Where to find 25% to 40% in cost savings and cash flow improvements for 2023
With economic volatility and input costs softening across the globe, there is one key question CEOs and PE executives need to ask: How much savings opportunity is there from a pure market perspective vs. how much is possible from achieving efficiencies in the internal and external value chain?
Don't Settle for Less
SGS Maine Pointe’s private equity team agree that the single digit % savings targets set internally and accepted in board rooms are potentially too low.
We outline a path to 25-40% savings across supply chain and operations without impacting growth and resilience.
The Table Stakes for Supply Chain & Operations
Today many procurement professionals are embarking on initiatives to re-engage with suppliers to capture the opportunities a softening and deflationary market can bring. As a result, some companies, suppliers, and buyers can secure savings in the region of 3-5% from their supply base. Although a welcome relief, this level of savings from incremental change will not be enough to weather the storms ahead.
Opportunity #1: Procurement
A deflationary market for raw materials and intermediate goods presents opportunities to revisit supplier agreements with an eye towards taking costs out of suppliers' value chains. With inflation in many commodity prices receding or peaking, many raw materials are already in retracement. Therefore, index-based price improvements of 3-5% are expected as "table stakes" in 2023.
However, by taking a more holistic Total Value Optimization™ approach to strategic sourcing, companies can realize an additional 5-15% in value creation through initiatives such as strategic sourcing. Embedding sourcing and distribution optionality into the business will reap dividends.
Based on analysis of current SGS Maine Pointe client spend relative to actual market evidence, up to 50% of direct goods price increases over the past year have no underlying justification. In short many suppliers have been over-hedging their price hikes. For example, a number of price increases we’ve looked at cannot be tied-back to underlying raw material, labor, and freight rate increases. There are, therefore, real opportunities to recoup some or all of the gross margin losses over the past 2-3 years.
Opportunity #2: Logistics
With logistics and freight markets starting to normalize, transportation rates are reverting due to a softening in energy prices. With capacity starting to decrease in some markets, excess warehousing and distribution center operations combine to drive costs down. Therefore, companies have the potential to achieve a 5-10% reduction in transportation and warehousing costs with a further 3-5% savings in fuel and freight.
Opportunity #3: Operations
With a probable recession looming, or at least the market flattening, unstable and softening demand patterns will take their toll as the past couple of years has seen inventory stock piling to avoid stockouts. With demand slowing, many companies have too much of the wrong inventory, often in the wrong locations. By taking a fresh look at sales, inventory, and operations planning (SIOP) using the latest digital tools, companies can strategically position inventory across geographies and drive the cultural and process change needed to optimize margins, sales, resilience, and response. This, combined with a fresh look at manufacturing operations, can drive an additional 10-15% improvement through initiatives such as network optimization, waste reduction, process optimization, and capacity consolidation.
Future Proofing Your Supply Chain & Operations
Taking a broader Total Value OptimizationTM approach to supply chain and operations improvement is critical, given that cost savings are only a one-dimensional view across the supply chain and operation. It is, therefore, essential to balance the levers of driving out costs (margin protection) with releasing cash (short-term working capital survival) and service (to ensure sustainable growth).
Given the inevitable supply-side, buy-side shifts taking place over the coming year, focusing on one element for change will not be enough to maintain competitiveness and deal with the challenges associated with the cost of debt and with volatile and softening demand. To reduce the downside risks and capitalize on upside opportunities, we advocate that executives expand their horizon to capture the opportunities that lie out there across the broader end-to-end supply chain and operations perspective – where you start will differ depending on the deal lifecycle and value creation areas. However, taking a portfolio approach will reap financial and service dividends.