Lean Commodity Sourcing

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 second example is based on the results obtained by Aptium Global on a company that created custom electronic and electro-mechanical components for the automotive and lighting industries hurt by the automotive downtown and huge price pressure on non-electronic parts.

This company had no visibility into material versus value-added processing costs and the lack of competition in a key category resulted in no cost savings ever being achieved on a $3.6 M category. In addition, the incumbent supplier imposed a premium that appeared to fluctuate regularly and the company was unable to track the fluctuation due to a lack of visibility.

By establishing a baseline using the Olin Producer Price Index plus a fixed supplier premium, the company determined that the incumbent supplier “floated” their premium, hiding their mark-ups from the buying organization. The company was able to use the baseline to generate competition among other highly qualified, and certified, suppliers and this resulted in the incumbent immediately lowering their premium to competitive levels, resulting in an immediate 4% savings on the base premium alone. Plus, the company’s new ability to automatically track the Olin Producer Index allowed the company to insure actual invoiced costs matched quotes. Furthermore, the company was able to implement a dual source strategy and put all new requirements out to bid, locking in future cost avoidance.

If you are part of a Private Equity firm and would like to know more about how lean processes can improve the operational efficiencies of your holdings, you can email Lisa Resiman at Aptium Global for further information, and maybe even luck out with an invitation to their next event.