{"id":218,"date":"2026-04-08T11:08:21","date_gmt":"2026-04-08T18:08:21","guid":{"rendered":"https:\/\/scmwithsekharv.com\/?p=218"},"modified":"2026-04-08T11:08:22","modified_gmt":"2026-04-08T18:08:22","slug":"when-isolated-cost-reduction-destroys-value-a-supply-chain-lesson","status":"publish","type":"post","link":"https:\/\/scmwithsekharv.com\/?p=218","title":{"rendered":"When Isolated Cost Reduction Destroys Value: A Supply Chain Lesson"},"content":{"rendered":"\n<p>A student once asked me for a real-life example of a situation where <strong>value creation was undermined by excessive focus on cost reduction<\/strong> by one entity.<\/p>\n\n\n\n<p>This is a surprisingly common phenomenon in supply chains.<\/p>\n\n\n\n<p>Consider the case of a leading FMCG company (name withheld).<\/p>\n\n\n\n<p>The company proudly reduced its <strong>cash-to-cash cycle time<\/strong> from <strong>18 days to 0 days<\/strong>, claiming that this was achieved through improved supply chain practices.<\/p>\n\n\n\n<p>At first glance, this appears to be an outstanding achievement.<\/p>\n\n\n\n<p>However, a closer examination revealed a different story.<\/p>\n\n\n\n<p>While the company did reduce its <strong>raw material and finished goods inventory<\/strong>, a significant portion of the improvement came from <strong>extending payment terms to suppliers<\/strong>.<\/p>\n\n\n\n<p>Supplier credit increased from <strong>73 days to 110 days<\/strong>.<\/p>\n\n\n\n<p>In effect, the company shifted the financing burden of its operations onto its suppliers.<\/p>\n\n\n\n<p><strong>What was the impact?<\/strong><\/p>\n\n\n\n<p>From the company\u2019s perspective:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Working capital improved<\/li>\n\n\n\n<li>Financing costs reduced<\/li>\n<\/ul>\n\n\n\n<p>But from the broader supply chain perspective:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Suppliers\u2019 profitability declined<\/li>\n\n\n\n<li>Suppliers had to borrow at <strong>14\u201316% interest rates<\/strong><\/li>\n\n\n\n<li>The company\u2019s own borrowing cost was only <strong>8\u201310%<\/strong><\/li>\n<\/ul>\n\n\n\n<p>This meant that financing was being pushed to <strong>a higher-cost part of the supply chain<\/strong>.<\/p>\n\n\n\n<p><strong>The result<\/strong><\/p>\n\n\n\n<p>While the focal company reduced its own costs, the <strong>total cost of the supply chain increased<\/strong>.<\/p>\n\n\n\n<p>In other words:<strong>Cost was reduced locally \u2014 but value was destroyed globally.<\/strong><\/p>\n\n\n\n<p><strong>The lesson<\/strong><\/p>\n\n\n\n<p>Supply chain leaders must look beyond their own balance sheet.<\/p>\n\n\n\n<p>True supply chain excellence requires:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>system-wide thinking<\/li>\n\n\n\n<li>alignment of incentives<\/li>\n\n\n\n<li>sustainable value creation across all partners<\/li>\n<\/ul>\n\n\n\n<p>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 <strong>total system perspective<\/strong>, not just from the standpoint of a single entity!<\/p>\n\n\n\n<p><\/p>\n","protected":false},"excerpt":{"rendered":"<p>A student once asked me for a real-life example of a situation where value creation was undermined by excessive focus 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