Building a great product and providing excellent service can earn customers’ loyalty. But the key to unlocking greater profitability and long-term resilience may lie hidden within the supply chain. Every process and material required to get a product to the customer incurs an expense—but these costs aren’t always well managed. Poorly coordinated inventory oversight can lead to costly stockouts or overstock. Disorganized warehouse layouts can increase labor hours. Fragmented shipping routes can waste fuel and human resources. These types of inefficiencies can add up to increased supply chain costs and diminished margins. Investing in greater supply chain visibility, improved supplier communications and collaboration, and automated processes can help organizations rein in these expenses.
What Are Supply Chain Costs?
Supply chain costs are the total expenses a business incurs to bring a finished product or service to market— all the investments required to manufacture, package, store, and ship products or deliver a service. They include direct costs, such as the purchase of raw materials or the labor required to manufacture a product. They also include indirect expenses, such as facilities management or supply chain software.
Tracking supply chain costs is more than an accounting best practice; it’s a strategic lens for understanding and improving the efficiency and competitiveness of a company’s value chain.
Key Takeaways
- Supply chain costs are the total expenditures required to transform goods from raw materials to delivered products.
- Supply chain costs often have an inverse correlation with supply chain efficiency.
- Investing in automation, smoother production processes, inventory management, and warehouse management can help curtail supply chain costs.
- Strong supplier management can yield better pricing and terms and mutually beneficial efficiencies, which can also lower supply chain costs.
Supply Chain Costs Explained
Supply chain costs make up a significant chunk of an organization’s spending, influencing pricing strategy and overall profitability. But an inverse relationship typically exists between supply chain costs and supply chain efficiency. Operational inefficiencies, such as redundant handling or expedited shipping to compensate for production issues, will drive up costs, while improved production processes will reduce supply chain costs through less waste and resource usage. External factors can also affect supply chain costs—high tariffs, for example, have a direct impact on the cost of goods sold.
Categorizing costs can help a company isolate cost drivers and pinpoint areas where operational changes can trim spending or improve service levels. At the simplest level, supply chain costs can be broken down into direct and indirect expenses, though some organizations choose to break down supply chain costs by origin, such as procurement, manufacturing, or warehousing. Direct costs tend to be traceable to specific products or orders, while indirect costs may be spread across the supply chain. Organizations can also classify supply chain costs as fixed, variable, and semi-variable. Fixed costs—like warehouse rent, equipment depreciation, and salaries—remain consistent regardless of output. Variable costs, such as raw materials, packaging, and shipping, fluctuate in proportion to output. Semi-variable costs, such as warehouse utility bills, may consist of a fixed monthly charge plus variable costs that occur when a facility is busier than usual and using more resources.
Supply chain metrics—such as supply chain cost per unit, supply chain cost as a percentage of sales (CAS), and cash-to-cash (C2C) cycle time—are fundamental to managing and reducing supply chain costs. Cost per unit divides total supply chain costs by the number of units produced or shipped; this is useful for product-level comparisons and supplier evaluation. CAS expresses total supply chain costs as a percentage of revenue, which can help with tracking cost efficiency over time, benchmarking against industry peers, and understanding how supply chain costs impact profitability. C2C is a key metric for evaluating supply chain cash flow, measuring the time between payments to suppliers for materials and receipt of customer payments for finished products.
How Do Supply Chain Costs Impact Operations?
Supply chain costs directly affect efficiency, pricing, profitability, competitive positioning, and risk management. Rising transportation costs, inflation, or other common supply chain challenges can create cost pressures that force a business to adapt its operations quickly to maintain service levels and profitability. For example, rising transportation costs may prompt a logistics team to re-evaluate its shipping strategies and contracts, enact tech-driven measures to optimize routes, or reduce logistics expenses in other ways. At the same time, business operations can influence supply chain costs; for example, operational improvements that minimize waste can help lower expenses.
While reducing supply chain costs may generally be seen as a smart business move, aggressive cost-cutting can negatively impact service levels and agility. On the other hand, seemingly smart operational investments may actually have a negative effect on supply chain costs. Just-in-time inventory management, for example, helps organizations reduce carrying costs, but it can also expose them to greater risks from supply chain disruptions. Meanwhile, playing it safe with increased safety stock can minimize risks, yet increase costs and diminish profitability. Frameworks like the Supply Chain Operations Reference (SCOR) model that integrate supply chain costs with service and process metrics can help companies strike the right balance.
What Are the Impacts of a Poorly Optimized Supply Chain?
A poorly optimized supply chain will affect the bottom line in one way or another, whether due to runaway expenses, costly disruptions, or both. The most expensive issues typically result from a lack of supply chain visibility, leading to ineffective supplier management and opaque logistics. Without transparency into their supply networks, global organizations struggle to keep tabs on raw materials and inventory and to manage their supply chains for cost and resilience.
Ineffective supplier relationship management can contribute to higher prices, excess inventory, and expedited shipping expenses. Poor vendor management can degrade compliance efforts. Most critically, companies that fail to diversify their supplier bases increase their exposure to disruption and higher costs. It’s not surprising, then, that supply chain strategies are evolving: 73% of companies reported progress on dual-sourcing strategies, according to McKinsey’s “2024 Global Supply Chain Leader Survey,” with 60% of respondents regionalizing their supply chains.
On a tactical level, poorly optimized supply chain systems and a dearth of real-time data also make it difficult to monitor inventory, production progress, and items in transport. This not only diminishes operational productivity, but also inevitably drive up labor costs and inventory shrinkage.
Ultimately, failing to optimize the supply chain undermines overall business success because organizations tie up excess capital in inefficient operations that could otherwise be invested in better customer service and sustainable growth.
14 Strategies for Improving Supply Chain Costs
Controlling costs is top of mind for most businesses. Indeed, cost management is the number one priority for C-suite leaders this year (for the third year in a row), according to a 2025 report from Boston Consulting Group (BCG). The year before, nearly two-thirds of business executives told BCG that they were prioritizing the reduction of supply chain costs over all other cost management actions.
The following are 14 smart strategies that business leaders can employ to reduce supply chain costs.
1. Identify the Biggest Pain Points
The primary bottlenecks or inefficiencies driving up costs may vary by company. But some of the issues that an organization should keep an eye out for include rising raw material and transportation costs, inaccuracy in demand forecasting, supplier reliability problems, and inefficient warehouse practices. Until an organization can clearly identify the biggest problem areas in its supply chains, any improvement initiative risks missing the mark or addressing symptoms rather than root causes. To prioritize the costliest supply chain issues, companies can drill into key performance indicators (KPIs) and operational data, such as carrying costs, order cycle time, supplier on-time delivery rates, and transportation spend per unit.
2. Improve Forecasting Capabilities
Accurate demand forecasting paves the way for companies to manage inventory and plan production schedules more efficiently. Ideally, this will reduce carrying costs while keeping production lines moving. Good forecasting capabilities start with reliable and accessible data, which is where a centralized enterprise software platform can help. Businesses will also want to standardize data collection, validate inputs, and continually audit data sets to maintain data hygiene. Forecasting models that use machine learning and predictive analytics can extract intelligence from a combination of internal data, external market signals, and other factors, including seasonality and real-time sales trends.
3. Deploy AI
Implementing AI-powered tools can help with everything from optimizing inventory levels to planning transportation routes. AI can be used to analyze data sets related to supplier performance and score them based on delivery times, quality, and cost efficiency, for example. In logistics, AI can help warehouse managers enhance space utilization and automate labor planning. AI-powered predictive analytics can help an organization anticipate potential supply risks by analyzing and monitoring such factors as supplier financial health, market trends, and geopolitical issues that encourage executives to take important mitigation steps only when necessary.
4. Minimize Material Waste
Decreased material waste through revamped manufacturing and logistics processes both reduces direct material costs and limits expenditures on excess handling, disposal, and reprocessing. Some of the most common causes of manufacturing waste are inefficient processes that result in overproduction, defective products, and excess scrap. Lean manufacturing principles that focus on bolstering quality and efficiency can limit defects and reduce the waste of resources used by each process. Additionally, organizations can establish recycling and reuse programs that recover usable materials from scrap, decreasing costs and improving sustainability.
5. Monitor Your KPIs
Monitoring supply chain KPIs is crucial for controlling costs. Some of the most relevant metrics include inventory turnover rates, order fulfillment cycle time, on-time delivery rate, forecast accuracy, and C2C cycle time. Companies may also want to tie those KPIs back to specific supply chain cost metrics, such as cost per unit or CAS. KPIs should be monitored regularly, with weekly or daily reviews for time-sensitive metrics like delivery performance. Sharing metrics across cross-functional teams that influence supply chain operations will foster accountability and help decision-makers take targeted cost management actions, such as adjusting procurement schedules, revamping inventory levels, or renegotiating carrier contracts.
6. Increase Supply Chain Resiliency
Increasing supply chain resilience may initially raise supply chain costs, but it will ultimately drive greater long-term savings and protect profitability in the face of external volatility. Investing in supplier diversification, appropriate safety stock, and technology that offers predictive analytics and greater supply chain visibility can help prevent costly supply chain disruptions. These disruptions could include everything from port congestion to a supplier’s insolvency. At the very least, supply chain disruptions increase costs via expenses related to emergency sourcing and rush shipments; in other scenarios, they can halt production. Organizations create resilient supply chains by instituting strategies that offer redundancy, increase operational flexibility, improve visibility, and support collaboration with suppliers.
7. Reduce Transportation and Shipping Costs
Reducing transportation and shipping costs is a vital step in lowering overall supply chain expenses. One important strategy is consolidating shipments to maximize space utilization in trucks and containers. Organizations can also reduce shipping costs by using logistics management systems, often embedded with AI, to provide route optimization. This can minimize fuel consumption, shorten delivery times, and avoid delays. Advanced logistics systems can also help organizations coordinate multimodal transportation to take advantage of the most cost-effective and appropriate mode. Establishing strong carrier relationships also helps organizations secure better terms and volume discounts.
8. Optimize Utilities Management
Reducing the consumption of electricity, water, heat, and gas in manufacturing and logistics can meaningfully lower supply chain costs. These expenses are often directly tied to production and handling activities, so trimming these expenses can decrease the cost per unit. Lowering utility costs starts in procurement and sourcing, but it progresses to rethinking operational functions. Implementing energy-efficient lighting, climate controls, and automated energy-consumption monitoring can have a big impact. Organizations may consider using renewable energy sources to lower costs and also meet sustainability goals. Facilities managers can institute ongoing and preventive maintenance to make sure machines and fleet vehicles meet their energy consumption targets.
9. Align With Your Suppliers
Supplier relations play a huge role in bringing down supply chain costs, starting with negotiating smart contract terms all the way through day-to-day collaboration. Establishing mutually beneficial relationships can foster an environment in which buyers and suppliers work together to find shared efficiencies and opportunities for savings. Engaged suppliers may offer materials recommendations and other suggestions to bring down supply chain costs without hindering quality.
10. Automate Processes
Automating processes across all the functional areas that impact supply chain flows will produce a leaner, more cost-effective supply network. Warehouse automation using robotics and barcode or RFID scanning can accelerate picking, packing, and order fulfillment to reduce labor costs and expensive errors. Automated storage and retrieval systems further boost accuracy and help minimize space requirements. Automation in inventory management makes tasks like cycle counts less labor-intensive. And automated demand planning tools can minimize excess stock and stockouts by equipping inventory managers to better align orders and stock replenishment with production needs. Automation also improves the efficiency of other administrative tasks, including invoice processing, shipment tracking, and the generation of compliance documents.
11. Lower Warehouse Expenses
Meaningfully lowering warehouse expenses necessitates a comprehensive approach that targets all major cost drivers: labor, space, equipment, inventory, and utilities. Most importantly, investing in warehouse management systems that feature performance analytics can help companies identify and address inefficiencies in workflows. Companies can improve space utilization with vertical storage systems and more efficient racking configurations to increase capacity without expanding footprints. Tactics like cross-docking and shipment consolidation can also save on storage needs and handling. Labor expenses can be lowered through AI-powered data analysis to enhance warehouse scheduling. And, as mentioned above, energy-efficient practices can trim utility bills.
12. Adopt a Culture of Continuous Improvement
Adopting a culture of continuous improvement in supply chain management (SCM) means adopting a culture of ongoing enhancements as a core business value, not just a one-and-done initiative. Companies often integrate structured frameworks, such as Kaizen, total quality management, or plan-do-check-act, to institutionalize continuous improvement. Open communication is another key ingredient for fostering an improvement-driven culture. Employees who feel safe identifying issues and offering solutions—trusting that they’ll be rewarded when they succeed and won’t be punished if they don’t—are more likely to look for ways to cut supply chain costs.
13. Analyze Your Sourcing Strategy
Exploring spending patterns in the context of supplier performance and market conditions can help uncover ways to bring down supply chain costs. Supplier pricing trends are important, but exploring metrics related to supplier reliability, spend categories, lead times, and total cost of ownership can reveal more cost-reduction opportunities. Sourcing strategy analysis can illuminate areas ripe for consolidation or alternative sourcing. By folding in market analysis, companies can arm themselves with information to conduct more competitive bidding and negotiation processes. Segmenting suppliers by factors like strategic importance equips companies to tailor their cost management efforts to each relationship or supply chain function. For example, the business may not hammer highly critical suppliers on pricing but could use techniques like long-term partnerships or risk-sharing agreements to bring down total costs.
14. Consider Lean Manufacturing Techniques
Lean manufacturing drives down supply chain costs by eliminating waste in production and logistics processes. It targets the eight types of waste that can increase costs without adding value: overproduction, waiting, transportation, excess inventory, motion, overprocessing, defects, and underutilized talent. Just-in-time manufacturing and pull systems are lean methodologies that use demand data to determine workflows and production schedules. Continuous improvement is fundamental to lean manufacturing, which focuses on making small, ongoing changes that increase efficiency and decrease costs.
How Does SCM and ERP Help Supply Chain Cost Management?
SCM and ERP platforms can power sustainable supply chain cost management. ERP unifies supply chain workflows and data into a single platform and offers modules, such as inventory and warehouse management, to automate core activities like replenishment and space utilization.
The centralized data within an ERP platform can feed into SCM systems, which helps firms optimize end-to-end supply chain processes. Modern SCM platforms use AI-driven analytics to help contain costs related to inventory, production, and logistics without diminishing service levels. It also facilitates analyses and coordination of supplier performance and communications so stakeholders align to agreed-on price and performance service levels.
Gain Control of Your Supply Chain With NetSuite
NetSuite’s powerful ERP and SCM capabilities arm organizations with the data and automation necessary to take control of supply chain costs. Organizations of all sizes depend on NetSuite ERP as an all-in-one cloud platform for managing the business elements that affect supply chain operations, including financial planning, production planning, inventory management, and warehouse operations. Coupled with NetSuite Supply Chain Management, the platform gives businesses visibility into the flow of goods from suppliers through manufacturing and into customers’ hands. NetSuite SCM helps companies keep tabs on materials to confirm availability at the right price, at the right time, and in the right location. The system coordinates communication with suppliers and offers automation and advanced analytics for better demand planning to inform production strategies and inventory management.
Successful management of supply chain costs takes more than short-term cuts. A sustainable strategy emphasizes supply chain efficiency to balance cost control with service quality and risk management. Getting supply chain cost management right requires a solid understanding of cost metrics in the context of supplier performance and the daily flow of materials and production processes. Organizations that invest in the collection of relevant and reliable supply chain data while integrating AI-powered analytics can more accurately identify opportunities to shrink costs without harming business resilience. Add increased automation of processes on the factory floor, in the warehouse, and across shipping lines, and a business can meaningfully reduce supply chain costs.
Supply Chain Costs FAQs
How can you improve your supply chain strategy?
Implementing AI-driven demand forecasting and strengthening supplier relationships can help organizations establish more efficient and cost-effective supply chain strategies. In addition, adopting technology to automate and improve inventory and logistics processes can help reduce costs and boost efficiency.
How can a company make its supply chain more efficient?
Automating processes and adopting strategies that minimize waste can help drive supply chain efficiencies. Special focus should be directed toward increasing supply chain visibility and implementing real-time tracking to improve management of inventory levels and avoid delays.
What methods can be used to reduce supplier costs?
Some methods to reduce supplier costs include consolidating purchases for volume discounts, negotiating contracts for better prices and terms, and diversifying the supplier base. Close collaboration with suppliers to identify mutual process efficiencies can also help.
