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The Supply Chain Management Challenge to Decrease the COGS
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The Supply Chain Management Challenge to Decrease the COGS

Competitive Advantage

One of the benefits to an outsourced supply chain management agreement should be the ability to drive down the cost of goods sold (COGS). Drive down these costs, and you have made a substantial contribution toward a competitive advantage. ATC Aerospace provides a system to optimize and manage inventory—to assure that enough parts are on hand, without over-spending capital resources. Effective inventory is not merely a function of smart software—experience in inventory management is an added value.

A supply chain management company  can help lower the costs of your materials requirements, such as raw materials, packaging, and related material handling, by aggregating your purchasing requirements with clients who have similar material needs. With a centralized spend management system, your vendor management and procurement  is managed by our aviation buyers who deal with over 1,500 suppliers. This allows you to consolidate all your requirements and ensure the lowest total cost while eliminating your overhead and operating costs associated with the procurement process.

A 2009 study by TMG-IMC documented how a company’s supply chain performance has a direct impact —56% COGS, with a related 35% impact on sales, general, and administrative expenses.

They noted that a supply chain management solution should be equipped to help reduce direct variable costs with a focus on optimizing demand planning and a just-in-time manufacturing sequence. This in turn will reduce warehousing and the related costs of staging finished goods.

COGS can be negatively influenced by the costs of carrying a high or excess inventory, which may have unforeseen consequences that contribute to disorganization at the plant or shipment floor, in addition to a more direct impact on cash flow.


Cost of Goods in a Typical Manufacturing Company

Material

65%–75%

 

Overhead Costs*

25%–30%

 

Direct Labor

10%

 

*Overhead costs are typically administrative and other types of indirect labor, equipment, facilities, and supplies.

Many companies have invested in supply chain management technology to strengthen their supply chain management performance, but have experienced bottlenecks in implementation. According to William Duncan of Computer Sciences, there are three basic problems that management often makes to undermine the effectiveness of a system. Duncan states that the biggest problem is traced to making shortcuts in implementation, and failing to cleanse the data loaded into the systems. He identifies inadequate training as the second problem, and third is the gap between a necessary change in the underlying business process that must accompany the software application to experience expected efficiencies.

All of these internal problems contribute to the disappointment realized when the expected reduction of COGS does not improve. Says Duncan, “They expect those improvements to result from better visibility of the assets themselves, better tools for balancing supply and demand, and greater levels of automation that require less human intervention in repetitive decision making around tedious tasks such as generating and managing purchase orders and manufacturing work orders.”

Duncan concludes that reductions in COGS have a dramatic impact on earnings compared to changes in revenue in most cases. Poor realization of these expected benefits can be devastating to the business case for investments in major software applications.

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