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If you were to tell me that your company had never looked at its supply chain costs and sought to deliver Categories
reductions, I would be mightily surprised. On the other hand, if you told me your company hasn’t been 3PL
able to sustain any progress in supply chain cost reduction, I wouldn’t be surprised at all.
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The following ve mini case studies explore a few high-pro le companies that have managed to sustain
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their supply chain cost reduction e orts and keep expenses under control. The challenges faced by these
organisations and the steps they took, may provide some inspiration for successful long-term cost Case Studies
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1. Deere & Company
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Deere & Company (brand name John Deere) is well known for the manufacture and supply of machinery Events
used in agriculture, construction, and forestry, as well as diesel engines and lawn care equipment. In 2014,
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Deere & Company was listed 80th in the Fortune 500 America’s ranking and in 2013 was 307th in the
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Supply Chain Cost Reduction Challenges: Deere and company has a complex product range, which
includes a mix of heavy machinery for the consumer market and industrial equipment, which is made to Glossaries

order. Retail activity is extremely seasonal, with the majority of sales made between March and July. Hiring

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The company was replenishing dealers’ inventory on a weekly basis, by direct shipment and cross-docking
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operations, from source warehouses located near Deere & Company’s manufacturing facilities. This
operation was proving too costly and too slow, so the company embarked on an initiative to achieve a 10% Purchasing
supply chain cost reduction over a four-year period. Retail

The Path to Cost Reduction: The company undertook a supply chain network redesign program, Slotting
resulting in the commissioning of intermediate “merge centers” and optimization of cross-dock terminal Supply Chain
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Deere & Company also began consolidating shipments and using break-bulk terminals during the seasonal Supply Chain Strategy
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Supply Chain Cost Management Results: Deere & Company’s supply chain cost management
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One of the world’s largest manufacturers of computer chips, Intel needs little introduction. However, the
company needed to make some signi cant supply chain cost reductions after bringing its low-cost “Atom”
chip to market. Supply chain costs of around $5.50 per chip were bearable for units selling for $100, but
the price of the new chip was a fraction of that, at about $20.

The Supply Chain Cost Reduction Challenge: Somehow Intel had to reduce the supply chain costs for
the Atom chip, but had only one area of leverage—inventory.

The chip had to work, so there were no service trade-o s that could be made. Being a single component,
there was also no way to pay less in the way of duties. Intel had already whittled packaging down to a
minimum and with a high value-to-weight ratio, the chips’ distribution costs could not really be pared
down any further.

The only option was to try to reduce levels of inventory, which, up to that point, had been kept very high in
order to support a nine-week order cycle. The only way Intel could nd to make supply chain cost
reductions was to bring this cycle time down and therefore reduce inventory.

The Path to Cost Reduction: Intel decided to try what was considered an unlikely supply chain strategy
for the semiconductor industry: a true make-to-order scenario. The company began with a pilot operation
using a manufacturer in Malaysia. Through a process of iteration, they gradually sought out and
eliminated supply chain ine ciencies to incrementally reduce order cycle time. Further improvement
initiatives included:

Reduced the chip assembly test window from a ve-day schedule, to a bi-weekly, 2-day-long process
Introduced a formal S&OP planning process
Moved to a vendor-managed inventory model wherever it was possible to do so

Supply Chain Cost Management Results: Through its incremental approach to cycle time improvement,
Intel eventually drove the order cycle time for the Atom chip down from nine weeks to just two. As a result,
the company achieved a supply chain cost reduction of more than $4 per unit for the $20 Atom chip—a far
more palatable rate than the original gure of $5.50.

3. Starbucks
 

Like Intel, Starbucks is pretty much a household name. But like many of the most successful worldwide
brands, the co ee shop giant has been through its periods of supply chain pain. In fact, during 2007 and
2008, Starbucks leadership began to have serious doubts about the company’s ability to supply its 16,700
outlets. As in most commercial sectors at that time, sales were falling. At the same time though, supply
chain costs rose by more than $75 million.

Supply Chain Cost Reduction Challenges: When the supply chain executive team began investigating the
rising costs and supply chain performance issues, they found that service was indeed falling short of
expectations. Findings included the following problems

Fewer than 50% of outlet deliveries were arriving on time

A number of poor outsourcing decisions had led to excessive 3PL expenses
The supply chain had, (like those of many global organisions) evolved, rather than grown by design, and
had hence become unnecessarily complex

The Path to Cost Reduction: Starbucks’ leadership had three main objectives in mind to achieve
improved performance and supply chain cost reduction. These were to:

1. Reorganize the supply chain

2. Reduce cost to serve
3. Lay the groundwork for future capability in the supply chain

In order to meet these objectives, Starbucks divided all its supply chain functions into three key groups,
known as “plan” “make” and “deliver”. It also opened a new production facility, bringing the total number
of U.S. plants to four.

Next, the company set about terminating partnerships with all but its most e ective 3PLs. The remaining
partners were then managed via a weekly scorecard system, which was aligned with renewed service level
agreements.

Supply Chain Cost Management Results: By the time Starbucks’ supply chain transformation program
was completed, the company had made savings of more than $500 million over the course of 2009 and
2010, of which a large proportion came out of the supply chain, according to Peter Gibbons, then
Executive Vice President of Global Supply Chain Operations.

4. AGCO
 

Like Deere & Company, AGCO is a leading global force in the manufacture and supply of agricultural
machinery. The company grew substantially over the course of two decades, with a considerable
proportion of that growth achieved by way of acquisitions.

As commonly happens when enterprises grow in this way, AGCO experienced increasing degrees of supply
chain complexity, along with associated increases in cost, but for many years, did little to address the issue
directly, largely due to the decentralized and fragmented nature of its global network.

In 2012, AGCO’s leaders recognised that this state of a airs could not continue and decided to establish a
long-term program of strategic optimisation.

Supply Chain Cost Reduction Challenges: With ve separate brands under its umbrella, AGCO’s product
portfolio is vast. At the point when optimisation planning began, sourcing and inbound logistics were
managed by teams in various countries, each with di erent levels of SCM maturity, and using di erent
tools and systems.

As a result of the decentralised environment, in which inbound logistics and transport management were
separate operational elds, there was insu cient transparency in the supply chain. Synergies and
economies of scale (and the bene ts of the same) were not being taken advantage of, and all these issues
were set against a backdrop of a volatile, seasonal market.

The Path to Cost Reduction: Following a SCOR supply chain benchmarking exercise, AGCO decided to
approach its cost reduction and e ciency goals by blending
new technology—in the form of a globally integrated
transport management system (TMS)—with a commitment to
form a partnership with a suitably capable 3PL provider.

As North and South American divisions of the company were

already working with a recently implemented TMS, it was
decided that the blended approach would be implemented
rst in Europe, with commitments to replicate the model, if
successful, in its other operating regions.

With the technology and partnership in place, a logistics control tower was developed, which integrates
and coordinates all daily inbound supply activities within Europe, from the negotiation of carrier freight
rates, through inbound shipment scheduling and transport plan optimisation to self-billing for carrier
payment.

Supply Chain Cost Management Results: Within a year and a half of their European logistics solution’s
go-live, AGCO achieved freight cost reductions of some 18%, and has continued to save between three and
ve percent on freight expenditure, year-on-year, ever since. Having since rolled the new operating model
out in China and North America, the company has reduced inbound logistics costs by 28%, increased
network performance by 25% and cut inventory levels by a quarter.

5. Terex
 

Headquartered in Westport Connecticut, Terex Corporation may not be such a well-known name, but if
your company has ever rented an aerial working platform (a scissor-lift or similar), there is a good chance
it was manufactured by Terex and originally dispatched to the rental company from a transfer center in
North Bend, Washington.

The North Bend facility is always lled with lifting equipment, most pieces made to order and uniquely
customised for speci c customers. Terex maintained a manual system for yard management at the
transfer centre, which generated excessive costs for what should have been a relatively simple process of
locating customers’ units to prep them for delivery.

The Supply Chain Cost Reduction Challenge: A wallboard and sticker system was a low-tech solution for
identifying equipment items in the yard at Terex. While inexpensive in itself, the solution cost around six
minutes every time an employee had to locate a unit in the yard. It also required a considerable number of
hours to be spent each month taking physical inventories and updating the company’s ERP platform.

The Path to Cost Reduction: Terex decided to replace the outdated manual yard management process
with a new, digital solution using RFID tracking. A yard management software (YMS) product was chosen,
and the transfer centre was surveyed before implementation of a pilot project covering a small portion of
the yard.

After a successful pilot, the solution was approved for full-scale implementation, replacing stickers, yard
maps, and wallboard with electronic tracking and digital inventory management. As at December of 2017,
Terex was making plans to integrate the yard management solution with its ERP platform to enable even
greater functionality.

Supply Chain Cost Management Results: While the YMS cannot reconcile inventory automatically with
the Terex ERP application, it does at least provide a daily inventory count via its business intelligence
module. That alone has saved the labour costs previously incurred in carrying out manual counts.

More importantly though, the RFID-based unit identi cation and location process has saved the company
around 70 weeks per year in labour costs, by cutting the process time down from six minutes, to a mere
30 seconds per unit.

Making Supply Chain Cost Reductions Stick

Of course, the above case studies are merely summaries of the changes these high-pro le brands made to
their supply chains. What can be seen from these brief accounts though, is that in order to make
signi cant and sustainable cost improvements, substantial change must take place.

Deere & Company had to overhaul its network completely.

Intel had to shift an entire supply chain to a new and previously unheard of strategy in its sector.
Starbucks had to shake up its third-party relationships and increase production capacity.
AGCO had to invest in technology and collaborative partnerships with external service providers.
Terex had to implement costly (but e ective) RFID tracking capabilities

At the same time, none of the changes took place overnight. In fact, each of the companies tackled issues
in phases, e ectively learning more as they went along.

Not Much to be Saved in the Comfort Zone

When it comes to making supply chain cost reductions that stick, every avenue must be explored.
However, at the root of high costs, there will usually be one major factor requiring innovation, whether it’s
the network, inventory strategy, the working relationships with supply chain partners, or some other
element of your operation.

Seldom will major savings be made by whittling away piecemeal at what seem on the face of it, to be the
most pressing issues of the day (such as direct transportation costs or supplier pricing). If you want to see
sustainable cost reductions, your company will need to view the big picture from a new angle or two, and
be prepared to step outside of the comfort zone to which it will have become accustomed.

Editor’s Note: This post was originally published in June 2016 under the title “3 Mini Case Studies: Successful
Supply Chain Cost Reduction and Management”. It has since been revamped to include two new case studies, so
that there are now ve mini case studies in total.

Best Regards,
Rob O’Byrne
Email: robyrne@logisticsbureau.com
Phone: +61 417 417 307

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8 Comments
Norberto Pruskowski on June 8, 2018 at 6:10 am
Reply
Me too.

Tangela Castellari on June 23, 2018 at 2:08 pm

Reply
As soon as I noticed this internet site I went on reddit to share some of the
love with them.

Anggi Fergian on September 7, 2018 at 12:18 am

Reply
I have an assignment to search example of SCM and nally I faound it.
Thank you for writing this case studies.

PALLLIKKARA VISWANATHAN on September 27, 2018 at 1:35 pm

Reply
Sir your articles are excellent. Let me have article on traceability in supply
chain. regards:

Hemant on October 3, 2018 at 8:45 pm

Reply
Great

Martha on October 10, 2018 at 10:27 pm

Reply
How to reduce Shipping cost of machinery globally

Rob O'Byrne on October 18, 2018 at 9:41 am

Reply
I would look at:

Lead times required

Order quantities and sizes
Transport mode in use
Review of available transport suppliers and rates

Jason Darnstaedt on November 1, 2018 at 8:46 am

Reply
Cost reduction and management are two important elements that help
increase pro ts. Unfortunately, not every company gets it right. These case
studies show how it’s possible to improve the situation.

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