. In such a scenario. the decision making becomes decentralised and less transparent. Such hiring can be managed with the help of tech platforms like Freight Bazaar, which can bring transparency and accountability.
Fleet management: The LSP having asset heavy model, always have a challenge of asset management. In some cases, owned asset turns out to be least efficient compared to leased or outsourced assets. There are reasons behind that as the core focus area remains on logistics service rather than asset management. In the era of non-connectivity, fleets were efficiently managed by unorganised sector. But as of now with the help of IOT, fleet can be managed efficiently.
Manpower productivity: In our country still, automation level is quite low and most of shop floor works are done manually. For manual workflows productivity benchmarking can help in optimisation, which is possible through time motion study of various shop floor activities. Such processes can eliminate the inefficiencies of operation and unnecessary bench strength.
Procurement cost: In G&A, procurement efficiency can reduce the overall cost with few basis points. The golden rule of procurement is economies of scale. The procurement activity must be centralised. For some of the category, an organisation can go for reverse bidding and uniform vendor for supplies. For efficiency enhancement, organisations have already started adoption of digitisation, AI, robotics, data analytics etc. Second key driver in such initiative is HR, because any business transformation or cost optimisation activity basically pushes for changes. Any change does not work without the active engagement of employees or stakeholders. Last but not the least for business transformation, the drive is assertiveness of top management.
(The views expressed are solely of the author. The publication may or may not subscribe to the same.)