How To Achieve Cost Savings From Supply Chain Management: Techniques That Work
Thomas A. Crimi, Supply Chain Team Coordinator/Strategic Sourcing
ChevronTexaco, Houston, TX 77010, 713-754-4921 crimita@texaco.com Ralph G. Kauffman, Assistant Professor
University of Houston-Downtown, Houston, TX 77002, 713-221-8962 kauffmanr@dt.uh.edu Abstract. This paper identifies and demonstrates proven techniques that achieve real cost savings from supply chain management, and provides information on how to apply these techniques in various business situations. Most supply chain professionals have knowledge of supply chain management, but many find serious challenges in achieving actual cost savings from the concept. This paper provides information on how to achieve cost savings from supply chain management.
Achieving Supply Chain Optimization
Supply Chain Management. A number of definitions have been proposed for supply chain management. Perhaps the best is simply, "an integrative approach to managing supply and distribution networks." The key word is "integrative," making the chain work better and at lower cost than would be possible by managing each segment of the chain independently. Another way of defining supply chain management is to state that it is the management of physical materials, services, information, money, and time across and between organizations in a business relationship in a manner that achieves the objectives of all the organizations at the least total cost.
Objectives of Supply Chain Management. Some common goals of supply chain management include: Reduce waste and non-value-added activities (i.e. cost reduction) including excess inventory, increase customer service/responsiveness, improve supply chain communication (speed/timeliness, accuracy of information, information sharing), reduce cycle time (e.g. new product development, supply leadtime), and improve coordination of efforts (continuous improvement, understanding of goals)
(Ellram 1994).
Results of Applying Supply Chain Management. The most-sought and most common result of applying supply chain management is reduced costs in the supply chain. A cost that exists throughout most supply chains and therefore is often the target of supply chain management is the cost of inventory, managing it and carrying it. Many supply chain management efforts are aimed at reducing inventory costs. Other results of supply chain management include improved quality, more dependable quality, more reliable supplier performance, e.g. in order fulfillment and delivery, improved transportation service, reduced packaging costs, elimination or combination of steps in the supply chain, faster cycle times, and more satisfied customers. It is by nature an integrative approach, as much entrepreneurial as logistical, and results come from the following:
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Having knowledge of a variety of methods, processes, techniques, and systems that can be used to manage supply chains
Studying particular supply chains to identify areas of potential improvement
Applying and implementing methods, processes, techniques, and systems as appropriate to improve supply chain performance
Evaluating changes, revising as needed, and practicing of continuous improvement through periodic performance reviews and value analysis.

Cost-Savings Approaches and Techniques. A total cost of ownership (TCO) savings model must include training of business units, buying organization's purchasing group, and top management personnel. Identification of Types of Costs and Savings.
Cost Reduction: Cost saving resulting from a situation where something is currently purchased and the cost of obtaining it is reduced. A cost reduction can be per unit or overall. Examples include: pay less, use less, eliminate the use of, use a substitute item at lower cost, decrease a part of the acquisition and use cost (total cost of ownership) other than price, e.g. transportation cost, inventory cost, handling cost, quality control cost.
Cost