Category Archives: Cost Reduction

Don’t Overlook the Soft Cost Savings from SOW Management

A recent article in the SIG Newsletter on the “best practices for managing and analyzing statement of work spend” that described the rapidly maturing market for centralized SOW (Statement of Work) management programs and the usefulness of a modern VMS (Vendor Management System) also described the one-time and continous benefits of managed SOW programs (under the guidance of a PMO – Program Management Office) and the hard and soft cost savings that resulted. While many organizations move to managed SOW programs, often through a MSP (Managed Services Provider), in pursuit of the hard dollar cost savings, that are often in the 10% to 15% range when done properly, the long term soft cost savings will often be more valuable.

In particular, the following benefits are invaluable to an average organization:

  • single point of contact for contingent labor needs
    no need to contact, and manage, multiple providers to fill different labor needs
  • reduced cycle times
    one call and the PMO or MSP uses a process already in place to locate and onboard your contingent labor
  • standardized criteria
    every department uses the same definition, and the company pays one rate for one type of resource
  • increased visibility
    one report shows the total spend on contingent / managed labour by type, department, provider, etc.
  • compliance firewall for classification, tax, and labor law issues
    which significantly decreases the risk of a massive fine when the same contingent workers are repeatedly rehired (and the government decides they are now employees and you owe more taxes and benefits)
  • standardized performance metrics
    and managed suppliers who know what is expected of them
  • better labor needs forecasting
    from complete and accurate contingent workforce data
  • payment management
    no interest from late payments, no overpayments, and, most importantly, no double payments

All of these benefits reduce complexity, increase reliability, and reduce risk — which keeps costs down in the long run as complexity, risk, and uncertainty only serve to drive up cost.

Cross-Docking Challenges, Part II

Part I noted how cross-dociking can be a great way to cut transportation costs if done right, because handling of goods while in transit, adds labor and time, which in turn costs the organization hard dollars and profit, but also noted that cross-docking is not without its challenges. It then went on to define eight of the biggest cross-docking challenges faced by an average organization.

This post is going to address what an organization can do to address each of the challenges and see the ROI from cross-docking that it expects to achieve.

Unpredictable Customer Demand
There are two things an organization can do to address unpredictable customer demand. It can restrict cross-docking to primary distribution centers, or it can invest in reusable multi-level packaging. In the first case, when a container hits a primary port or DC, it will use cross-docking to divert the inbound product to the regional DCs, but will not use cross-docking to divert the goods from the regional DCs to the stores. In the second case, it will package small goods in smaller bundles, and if the boxes are too small to allow for efficient handling, it will place those boxes in larger, recyclable boxes or reusable containers and then, depending on demand updates, break the boxes or containers down to ship the revised quantities to the end locations.

IT System Support
This is easy — the organization invests in a new TMS (Transportation Management System) or WMS (Warehouse Management System) that is designed to support the organization’s cross-docking needs. Such a system will also likely come with advanced analytics, modelling, simulation, and/or optimization capabilities that will help the organization identify additional opportunities for cost saving.

Changing Business Dynamics
Cross-docking has to be part of the network (re)design, and not just an ad-hoc afterthought, and the contracts have to be written with the same flexibility as the shipping, distribution, and (temporary) warehousing contracts. This way it is no more risky than the other supply network activities and no less ill-fitted than the rest of the network should dynamics change.

Supplier Reliability
The organization has to build appropriate performance metrics into its sourcing contracts and establish appropriate SRM/SPM/SD (Supplier Relationship Management / Supplier Performance Management / Supplier Development) programs to insure that suppliers have, or build, a track record of on-time delivery.

Carrier Reliability
The organization has to build appropriate performance metrics, penalties, and out clauses, into its logistics contracts and establish appropriate monitoring policies and procedures to make sure its carriers deliver on time.

Facility Design
The organization has to select facilities appropriate to its crossdocking needs or invest in the necessary leasehold improvements to insure its cross-docking operations run smoothly.

Shelf Life
The organization has to adopt a FGIFGO (First-Group In, First-Group Out) policy and allow for newer products, with about the same shelf-life, to be sent out if currently cross-docked. If the product on the shelf has 27 days life, and product in the truck has 30 days left, there’s not much difference and it should send the product currently on the truck out if it can cross-dock. However, if product on the shelf has 14 days and product on the truck has 28 days, then, unless it can guarantee the product on the shelf will go out in the next 24 hours, it has to send out the product on the shelf. For each product, it has to define “close-enough” time-bands, and accept substitutions within the same time-band that are “close-enough”. (Unless, of course, there is product on the shelf about to expire, in which case it can define an override.)

ROI
The organization implements the right group of policies and procedures that will minimize touch and maximize ROI.

In other words, while cross-docking presents challenges on the road to success and cost savings, each challenge can be overcome and an organization that perseveres will see significant cost reductions in its logistics and transportation spend.

Cross-Docking Challenges, Part I

Cross-Docking can be a great way to cut transportation costs if done right, because handling of goods while in transit, adds labor and time, which in turn costs the organization hard dollars and profit. But cross-docking is not without its challenges. A recent piece over on Supply Chain Digest on how interest in cross-docking is high, but challenges are many did a great job in summarizing some of the largest challenges.

Unpredictable Customer Demand
The organization might know with 95% certainty that it is going to sell 500,000 units of its new mobile phone in the United States, but it may have a hard time predicting at a granular level which markets are going to take off first, and which markets will be the hottest. That can make it difficult to determine whether to route 500, 5,000, or 50,000 to a local DC.

IT System Support
Many TMS (Transportation Management Systems) and WMS (Warehouse Management Systems) were not designed to support cross-docking. Consider these quotes from participants at the recent WERC (Warehouse Education and Research Council) annual conference who said that “the WMS wants the goods to be in a pickable location before it can allocate the goods to the DC orders” and that, in the ERP system, “goods received one day simply could not be allocated for orders until the following day”. How can an organization support cross-docking if the systems don’t support it?

Changing Business Dyanmics
In some organizations, the business dynamics, which depend on local and global market conditions, can be as unpredictable as the customer demand.

Supplier Reliability
In order to cross-dock goods from four different suppliers onto the same outbound truck, all four suppliers have to ship the required quantities on time.

Carrier Reliability
In order to cross-dock goods from four different source locations onto the same outbound truck, all of the carriers have to deliver on time.

Facility Design
The facility needs to be designed to accommodate the crossdock process. If the facility can only support two trucks at a time, for example, it is hard to cross-dock off of four trucks onto one.

Shelf-Life
First In, First Out (FIFO) principles can also add complexity, because companies in expiration date sensitive industries, are reluctant to ship a more recently manufactured/received product if older product is sitting on the shelf, even if that requires extra handling than would be the case if inbound receipts were crossdocked for cross-docking customers.

ROI
At some companies, cross-docking is still “high touch,” resulting in higher processing costs than the organization initially thought was possible.

So what can a company do to overcome these challenges and get benefits from cross-docking? Stay tuned.

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.