Overwhelmed by rising costs, many companies are realizing that profits don't come easy these days. That's true even when you're sitting on a gold mine. Despite the massive run-up in gold prices (160 percent since August 2003), Kinross Gold Corp. has taken a pickax to a host of supply-chain costs, driving out waste wherever it can. Finance executives in many sectors can relate, as manufacturers, distributors, retailers, and others suddenly realize that with margins under pressure, ideas that once seemed unworkable are now viable.

Kinross has a supply chain that's unusual, to say the least. Consider its Maricunga open-pit mine, located high in Chile's Atacama Desert, nearly three miles above sea level. In the summer, winds whip in excess of 60 mph, and in winter the temperature can drop to
–20° F or more. Visitors to the mine require a physical before making the ascent and another when they arrive, and workers are checked daily by medical personnel lest altitude sickness take a toll. "When I get back to sea level, I sometimes find that my notes don't make sense," concedes Sean Samson, vice president of commercial development for $1.1 billion Kinross.

The Toronto-based company extracts and processes about 11 million metric tons of ore per year from Maricunga, which yields about 8 tons of gold. At Maricunga and other similarly remote sites, that activity requires vast fleets of heavy trucks, some of which consume an astounding 20 to 25 gallons of diesel fuel an hour. Kinross executives can be thankful that the soaring price of oil has coincided with an equally momentous bull market in gold. "Our revenue is growing tremendously with the rising price of gold," Samson says. "We are in a tremendous boom — a super cycle in precious-metals mining. But we are also heavy consumers of oil, which is killing us on the cost side. That means we have to continue to bring financial discipline to our supply chain."

To do that, Kinross and other companies are leaving no stone unturned. Many are talking more frequently with vendors and customers to improve forecasting and better manage inventory levels. Some are deploying technology in the cause, from warehouse robots to software systems that help businesses route freight efficiently. Still others are revisiting payment and delivery terms with suppliers and customers, centralizing procurement activities to leverage economies of scale, exploring more-sophisticated commodity-hedging strategies, and scrounging for any way they can think of to minimize energy consumption. Some, like Arrow Electronics Inc., a $16 billion distributor of electronic components and computer products headquartered in Melville, New York, have even tweaked their compensation schemes to reward managers for efficient supply-chain operations.

"This economy has sensitized people to what it really costs them when they're not doing as good a job as they can with forecasting and other aspects of managing their supply chains," says Stephen Timme, president of supply-chain consulting firm FinListics Solutions Inc. in Atlanta. "We've been talking about this for years, but this slowdown has convinced people to go back and revisit the issue."

A Closer Look at Customer Demand
Dow Chemical Co., the $54 billion producer of plastics, chemicals, hydrocarbons, and agrochemicals, is renowned for its financial-management prowess. But even finely tuned enterprises like Dow can be roughed up by turbulent markets. The Midland, Michigan-based company reported a 23 percent year-over-year gain in sales in the second quarter, but saw net income slip 24 percent compared with the same quarter last year as it wrestled with a $2.4 billion increase in feedstock and energy costs. One response has been to put even more effort into what is already a sophisticated forecasting operation in an attempt to better match inventories with customer demand.

"We've bought into a concept called demand-driven business operations," says Darrell Zavitz, "which is about having good dialogue with the market and your customers and what's going to be needed, and producing the right products and getting them to [your customers] efficiently." As vice president of market-facing shared services, Zavitz is heavily involved in supply-chain and procurement activities. "It is about dialogue, and also respect for the urgency of certain messages," he says. "We are getting more face time with our customers, we are on the phone with them more quickly, and we are making sure we maintain a solid line of communication between them, our suppliers, and ourselves."

Internally, senior Dow executives are stepping up their oversight of sales and operations planning, too. "In the past we may have had routine reviews on a quarterly or a monthly basis," Zavitz explains. "We're increasing that frequency. For example, in some businesses we're bringing teams together weekly to determine whether or not we have the right supply/demand balance. I'm talking about a fairly senior group of people responsible for big assets or markets."

Arrow Electronics is following a similar strategy by sharing more inventory information among its various locations around the world. "If we don't have enough inventory in one region," says CFO Paul Reilly, "it may be more prudent to buy it from ourselves rather than our supplier." The company also is making an extra effort to get aged inventory out of its distribution centers by reviewing return rights with suppliers and checking with customers to ensure they take delivery according to the delivery date.

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