Category Archives: Cost Reduction

The Tariff Tax Is Coming – And There Ain’t Much You Can Do About It!

Since you have been ignoring the home-shoring/near-shoring that a few of us experts tried to warn you about almost a decade before the first of the predictable tragedies happened (with articles appearing in the late 2000s on the dangers of outsourcing and the advantages of near-shoring — here are 3 SI articles from 2009, 2011, and 2013), you will now have to pay the tariff tax.

(Note that we are now on the fourth predictable tragedy. The first was the COVID pandemic, which the WHO and WEF were warning us about for a good decade [even though they didn’t know what the pandemic would be, they knew a pandemic was inevitable]. The second was geo-political conflicts and sanctions that cut off entire markets. The third was the double whammy of Panamanian droughts and Houthis in the Red Sea, cutting off the fast shipping lanes and forcing a return to routes around the Capes. Now we have tariffs, a predictable result of home-first economic policies that always return in times of tense geo-political climates … and especially in countries run by leaders who believe they have autocratic power, even if they aren’t supposed to.)

So now you will get hit by tariffs. No ands, ifs, or buts about it. And there is nothing you can do to prevent it. Why?

  1. Tariffs are going to be applied across the board. Thus, changing locations isn’t going to prevent them, just minimize them.
  2. In most countries, tariffs on products don’t change weekly. But sales can based on the perceived economic situation, so stocking up on inventory can increase inventory costs beyond expectations as well as logistics costs if you have to expedite shipping.
  3. Locations with cheaper tariffs without supporting supply chain networks will actually cost more, especially if the average competency of the workforce is lower than other locations.
  4. Proclamations are not actualizations. Actual tariffs could be more or less. You could switch from a location expected to see tariff increases to one that sees even more tariff increases.

If you want to protect from tariffs, which are likely only going to get worse as time goes on, there is only one option — re-shore as close as you can! You want to be as close to home as you can to not only protect against tariffs, but to minimize other costs and risks. Logistics risks, and costs, are less. Re-supply times are less. Risk response is faster. And new development and innovation is easier.

So even though costs will increase in the short-term — as you build/upgrade/refine factories and production lines, retrain workforces, build new supply lines, design new distribution chains, and so on. Especially when you re-shore to a location with higher energy or workforce costs. However, over time, the workforce will become more skilled and productive, automation will improve, and supply and distribution lines will optimize. Costs will go down, and they will be more stable than costs half a world away you have no control over.

The key is figuring out what you should re-shore and what you shouldn’t. You should only re-shore what you can do cost-competitively unless you are certain you would lose access to supply otherwise. While the end goal should be that you only outsource for what you can’t get near, or at, home, the reality is that you have to stay in business, and that means staying competitive. So, at least in the short-term, you have to pick-and-choose. So how do you do that?

What-if cost modelling, optimization, and predictive analytics. You need to accurately model the costs associated with pulling acquisition and production back over time. First production batch, 6 months, 1 year, 2 years, etc. Plot the costs over time and if the trend indicates the costs will match the outsourcing/offshoring costs within a few years, you go for it. These costs will require predicting all the component costs with predictive trend analytics, building detailed cost models, and optimizing them against all the different options. A lot of modelling, calculation, and what-if. But if you have the right advanced sourcing platform it can be done. (Although you will need to reach out to platform and modelling experts to figure out how.)

In the interim, for those of you panicking in the USA, just remember that some of the proposed tariffs is just posturing to force American allies to give into other US demands (more defence/border spending, less tariffs for US products). Others are promises to take revenge on countries that didn’t play nice or line certain pockets the last time the administration was in charge, unless those countries do exactly what is asked this time around. Thus, you don’t know exactly what will happen, all you know is that, since not everyone will meet the demands, more tariffs are coming. (And even if the worst don’t come now, who knows what the administration in four years will bring. Tariffs are coming!) That means you can’t select alternative locations ahead of time, or predict when to pre-buy. Moreover, you can only hold so much inventory, and can only get so much here so fast, so pre-buying wouldn’t help much anyway, if it helped at all.

The only sure fire way to minimize tariffs over time is to start re-shoring what you can relatively cost-effectively, as that will protect you no matter what, and even though it will take time, it will payoff in the long run. (And again, to be blunt, you should have started this fifteen years ago when Sourcing Innovation first started echoing the warnings of the inevitable disruptions that were going to come from too much off-shoring if a significant event happened, and now that we have had multiple — COVID, “special military operations” and sanctions, logistics challenges in Panama and the Red Sea, and now anti-trade policies in many countries — it’s time to act before even more disruptive events happen).

Optimization Still Saves Double Digits — Why Aren’t You Using It?

Sourcing Innovation has been publishing for eighteen (18) years (over which it has published over 6,000 articles — inspired by the GruntMaster), with the first article published on June 15, 2006 with regular coverage since, including a push for all events to use sourcing optimization in Supercalifragilisticexpialidocious.

The reason is simple. It’s one of only two technologies that has been proven to identify savings in excess of 10% for almost 20 years (the other being spend analysis). The International Business Times recently reminded us of the power of this solution when it published an article on how Procurement Expert Sylvia Zhou Reduces Operational Costs by 13% Through Strategic Supply Chain Optimisation.

When we read how Zhou’s shift in sourcing strategies and supplier relations management allowed for a drastic reduction in operational costs by 13%, it reminded us of how decision optimization is not restricted just to sourcing and logistics, where it has traditionally been used, but saves across the supply chain, as discussed in our recent post on comprehensive optimization.

According to Zhou, with her team, she assessed their entire supply network, identifying bottlenecks and inefficiencies. By partnering with suppliers aligned with their operational goals and technological capabilities, they could streamline processes and cut costs. This approach worked so well that post-optimisation, her company reported a 33% increase in profits, attributed mainly to the reduced cost of goods sold and improved operational efficiencies.

And the best way to identify logistics efficiencies, product-based savings, and opportunities for operational efficiency is optimization. Sometimes there’s no better way to identify significant savings. So, go forth and optimize!

Cost Savings is NOT Cost Cutting …

… and we need more articles that hammer this point home!

A recent article over on the Supply Chain Management Review (SCMR) focussed on how strategic cost savings differ from cutting costs, highlighted a recent survey from Boston Consulting Group (BCG) that found that while 65% of executives are prioritizing supply chain and manufacturing costs as the biggest levels for organizations to pull for cost savings, 52% [are still focussed on] labour and non-labour overhead costs. OUCH!

Most Supply Chain / Procurement Departments are understaffed and/or under platformed due to lack of talent and lack of available budget. They’re also a very small part of the organizational headcount, which in many organizations is now a small part of total spend. As a result, labour is not the problem. External spend is.

And kudos to the SCMR and Laura Juliano from the Boston Consulting Group for pointing out that strategic cost control is the right approach.

If you’re spending 100M on a category, you should be doing a lot more than just a 3-bids-and-a-buy RFX, cutting a PO, and paying an invoice. A lot more. And looking at more than just the unit cost — at the very least the total cost of ownership from initial acquisition through warranty/repair and eventual disposal, if not full total value management which also looks at brand value, bundled services, etc. Even well managed direct categories usually have 3% or more savings opportunities, and those that were not well managed can have two to three times that (in the 6% to 9% range). In other words, giving one person the time to properly source one category, even if it takes 3 months of man effort, can save 3M. Even if the fully burdened resource costs your organization 240K a year, that’s an ROI of 50X on the proper use of that one resource’s time.

This one example surfaces the key point of strategic cost control. It requires strategy and strategy requires PEOPLE with real HUMAN INTELLIGENCE (HI!). (Not hallucinatory Gen-AI like “chat, j’ai pété”). People who can analyze the situation, the available data, case studies from similar (historical) market situations, suppliers, products, and make the overall best decision(s) for the organization. And, preferably, people who can also consider the sustainability of their decision (and the implications with respect to any regulations in laws in countries they source from and sell to). (Senior Procurement leaders can’t ignore any sustainability requirements they are subject to [40% are], they definitely can’t be unaware of legislation that could affect them [37% are], and they definitely can’t be making awards to suppliers and/or for products that might just disappear in a year or three.)

In other words, you can’t reduce headcount. (You may need to replace people if you initially hired people who thought strategic procurement was catalog comparison or invoice verification, of which 95% to 99% can be fully automated, but never, ever reduce the number of people in Procurement.)

Cost Savings is NOT Cost Cutting …

… and we need more articles that hammer this point home!

A recent article over on the Supply Chain Management Review (SCMR) focussed on how strategic cost savings differ from cutting costs, highlighted a recent survey from Boston Consulting Group (BCG) that found that while 65% of executives are prioritizing supply chain and manufacturing costs as the biggest levels for organizations to pull for cost savings, 52% [are still focussed on] labour and non-labour overhead costs. OUCH!

Most Supply Chain / Procurement Departments are understaffed and/or under platformed due to lack of talent and lack of available budget. They’re also a very small part of the organizational headcount, which in many organizations is now a small part of total spend. As a result, labour is not the problem. External spend is.

And kudos to the SCMR and Laura Juliano from the Boston Consulting Group for pointing out that strategic cost control is the right approach.

If you’re spending 100M on a category, you should be doing a lot more than just a 3-bids-and-a-buy RFX, cutting a PO, and paying an invoice. A lot more. And looking at more than just the unit cost — at the very least the total cost of ownership from initial acquisition through warranty/repair and eventual disposal, if not full total value management which also looks at brand value, bundled services, etc. Even well managed direct categories usually have 3% or more savings opportunities, and those that were not well managed can have two to three times that (in the 6% to 9% range). In other words, giving one person the time to properly source one category, even if it takes 3 months of man effort, can save 3M. Even if the fully burdened resource costs your organization 240K a year, that’s an ROI of 50X on the proper use of that one resource’s time.

This one example surfaces the key point of strategic cost control. It requires strategy and strategy requires PEOPLE with real HUMAN INTELLIGENCE (HI!). (Not hallucinatory Gen-AI like “chat, j’ai pété”). People who can analyze the situation, the available data, case studies from similar (historical) market situations, suppliers, products, and make the overall best decision(s) for the organization. And, preferably, people who can also consider the sustainability of their decision (and the implications with respect to any regulations in laws in countries they source from and sell to). (Senior Procurement leaders can’t ignore any sustainability requirements they are subject to [40% are], they definitely can’t be unaware of legislation that could affect them [37% are], and they definitely can’t be making awards to suppliers and/or for products that might just disappear in a year or three.)

In other words, you can’t reduce headcount. (You may need to replace people if you initially hired people who thought strategic procurement was catalog comparison or invoice verification, of which 95% to 99% can be fully automated, but never, ever reduce the number of people in Procurement.)

The Public Sector is Giving Procurement Integrity A Bad Name … Can the Private Sector Fix It?

A recent article over on Global Government Forum on Procurement Integrity: A Big Problem That’s Worse Than Most Organizations Think, pointed out that errors, fraud and abuse in procurement cost governments and organizations millions of dollars every year, and even though recent headlines in the US (TriMark, Booz Allen Hamilton), UK (NHS, Royal Mail), and Canada (ArriveCan) are starting to shine the light on the extent of (public sector) procurement fraud, the problem is still bigger than you think. Much bigger.

Current estimates are that organizations, across the public and private sectors, lose 5% per year due to procurement errors, abuse, and fraud. Given that Global GDP is about 85 Trillion dollars, at 5%, that’s 4 TRILLION dollars estimated to be lost annually to errors, abuse, and fraud. And that’s probably a low-ball estimate due to the fact that we just calculated that Over One TRILLION dollars will be wasted on IT software and services due, primarily, to lack of knowledge and/or outright stupidity (and not malicious intent, but if it’s easy for consultancies and third parties to considerably over bill for legitimate goods and services that you need, imagine how much they are fleecing you for goods and services that you don’t need and may not even receive).

It’s highly likely that the true cost of errors, abuse, and fraud (internal, collusion, and external) is closer to 10% of total GDP, or close to EIGHT TRILLION. That’s at least twice the GDP of every country on the planet except China and the United States. That’s a BIG PROBLEM, which is definitely not being helped by the 100M to Multi Billion Procurement Frauds being reported almost monthly across major western economies — and multi-million dollar fines don’t repair the damage. (They don’t even come close.)

This is damage which Procurement needs to repair — because Procurement is the only department that has any hope of putting proper procedures, processes, and platforms in place to minimize the errors; training the organizational employees on proper procedures and monitoring the implementations to prevent abuse; and putting in place proper detection systems to detect, and prevent, potential fraud and quickly identify and track it when it happens.

Unless all the bucks go through, and stop at, a modern Procurement department run by a CPO who puts in place proper people, processes, and platforms, loss is going to continue to run rampant. Which means that while the public sector is failing us daily, the Private sector has to step up and restore the integrity of Procurement. It can start by utilizing some of the the techniques in the linked article, and continue by continually learning and implementing the best technology and processes it finds to not only uncover significant savings in inflationary times, but return integrity and trust into big business, and give governments who have lost their way a model to follow.

And for more details on Bad Buying to avoid, and how to achieve Procurement with Purpose, the doctor suggests you start by following the great public procurement defender, Peter Smith.