Category Archives: Cost Reduction

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.

For More Savings, Turn Your Sights on IT

Every organization has it’s sacred cows, be it legal, marketing, or IT. And every head of the sacred cow organization says that Procurement couldn’t possibly help it save money because of the nature of the relationships it needs to maintain and the need for highly specialized, expensive skills. And while this is true to some extent, any automated discovery program that does X, Y, and Z may do the trick; printing is not a highly skilled and specialized operation; and most hardware is commodity these days, so Procurement does have a role to play in reducing cost in each of these organizations.

And now that many software systems are becoming commodity and the cloud is making IT a utility, Procurement has an increasingly important role to play, especially for “Factory IT”. As per this recet McKinsey Quarterly article, which is well worth the read, on “reshaping IT management for turbulent times”, IT can be broken down into “Factory IT” and “Enabling IT”. “Factory IT”, which composes the bulk of an organization’s IT activities, is amenable to standardization, simplication, scale, and outsourcing to increase efficiency and reduce cost — and a perfect category for Procurement to help IT identify significant cost savings. While “Enabling IT”, that helps organizations respond more effectively to changing business needs and gain a competitive advantage through innovation and growth, may need expensive resources with rare skill sets or custom built systems, Factory IT can often be bought like a commodity.

So don’t overlook IT. It’s ripe with cost savings.

How Can the NHS Find 50% More Savings?

A recent article over on the BBC News site notes that NHS hospitals [have been] told to seek 50% more savings by a regulator. A number of factors are being blamed for the target, including greater-than-expected inflation, but regardless of the reason, if the NHS doesn’t find savings of at least 6% to 7% a year, it could be in trouble, as it needs to make up to Twenty Billion Pounds of efficiency savings by 2015 to reinvest in care.

So how can the NHS find more savings without sacrificing services, with wait times that are already at a 3-year high, even further?

The obvious answers are:

  • streamline the supply chain and
  • improved GPO performance for prescription and specialized equipment buys

but the real answer is probably:

  • stop buying like a government agency!

I’m not as familiar with the UK buying rules as I am with the Canadian buying rules, but many jurisdictions within North America, the UK, and Australia / New Zealand have the following rules that do nothing but increase cost, decrease efficiency, and put quality of product and service in jeopardy:

  • bids over some random amount must be public and go to the lowest bidder,
  • you must be on a standing offer before you can bid, and/or
  • past performance cannot be used as a determining factor in the award decision.

Let’s take these one by one:

Bids over some random amount must be public and go to the lowest bidder.
Whoever thought this was fair and/or efficient is a moron. While it makes sense to allow any vendor who can competently provide the service to bid, letting every vendor, and his little dog too, bid is ludicrous. What happens is you get consulting organizations with no appropriate skills whatsoever putting in bids in the hope of getting more work, who, if they get the bid, will then flail madly to hire whomever is available to throw on the project. Half of these people will be unsuited for the job and they’ll have no experience working at a team. Furthermore, many organizations that subsist on government projects have mastered the art of the “change order”. They’ll agree to do “X” where “X” sounds like it is what you want, but really isn’t, and then to get what you really want, because of the tight contract, you’ll have to pay a ridiculous amount in change order fees, and the result is that the net cost will be more than the highest bid, and significantly more than the lowest bid from a competent, honest, vendor.

You must be on a standing offer before you can bid.
This generally takes a lot of time and effort, and is not a good use of time for most private organizations as standing offers only allow you to get no-bid work for an amount not worth it for the effort, or bid for projects you might not get. Proper procurement practice should be to put out a call for participation specific to a project, and then qualify organizations who can bid, not force an inefficient process that wastes nothing but time and money.

Past performance cannot be used as a determining factor.
This is my favorite. Whomever thought this was fair is a complete idiot. How is it fair to penalize competent vendors again and again by allowing an incompetent vendor to repeatedly bid, and, if the low-bid rule is in place, win projects that everyone knows the vendor cannot do at that price point. All that happens is that millions of dollars of public money gets wasted. How is that fair?

So if the NHS really needs to increase savings drastically, my advice would be to identify any buying practices that were inspired by government procurement, and not the private sector, and axe them.