A student once asked me for a real-life example of a situation where value creation was undermined by excessive focus on cost reduction by one entity.
This is a surprisingly common phenomenon in supply chains.
Consider the case of a leading FMCG company (name withheld).
The company proudly reduced its cash-to-cash cycle time from 18 days to 0 days, claiming that this was achieved through improved supply chain practices.
At first glance, this appears to be an outstanding achievement.
However, a closer examination revealed a different story.
While the company did reduce its raw material and finished goods inventory, a significant portion of the improvement came from extending payment terms to suppliers.
Supplier credit increased from 73 days to 110 days.
In effect, the company shifted the financing burden of its operations onto its suppliers.
What was the impact?
From the company’s perspective:
- Working capital improved
- Financing costs reduced
But from the broader supply chain perspective:
- Suppliers’ profitability declined
- Suppliers had to borrow at 14–16% interest rates
- The company’s own borrowing cost was only 8–10%
This meant that financing was being pushed to a higher-cost part of the supply chain.
The result
While the focal company reduced its own costs, the total cost of the supply chain increased.
In other words:Cost was reduced locally — but value was destroyed globally.
The lesson
Supply chain leaders must look beyond their own balance sheet.
True supply chain excellence requires:
- system-wide thinking
- alignment of incentives
- sustainable value creation across all partners
This is one of many real-world illustrations I use in my teaching to demonstrate that supply chain decisions must always be evaluated from a total system perspective, not just from the standpoint of a single entity!