Daily Archives: February 27, 2007

Lean Services

Last week at Aptium Global’s private 10 Ways to Significantly Improve EBITDA and Reduce Operational Risk in Your Portfolio Companies, Lisa Reisman, Mark Pruitt, and Ara Surenian presented ten real-world examples of cost reduction and EBITDA improvement in small and middle market operations that proved that Lean can be used to save significant amounts of money even in categories where annual spend is in the low seven digits. Jason Busch did a good job of summarizing the event at the macro-level in his post Small / Middle Market Private Equity Investments and Spend Management, so, with the kind permission of Aptium Global, today I am going to detail the first of two case studies that serve to illustrate that not only can lean significantly improve operations in companies with revenue as small as ten or twenty million, but do so outside of traditional manufacturing operations.

This first example is based on the results obtained by Aptium Global for the US Division of a high-end manufacturer (in tubing) for the automotive market. This division was finding it extremely difficult to “baseline” services spending, such as machining or heat treating, which was generally based on price per piece quotes, compounded by the fact that many pieces were of odd sizes and shapes, and further compounded by the fact they are usually produced on the basis of capacity and/or geographic proximity.

By creating a pricing matrix that included piece grade, weight, and invoice value, Aptium Global was able to calculate a price per pound for each service to estabish a baseline. This allowed the division to source strategically as it allowed for a straightforward negotiation process, provided a way for savings to be monitored on an on-going basis, and fixed pricing going forward. Furthermore, since the baseline reduced sourcing confusion, it allowed the division to spend more time on quality control and develop of on-going process control methods to insure that quality issues were detected quickly, and the supplier notified promptly.

As a result of the implementation of this simple lean sourcing methodology, the division was able to realize an average savings of over 20% on services spending. Furthermore, the net operational improvements allowed the division to rationalize their supply base and reduce their three (3) day lead time to twenty-four (24) hours.

Next entry: Lean Commodity Sourcing