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'Treadmill of Innovation' spurs supply chain costs


Posted on 24/07/2013 by Wayne Brophy FCILT

Supply chain costs are spiralling as the retail sector keeps up with a “treadmill of innovation”, according to one academic.

Martin Christopher, professor emeritus of marketing and logistics at Cranfield School of Management, told Business Reporter that costs are growing as a result of increasingly complex ranges of products on the market. The retail sector, he adds, is where this is being felt most acutely.

Despite the fact that businesses have improved their supply chain management, Prof. Christopher says, operating costs continue to rise because distributors need to support an ever-growing range of products.

For many of these goods, such as household appliances, replacement parts must be accessible for the whole life of the product even if it is superseded by a newer model, he explains. As more and more new products enter the market, supply chains increasingly feel the strain. The ongoing competition between different companies to develop new products and get them to market first means that the number of available products is growing at an accelerating rate.

Because consumers are accustomed to the level of choice they now enjoy, Prof. Christopher argues that it is unlikely this culture in the retail sector will ease off anytime soon.

Keeping supply chain costs down is as important as ever for companies looking to boost their often fragile profit margins. Research published earlier this month by Proxima found that among Dutch companies supplier costs accounted for three-quarters of the collective revenues of all the AEX25 firms listed on the Amsterdam stock exchange. According to the research, cutting these costs by just one per cent could push profits upwards by an average of more than five per cent a year.

However, Proxima found that the executives at these firms consistently underestimated the effect of supply chain costs on their profits, instead attributing the lion’s share of their expenditure to paying their staff. Cutting labour costs by the same amount of one per cent would only have boosted profits by 0.7 per cent, according to the research, thereby making this move counter-productive.

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