Daily Archives: September 16, 2013

Where Do the Savings Lie?

Inflationary times are back, economic growth is slow, the job-situation hasn’t improved much, employers would rather keep a job vacant nine years waiting for the perfect candidate over spending even a single dollar on training, and CFOs are being told to put pressure on Procurement to cut costs to the bone. In other words, despite all the talk in recent years about training, innovation, and value-generation, it’s still business as usual at review time.

You’ve beat your suppliers senseless, kept overhead to a minimum (not by choice, you weren’t allowed to replace people lost to attrition), done some automation and strategic sourcing, and put as much effort as you could into high-cost categories. As far as you’re concerned, you’ve squeezed all the blood out of the stone and there’s nothing left. And if you are a sourcing leader, that might be true for the categories you’ve been focussing on for 6 to 9 years and that you’ve strategically sourced 3 times in a row.

But is this all the savings to be had? Not by a long shot.

The first thing to remember is that costs fall into two categories: recurring and one-time. Recurring costs include human resources (employees and mid to long term contractors); raw material, component, and production costs; overhead; COGS (cost of goods sold), transportation, and insurance. If your organization is a leader in Procurement and Supply Management and seen as a value generator, then, in addition to reducing raw-material, component, and production costs, it works with operations to keep overheads and insurance costs low, works with logistics to keep transportation costs low, works with Sales & Marketing to keep COGS low using its expertise, and even works with HR to get contractors at competitive rates. (In other words, it’s directly or indirectly reducing every cost except salary, which it has no control over.)

One-time costs include expedited shipping, temporary/contingent labour (to address seasonal spikes, such as the surge in demand many retailers get around Christmas time), switching costs (when switching suppliers or raw materials), and one-time costs associated with recalls, settlements, and stock-outs (on the shelves and in the factory). Most Supply Management departments work with logistics to optimize and keep transportation in check to minimize shipping costs, work with HR to make sure temporary/contingent labour is sourced appropriately, and take switching costs into account when evaluating sources of supply, and this is a good start, but these one-time costs pale in comparison to the cost of a recall, settlement, or stock-out. Recalling a contaminated or unsafe product that makes it to the shelves can easily cost in the tens of millions of dollars, a settlement that results from a class action lawsuit can cost in the hundreds of millions (especially when legal costs are factored in), and a supply chain disruption that results in the assembly line for the key, or only, product line being shut down for months can bankrupt a company (and a number of companies have gone bankrupt as a result of serious disruptions in production). How much is your Supply Management organization doing to prevent these very costly incidents, which can wipe out years of savings, from happening? Remember, Supply Management has, or should have, the supplier relationship and be doing its utmost to insure quality (preventing recalls or lawsuits), supply management has (or should have) the visibility to detect shortages or stock-outs well before they happen (and is the only organization in the position to take action and locate another source of supply in time), and only Supply Management has (or should have) the cross-functional capability to address these issues.

So, do you know where the savings lie?