At Gartner, we routinely check with our client members on their top priorities and initiatives. Of course, the chart below shows digital business and supply chain transformation prominently at the top of the list. But we started asking about cost optimization this year, partly to establish a reference point we could gauge other priorities against. After all, managing and improving the cost of delivering products and services is fundamental to the supply chain role and its value.
Cost optimization cracked the top 10 during the most recent mid-year survey. We will continue to monitor its position as the global economy cycles through and responds to innovation, consumer behavior and a variety of demographic, monetary and geopolitical dynamics. Our supply chain cost optimization research asserts that cost optimization is not a separate initiative. Rather, it is a set of principles and practices to apply to any supply chain strategy, whether supporting profitable growth or competing in an environment of margin pressure (see Driving Cost Optimization Across the Enterprise: A Supply Chain Perspective).
Consider another way to think about cost optimization — as the benefit of doing the “right things right” in your supply chain strategy to serve customers and support the business strategy. The desire to optimize cost and realize digital ambitions are complementary to each other. Findings from this year’s digital supply chain survey indicate that “cost reduction” and “improved cash flow” rank only slightly (about 3%) behind revenue growth as drivers for investment. And when we test for the true nature of company digital ambitions (see CSCOs Must Align Supply Chains to Digital Business Ambition: Transform or Optimize?), more than 65% of respondents in the next two years are focused on enablement and optimization.
In other words, a majority of digital roadmaps are driving automation and other changes that improve efficiency and cost of supply chain operating models. The survey indicates that more than 70% of companies are working from a vision and roadmap that extends three years or less into the future. And the graphic above shows that the percentage of companies focused on enablement and optimization rises to 75% for time horizons extending out five years. This validates that even after you transform there will be a need to cost optimize the new operating models.
We began to publish a series of role-based Playbooks for Cost Optimization this year, in order to ensure that clients have access to content that is both thought-leading and actionable.
The playbooks are organized into a structure, illustrated in the table below, which provides a different lens into the insights from our digital supply chain research.
Leaders who are moving toward a vision involving digital transformation must still think and operate along three time horizons, each of which will provide cost optimization benefits.
- Leveraging best practices in planning and operations creates credibility, momentum and funding for investment in digital capabilities.
- Networks, organizations and incentives must be reconfigured to eliminate excess capacity and waste from misalignment while ensuring that conditions exist for successful change.
- Investment in transformed, digital capabilities drives higher levels of efficiency and enables transformation to new operating models that drive profitable growth.
Integrating cost optimization into your supply chain strategy will establish credibility by delivering a continuous stream of value which can be used to fund investment in change. This will ensure that business and market surprises don’t prematurely derail your digital ambitions.
Paul Lord, Senior Director, Supply Chain Research and Advisory, Gartner