For any company that makes or moves products, supply chain costs are a large share of overall operating expenses—making them a high-priority target for cost efficiency measures. That’s particularly true today, with inflation, shifts in global trade routes, potential tariffs, and other factors all squeezing margins.
Since the pandemic, many operations leaders have already taken steps to reduce costs along the supply chain—such as clawing back price increases from their suppliers. But those tend to be the easier measures. Companies now need to make harder and more substantive decisions about people and physical assets, where the stakes are higher and potential mistakes are harder to unwind.
How to start? Our experience working with operations leaders across a wide array of industries suggests that five measures should be priorities.
1. Base the Cost Agenda on the Company’s Growth Outlook
Companies in lower-growth, lower-margin industries—or those with internal stressors unique to their organization—likely need to reduce costs by consolidating their footprint, closing plants, streamlining distribution networks, and rethinking processes. They also may face acute time pressures that push them to implement rapid measures that yield results quickly to shore up their financial position.
Conversely, companies in growth mode with a wide range of new products and geographic markets may reallocate the savings to growth or innovation (a priority for roughly two-thirds of business leaders in BCG’s recent executive survey on costs and growth). They may also opt to invest in supply chain initiatives to increase efficiency. These organizations can be more proactive and forward-looking, since they have more time to make structural improvements that have a longer implementation timeline and lag in ROI.
In both cases, companies should initially focus on a manageable number of projects and track results over time. In our experience, companies can sometimes be overly broad in their cost agenda; they launch a large number of projects and quickly get overwhelmed by complexity and are unable to ensure value. Instead, they should take a portfolio approach, ranking potential projects by ROI and staggering their implementation to capture the full financial value of each solution before shifting to the next one—while also balancing demands across the company.
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2. Increase Transparency Through Modeling
Companies can’t improve their supply chain costs until they understand those costs. It’s a big challenge, given the complexity of supply chains at large organizations. To address it, cost leaders build detailed, dynamic models that quantify costs across specific steps and processes of the supply chain, giving them greater visibility into costs and enabling them to monitor performance more effectively.
Building this type of model is a data management challenge. Companies need to gather accurate information from across the supply chain, aggregate it into a single model that continues to draw real-time data, and run analytics to identify problem areas. But such a model yields key insights to help operations leaders understand the company’s current cost position—and where they can influence or control costs.
Companies can’t improve their supply chain costs until they understand those costs.
Critically, modeling also enables leaders to run simulations of different scenarios, such as a spike in demand, a decrease in supply for key inputs, or the cost implications of reorganizing distribution networks to service a fast-growing market. Addressing today’s cost challenges is important, but COOs can’t assume that the future will look like the present. Scenario planning can assess how the cost structure will perform under meaningfully different, plausible conditions. Companies can also plan three- and five-year targets and consider make-versus-buy decisions more effectively.
For example, one company built a cost model with short- and long-term projections, categorizing costs as controllable, influenceable, or static. Controllable costs, such as productivity rates, can be directly improved, while influenceable costs, like freight rates, can be managed through procurement strategies. Fixed costs, such as lease payments, are considered static and remain constant over time. The company is also developing three- and five-year plans to reduce costs, manage supplier margin pressures, and ensure long-term profitability.
3. Create a Cost-Aware Culture
Many companies treat cost efficiency measures like a crash diet—a discrete, disruptive event that realigns the organization’s priorities for a short period of time, after which everyone reverts to their previous ways of working and costs slowly creep back. In contrast, leading organizations approach these measures like a healthy lifestyle. They make deliberate choices as part of day-to-day work across the supply chain, with the entire workforce bought in and aligned around cost metrics.
BCG’s research shows that firms that align culture with cost goals achieve up to 11% greater long-term cost reduction, and 62% of these “cost pioneers” report positive impacts from embedding cost consciousness into the company’s DNA.
Building a cost-aware culture like this requires companies to make a clear case for change, helping the workforce understand how cost savings fit into the overall success of the organization. Leaders and middle managers communicate this consistently through town halls, daily team huddles, and other channels, all focused on a coherent story about why the organization needs to change. They also set clear metrics and KPIs and track performance, so that employees at every level understand what’s being asked of them and what success will look like.
4. Make Supply Chains More Agile and Resilient
As volatility in the business environment increases, supply chains must be built to change over time. There are clear cost implications: companies need to invest intelligently and avoid overspending, and the cost of getting it wrong can be steep in terms of business disruptions and other factors.
In the short term, companies need to build stronger crisis response capabilities, so they can respond to disruptions and mitigate negative impacts faster than their competitors can. Dynamic modeling is a critical prerequisite, helping companies make faster decisions and execute more effectively. Modeling can also help organizations simulate disruptive events in order to understand their supply chain implications and develop response plans in advance. Companies can also create redundancies—through dual sourcing, buffer inventories, and local supplier partnerships, for example—to secure critical supply chains.
In the longer term, companies need to build more resilience along the supply chain, developing systems and strategies to withstand future uncertainties. That demands comprehensive scenario planning to mitigate tariff and geopolitical risks, as well as consideration of near-shoring and regional partnerships to reduce reliance on vulnerable global routes and consideration of export challenges and margin pressures in key markets.
5. Harness AI and Analytics to Optimize the Supply Chain
Digital and automation solutions are now table stakes for supply chain leaders, and AI holds tremendous potential to further reduce costs by helping companies develop innovative production and distribution models and processes. In a recent BCG survey of companies in 21 countries, 19% were cost leaders, and this group cited AI as the most important tool to reduce supply chain costs.
Some organizations have struggled to capitalize on AI owing to outdated processes, legacy IT systems, disconnected data systems , and other factors. But GenAI can reduce complexity and help companies capture many of the previously untapped benefits of AI along the supply chain.
AI holds tremendous potential to reduce costs by helping companies develop innovative production and distribution models and processes.
Notably, investments in advanced technologies like automation and AI don’t just improve efficiency—they also lead to better service. GenAI can automate end-to-end processes with smart bots to improve speed, reduce manual tasks, and increase cross-functional collaboration. For example, a food distribution company automated delivery routing, balancing cost reduction with high-touch customer service.
These new solutions also challenge the perception of many employees that companies will use GenAI merely to reduce headcount. In our experience, talent is scarce in most supply functions, making GenAI a critical tool for improving productivity. Capturing those gains requires that operations leaders strike the right balance between efficiency investments (those aimed at using AI to do work faster) and effectiveness investments (aimed at improving outcomes like quality, delivery speed, or carbon reduction).
When implementing automation and analytics solutions, leading organizations start small—focusing initially on a limited number of high-impact applications before embarking on an end-to-end supply chain transformation. For example, they deploy AI in demand forecasting, replenishment, and predictive analytics to manage inventory and stabilize operations. We have seen a 10% to 20% reduction in manufacturing, warehousing, and distribution costs from AI implementation in supply chains.
Companies also start by adopting proven solutions that are commercially available. As they develop capabilities and build momentum, they advance to tailoring solutions to their needs—a more complex undertaking but one that yields correspondingly greater benefits. Eventually, they partner with suppliers and tech providers to co-develop innovative solutions and smarter ways to reduce costs, such as automation-as-a-service or a greater reliance on contingent workers.
Regarding the workforce, leading companies understand that the best technology will not work if employees don’t willingly adopt it. These companies understand that the vast majority of benefits from a new solution come not from the technology itself but from new ways of working that the technology enables. They therefore invest the resources needed to upskill employees, ensuring a smoother transition to smarter and more cost-efficient processes.
Supply chains account for the bulk of operating costs for many companies, making them a clear priority for cost reduction measures. By focusing on the five measures discussed here, companies can not only reduce costs but build a smarter and more responsive supply chain—one that mitigates potential disruptions and capitalizes on emerging opportunities. Some companies may opt to reallocate the savings to fuel growth and innovation, while others will send them directly to the bottom line. The common thread is the competitive advantage that cost efficiency affords.
