Category Archives: Cost Reduction

Cost Cutting – Let Us Count the Ways

A recent article over on the CPO Agenda on “cutting it fine” noted that there is more to cost cutting than just hammering down price. In fact, it noted that, in most companies, the following seven options are available:

  1. Avoid
    The best way to cut cost is not to spend money in the first place. Improve forecasts, shape demand, and eliminate need (through process transformation), spend will fall, and savings will rise.
  2. Reduce
    Finding a more energy efficient or water efficient manufacturing process will reduce costs, as will one that reduces the amount of (wasted) raw materials required.
  3. Reuse
    Find multiple uses for a product beyond its initial application or self life. Reuse an old desktop machine as a print server.
  4. Recycle
    Any production waste that can be recycled for other purposes will save money (and increase the bottom line if the scrap can be sold) as will any products that can be reclaimed from the end customer for reuse or recycling at end of life.
  5. Recover
    Retrieve discarded products from the customer at the end of life to remove precious metals from the products or components from a computer or piece of electronics equipment.
  6. Treat
    Apply treatments to products or processes to make them last longer and reduce costs.
  7. Dispose
    Dispose of unused or unwanted assets (in a sale if possible) and lower costs.

And the article is 100% correct. The question is, when will the rest of the world see that it’s not just negotiating a price break.

Quick Hit Cost Savings Projects

Since it’s impossible to get away from cost reduction, inspired by a recent SIG article on “Strategic Cost Management: The Survivor’s Playbook to Savings”, which listed the following high-impact projects for same year savings:

  • Software Maintenance-Rate Reduction
    Identify all of the maintenance contracts, annual spend, and maintenance percentages. Develop a standard maintenance agreement and standard percentage for annual maintenance, require an exception appoval process with senior management involvement for any alterations, and focus (re)negotiations on highest savings opportunities. Savings of 5%+ is not uncommon.
  • Software Maintenance-Elimination
    Eliminate maintenance on all non-critical systems or all systems where annual maintenance cost is low. (In the latter case, even if the system is critical, it will cost less to re-instate the maintenance on a system at a later time if it is required than to pay maintenance on all such systems.)
  • Legal Services-Hourly Rate Reduction
    Most legal firms raise costs annually regardless of competitive market conditions. (Threaten to) conduct a sourcing exercise and watch rates drop quickly.
  • Legal Services-Bundles and AFAs (Alternate Fee Arrangements)
    For general legal services that are project or task oriented, and not litigation oriented, bundles or AFAs can save the company a significant amount of money.
  • Desktop Printers-Elimination
    Shared multi-function devices, with password printing, are much cheaper to operate than individual desktop printers.

here are a few more quick-hit cost savings projects that will generate cost savings if the organization has not run them (recently):

  • Marketing-Print
    Unbundle print from creative services and then run a quick sourcing project. Significant cost reductions in the 10% to 20% range (or more) will quickly materialize when printers are being faced off against each other.
  • Office Supplies-Live SKU Guarantees & Price Checks
    Everyone knows that a quick auction will drop prices across the board, but most category experts also know that the vendors make this back by raising prices a few months down the road when they think no one is looking and by bidding expiring SKUs, which will be substituted with higher price items down the road. Insisting on a clause that states that all SKUs must not be schduled to reach end of life within the contract term, and that any SKU that is retired must be replaced with a SKU of equivalent, or greater, functionality at current, or reduced, cost will prevent those overpayments and insure that significantly greater savings materialize.
  • Computers-Overpayment Recovery
    Most vendors don’t honor the “best price” clause and generally charge the same rate for the life of the contract, even though most computers and components decrease 2% to 3% a month. A careful spend audit will typically reveal 10% or more in overpayments that can be targetted quickly.

Some Ideas for Reducing Transport Costs from Rising Fuel Prices from Supply Chain Digest

A recent piece over on Supply Chain Digest had some ideas for reducing transport costs given rising fuel prices from strategic, tactical, and operational viewpoints that is worth a review by anyone moving product from point A to point B. While most of the suggestions will be top of mind for most transportation managers, I’m sure there will be a few that are overlooked and worth remembering. Some of the more valuable ideas were:

Strategic

  • tradeoff inventory for transportation as low cost warehousing at TL (truckload) may be cheaper than JIT (just-in-time) at LTL (less-than-truckload)
  • centralize transportation planning
  • invest in a network optimization tool

Tactical

  • reduce packaging to minimal levels when shipping air
  • plug in rail/intermodal options into the TMS
  • manage inbound and outbound freight

Operational

  • optimize pallets and trailer cubes
  • insure shippers are compliant with the routing guide
  • avoid expedited shipping unless its a true emergency

Cargo Costs Getting You Down? Go Fly a Kite!

It takes a lot of fuel to carry a (post/new) Panamax vessel across the ocean and the 3,001 to 14,500 TEU (twenty-foot equivalent units) of cargo they contain. Even though they might be more fuel efficient than air transport, and account for 90% of international trade, they’re still a very dirty mode of transportation. A single contain ship can emit more chemicals than 50 Million cars and the ocean shipping industry as a whole, which is mostly unregulated from a clean-air standpoint, emits 6,000 times the emissions of every single automobile on the planet. (Source)

That’s why I was thrilled to see this article over on Industry Week on how “Cargill is Flying a Kite to Reduce Fuel Consumption”. According to the article, Cargill is in the process of installing a 320 square meter computer-controlled kite on an ocean cargo ship that will function 100 to 420 meters above the ship and generate enough propulsion under ideal sailing conditions to reduce fuel consumption by 35%. Working with German-based SkySails, Cargill plans to have the kite based propulsion up and running by 2012. Given that Cargill alone transports more than 185 Million metric tons of cargo a year, this will have a significant impact on its carbon footprint.

Cost Reduction Success Requires More Than a Reverse Auction

As more and more companies have found out over the past few years, it takes more than a well-structured reverse auction to cut costs, especially during a recession. If your organization is not yet a next level supply management organization, here are a few tips to get you on your way.

Understand the Need
The current market environment is to do more, and grow more, but spend less. It’s an economic paradox, but it’s the reality for the time being. As a result, any company that fails to achieve continual cost reductions might find themselves the next victim of the jobless recovery.

Accept the Reality
Despite what South Park might suggest, it is not possible for an entire company to bury its head in the sand to get through some trying times. Nor is it possible to ignore the need for continual cost reductions even if there are no obvious “low hanging fruit” opportunities left to pick.

Negotiation is Not Enough
The days of yelling, table banging, and threatening to take the business elsewhere are long gone. Margins are tight across the board and no supplier is going to risk survival for a customer who may, or may not, be around next year. A moden organization needs a number of tools at their disposal, including good spend analysis and e-Negotiation solutions.

Make The Business Case (to be a Technolgy Ace)
Given the do more but spend less mantra, the C-Suite will probably want Procurement to get by with whatever tools they have now, even if those tools aren’t more powerful than a pencil, paper, and abacus. Fortunately, numerous studies exist documenting the ROI of Spend Analysis and Decision Optimization solutions that prove that these two solutions, on average, each deliver a year-over-year return of over 10% (and are the only e-Sourcing solutions that fall in that category). Thus, if Procurement focusses on Spend Analysis (to identify its most profitable opportunities in the short-term and the long-term) and an e-Negotiation suite that contains Decision Optimization (in addition to modern RFx and e-Auction technology), it has a lot of ammunition.

Focus on Erosion of Savings
Generally, 40% (or more) of negotiated savings in an average organization are never realized due to maverick spending and non-compliance on the part of the supplier. Implement e-Procurement policies and solutions that can ( a) prevent the approval of POs to non-contracted suppliers without appropriate executive sign-off and ( b) automatically m-way match each invoice to goods receipts and purchase orders (verified to be at contracted rates) and prevent payments until all items have been delivered and billed at contracted rates. While not perfect, as there will always be emergencies that require off-contract spend, such a solution will get an average organization from 60% to 90% compliance, and if the negotiated savings was 10%, increase implemented savings by 50%, which is a substantial amount on a multi-million category.

Work as an Interdisciplinary Team
It’s important to work with the joint S&OP team to insure negotiations, and buys, are based on good forecasts and with engineering to not only make sure the raw materials and component parts but to help them, during NPD, select alternate sources of supply that can reduce costs from step one.

Communicate, Communicate, Communicate
Procurement requirements change everyday, and if the organization is buying last year’s materials on last year’s forecasts, one can be sure that opportunities for savings are lost.