Benchmarking Reveals Cause of Supply Chain Cost Overruns

A $1 billion supplier of consumer electronics employed a business strategy built around constant, low-cost innovation and a make-to-stock approach for fast order fulfillment.

Each business unit within the company therefore attempted to manufacture at the lowest possible unit cost to ensure it could readily supply the necessary products immediately upon receipt of customer orders.

To become a low-cost producer, the company configured its global supply chain focused on manufacturing locations with low labor rates and negotiated long-term contracts with sea shippers to deliver completed products to local distribution centers. The majority of the manufacturing sites were in Asia while most of the company’s customers were in North America and Europe. As a result, products required as much as five weeks to reach distribution centers. In an attempt to reduce the time delays, the company turned to air freight as an alternative, which—while indeed faster—nearly quintupled its transportation costs. Clearly, the company needed to find a way to do both: improve distribution operations while reducing costs. But no answers were apparent.

The company subsequently called upon PRTM to perform a comprehensive benchmarking of its supply chain operations against those of competing electronics manufacturers. In exacting detail, PRTM analyzed each element of the company’s total supply chain management costs, including planning, order management, materials acquisition, and inventory carriage. The benchmarking exercise determined that the excess supply chain costs were being fueled, as expected, by the unplanned and costly air freight expenses. But it also uncovered the surprising root cause of the exorbitant distribution expenses: forecasting inaccuracies.

As a result of this finding, the company adopted a major change in its operating philosophy by placing greatly increased emphasis on its supply chain costs. For the first time ever, product managers recognized the huge expenses associated with expediting shipments—the bulk of which stemmed from forecasting inaccuracies. Further, the company began a major initiative to improve its forecasting process, a step that ultimately bolstered its forecasting accuracy and reduced the company’s reliance on supply chain execution to compensate for planning errors.