Daily Archives: April 25, 2007

The Top Three III: The First Guest Blog

With at least eighteen confirmed bloggers and guest bloggers, the big question was, who will go first? Well, I’m happy to report that Lisa Reisman, Managing Director of Aptium Global Inc, has volunteered to go first. Today, I’m pleased to present her “Top Three”.

Maximizing the Savings Potential of Global Sourcing Strategies

In the past few years, we have observed a range of companies that leave tremendous dollars on the table because they have not formalized or streamlined global sourcing or LCCS processes. Why? Organizations who regularly source from low cost regions may have already implemented less than lean global sourcing practices. Lean sourcing practices encompass all of the processes around global trade but exclude the actual item(s) themselves. Cost savings opportunities exist for better global logistics practices, better negotiated trade finance terms and banking deals, and optimization of various international trade agreements, tariffs and treaties as they relate to the items sourced.

Companies with significant overseas sourcing volumes often have accumulated a whole host of costs not necessarily part of the original cost savings analysis. These costs can be in the hundreds of thousands if not millions of dollars, depending on the size of the organization and volume sourced globally. Missed savings – and added costs – have a direct negative impact on the bottom line.

There are ways to address these costs. The first is to examine the largest elements that comprise total cost outside of product cost. In the case of global trade the largest cost areas include: freight/consolidation, harmonized code classification and duties, payment terms and international trade finance arrangements, brokerage and associated customs fees.

There are enough risk factors affecting global sourcing decisions (e.g. currency volatility, political risk, loss of flexibility etc) that companies should be managing all costs that can be controlled.

Managing Volatile Commodities

Companies are struggling to maintain margins and plan their purchases for a full range of metals, metal services and semi-finished products with high metal content due to the ever fluctuating metals markets. Copper, steel, nickel, stainless steel and aluminum all have significant price volatility.

Volatility does not appear to be going away any time soon. The greater the volatility and uncertainty, the greater likelihood that a company may engage in practices counter to running a lean operation (e.g. buy and hold unnecessary inventory)

Companies can deploy many strategies to mitigate commodity pricing volatility which may include commodity indexing and bidding out of the value-add portion, deploying price escalator/de-escalator clauses, allocation of spot, forward, and averaging along with fixed index pricing to smooth peaks and troughs.

Enterprising companies may choose to develop commodity management strategies as a means of not only mitigating risk but also creating competitive advantage (think Southwest Airlines as an example of a company that created a competitive advantage due to advanced commodity management strategies).

Implementing Savings

This is the age-old sourcing conundrum … savings is identified but for whatever reason it is not implemented. It’s significant because many of the savings not taken include incumbent savings, which, of course, is the simplest of all savings to implement. The not-invented-here syndrome is a major impediment to savings implementation.

Many companies do not fully appreciate the opportunity cost of not realizing savings earlier as opposed to later. An annual savings of $130,000 might not be interesting to a Fortune 500 company but in middle market manufacturing, that contribution to EBITDA can be quite significant!

Larger companies talk about change management but we prefer to look at incentive programs. If you structure the incentives correctly, the right behavior will follow. Without allowing employees the opportunity of a little upside for saving money (and savings should be β€œnet” savings), companies will continue to implement less than they could.