Business planning

Cost Management and The Supply Chain

rferfThe current global economy is characterized by the doctrine of survival of the fittest and marked by the changing face of the business environment. Currently, each company strives to remain relevant amidst such a competitive environment. One of the assured ways for this to be achieved is for quality products to be produced at an affordable rate, a product which fits the needs of the consumer.

It is expected, however, that manufacturers strike a balance not only in cost ascertainment and output, but also cost reduction, for the production cost to be reduced. Doing this would ensure effective production of quality products, meeting customer needs, and requirements. Managerial Mantra, a quote articulated by Michael.E.Porter, a popular strategist, now seems to be in the mainstream of cost reduction. Therefore, there exist, several techniques of strategic cost management which include but not limited to logistics/transportation analysis, value/business re-evaluation, supply chain management(SCM), and total productive maintenance.

All these are Inter-related in minimizing the cost of production while maximizing profits. Of these strategies, logistics and supply chain management are the most effective tools of cost reduction. It is a powerful strategy employed by managers and business owners to increase the response rates of business to the changing business environment and strengthen the organizations competitiveness. With the increasingly global economy and the marked intense competition, for survival to be enhanced and business, organization and company to become competitive, market responsiveness must be enhanced.

This competition, characterized by fuel prices fluctuations, safety concerns and the attendant social regulation, increasing customer expectations, the scenario of changing the mode of transportation and its associated cost, effects of globalization and the rest, managers continuously seek the most cost effective methods to optimally satisfy their customers.


Defining supply chain management is complex. However, definitions during the past few years vary from one reference to another. As defined by supply chain management (SCM) Yearbook of 2000, “it’s a chain of processes that facilitates business activities between trading partners, from the purchase of raw materials for manufacturing processes, to the delivery of the finished goods to the consumer.” The APICS definition of SCM goes as” the globally integrated network, by which products and services are delivered, from raw materials to consumers through a coordinated flow of physical distribution, information, and cash.

Thus, it appears that theInternational Journal of Logistics Management aptly captured the current scenario of the global economy, when SCM is defined as “an integrative philosophy to manage the complete flow of a distribution channel from the supplier to the final consumer.”

Commons to all these definitions are:

  • the channel begins from the supplier (manufacturer) to the final consumer
  • Information and cash are included with products and services
  • the goal is to reduce cost while meeting consumer demands
  • the process involves an inter-related network of global and integrative approach


As indicated earlier, there are numerous techniques to reduce cost, but supply chain management has proven to be the most effective tool. Evidently, strict supervision, power reduction, overtime work and quality compromise are practical ways to achieve this. It should be noted, however, that cost reduction is a mere waste strategy once the cost of quality has been compromised. Supply chain management aims to reduce cost without affecting the quality. With SCM as a strategy, all non-value added activities associated with the distribution of goods and products would be eliminated; right from the producer to the end user. The goal of SCM is for the competitive edge as a whole to be increased. One of the ways to accomplish this goal is for the creation of customer value over competitors values, and therefore, to increase customer satisfaction, either through lower cost or added values.


Transportation management industry continues to experience a lot of shortcomings, notably among is the increasing shortage of falling transportation capacity and truckers. In such a situation, it is extremely difficult for core carriers and shippers to adapt to the changing face of the logistics company, which results in missed opportunities and operational problems. Particularly, one of these missed opportunities is totally leveraging the transportation management system as an important strategic part of the supply chain.

To build a flawless system of supply chain management, logistics management systems have an important role to play. While connecting manufacturers, suppliers, distributors, and consumers together, the system plays an important role in achieving the fundamental objectives of supply chain management, by transporting inbound shipments from the source point to the manufacturing point, moving stocks between distribution units and points, and then moving the finished items to the end-users. The integration and implementation of a good shipping planning enhance the benefits inherent in good shipping operations. These benefits are supply, production and locating end users. Getting goods ready and available for delivery doesn’t complete the chain, but it is rather completed by moving the goods to where they are needed while meeting consumer needs. Therefore, for small and medium scale Enterprises (SMEs) to gain the competitive edge, it is imperative to integrate logistics with supply chain management.


For every economy, there is an array of numerous small and medium scale Enterprises (SMEs), but their impact is minimal as a result of their operational efficiency being low. Thus, implementing the supply chain management system in SMEs will increase efficiency while reducing operational cost.

To ensure economic growth and development, implementation of an effective supply chain management system is important. There is need to identify and eliminate all shortcomings experienced by SMEs for them to develop. For SMEs, there is an increasing awareness on the need to fully integrate SCM into the business proposal, as consumers are now demanding faster and demand timely delivery of goods and products. For small and medium business owners, vast knowledge of products and goods requirements is needed for better procurement and operations process. This urgent call for better coordination among customers, producers and service providers summarize the need for larger collaboration and visibility throughout the supply chain processes.

To eliminate the identified hindrances affecting the effectiveness and efficiency of a supply chain management system in SME, two categories of models are suggested. These include:

  1. Production and supply integration
  2. Product and supply integration


It involves the series of the process associated with the production of goods/products. It summarizes the whole activities from sourcing of raw materials by the producer to the consumption of the finished products by the end users. Some of the necessary steps include;

  • The goods/products and the volume to be produced need to be identified and defined.

The products must be related to the agreed specifications of the market needs. The aim is to produce the needed quality of materials, as any mistake in this phase will affect the whole process of the value chain.

Additionally, sourcing of raw materials must conform with the plan of production and scheduling. More so, the life span of each material has to be known in the purchasing and storage process. To manage and handle the inflow and outflow of raw materials, an Enterprise Resource Planning Strategy has to be employed. This will enable raw materials to be issued in accordance with the expected components that are required to be included in the specification of the intended product.

Very important in the value chain process is the production of goods. This is so because any lag in the production process will have a devastating effect on the output. For quality production and the time management to be ensured, production policies, procedures, and processes should be designed.


This describes the best way for the processes involved in delivering the right volume of products, with the required demands of the consumer at the right time and in the right condition.

In the first place, to identify product needs in the market, extensive research and development are required to be carried out. This will provide a hindsight of the trending products in the market and SMEs will have the opportunity to understand consumer needs.This stage is very important as SMEs will be assured that the produced goods meet market demands.

Furthermore, product identification should be done in accordance to market needs. Once the requirement is well-defined, these requirements will be communicated to the whole process of the value chain. Such communication ensures that production is in accordance with the same quality of product needed in the market.

Also, the projected production must not exceed the consumption power of the market. To achieve this, a market survey has to be done and must be carried out in the area of the target population. With this survey, high inventory turnover will be achieved, which will assure SMEs that the produced quantity doesn’t exceed the consumption ability of the market at every point in time.

In conclusion, in this changing business environment, the equations keep changing at a faster rate, with new entrants replacing yesterday front-runners in the market. The global business environment continues to be affected by an advance in technology, competition, life cycles of the product and customer demands. This volatile nature of business is making it difficult to compete effectively. The traditional approaches didn’t have the required demands of the evolving global complexity. Therefore, with this pressure, businesses continue to look at logistics, procurement, supply chain, marketing and other business components. Effective integration of the functions of these components helps to position companies strategically. All SCM links can help to achieve a competitive advantage.


If you have any questions, please ask below!