Category Archives: Cost Reduction

VFS: Accident or Planned?

If you haven’t figured it out by now, I’m in the process of dissecting the latest report from CAPS Research on Value Focussed Supply (VFS) with ultra-fine tweezers because it might just turn out to be the most important report of the new decade — if you can get past the fact that they’ve thrown YAMA (Yet Another Meaningless Acronym) our way. Or, it might just be a trivial summary of obvious supply chain improvements from the past few years and have no lasting impact. However, unless we dive in to the details of the 90 page report, we won’t know for sure.

Early in the report, the authors state that the aim of the report is to understand how a holistic value approach differs from traditional competitive sourcing approaches. The hypothesis is that companies that are successful at VFS (which The Mpower Group would term next practices) do two things:

  1. Follow a Value-Focussed Process for Key Categories
    that links to current and future business and technology needs, establishes fact-based value goals for the category, and formulates, implements, and measures strategies designed to achieve the fact-based goals
  2. Invest in Process Enablement
    to conceive, identify, deliver, and sustain value for the near and long term

And while one must agree that any organization that does these two things has a good chance of increasing the value obtained from supply management — as the organization will be looking beyond simple cost reduction to sustainable value creation through supply risk reduction, alternate supply sources, quality improvements, and increased value add to the core product — there is also a chance that, for an average organization, VFS is arrived at by accident. A significant disruption occurs. The team steps up and finds a creative way to solve the problem and restore quality supply in a timely basis, and, in the process, creates additional value as a side-effect because the new process is more efficient or the new materials are more reliable, etc.

Consider the case study for Powercon Co. It had 300 part numbers that could only be obtained from a sole-source supplier that was 40 days late, on average, when a delivery date was missed and that only managed to achieve 50% on-time delivery performance. As the company could not identify any alternate suppliers that would meet all of the company’s needs (affordably), the company had to do something about the problem to improve the supplier’s performance in order to maintain its productivity (and, presumably, profitability) as the late orders brought about a host of problems for the company which did not want to delay its own shipments and face customer service level issues due to a supplier’s problem. In addition, the late orders were also limiting the company’s ability to optimize its manufacturing operations, forcing it to keep excess inventory on hand.

In this situation, even though the company eventually took a formal effort, based on Six Sigma, to improve the situation, VFS was as much an accident as a planned project. The Supply Management team didn’t wasn’t sitting around looking for new ways to add value, they were responding to a dire situation and looking for a way to put out the flames. With the help of an external expert who designed the Six Sigma program, the company improved the supplier’s performance by over 95%, achieving an on-time delivery of 98%, and reaped all the benefits that came from the improvement, but not all of the value was by design.

But sometimes value is by design as well. Consider the case study of F&B that rationalized specifications to reduce SKUs and requirements to those that customers valued and paid more for. This effort had a significant design element up front. But is it really VFS from the get-go? The ultimate goal was cost reduction, and this was a way to achieve the same goal since increase profit per unit is sometimes just as good as reduced costs since it reduces the percentage of revenue spent on raw materials.

What do you think? Is VFS by design or is it by accident?

More to come.

Remember: Cheap Gas Comes At The Expense of the Environment … And Your Supply Chain

I was pleased to see this recent article in Fortune on “why gas costs more — and is more profitable — out West” (CNN Money, January 3, 2011) because it hammers home three points.

  1. Gas prices are not uniform across North America, and, thus, it’s not all about the price of oil.
  2. If gas is cheaper, it’s not just because transportation costs or taxes are less, it’s because it’s dirty.

And as badly as we may want cheap gas, we should want clean air more. We need agreement on a Kyoto protocol that will mandate consistent EPA requirements across North America. Not only will our lungs thank us, but so will our CFOs — because, then, for once, we’ll have consistent fuel prices across the board and planning will be easier, and cheaper. We will be able to locate DCs at a point that minimizes the total distance across all lanes, because we won’t have to account for fluctuations in fuel prices due to local EPA laws.

Right now, because of so many fuel price variations above and beyond carrier rate variations, an average company requires the most advanced and expensive optimization solution on the market to even attempt to optimize a distribution network. This advanced software is still well beyond the budgets of smaller mid-sized companies. But if the model simplifies, the software requirements for basic network analysis decrease, and lower-cost solutions become sufficient — solutions that are within the budget of the average mid-sized company. And now its clear why cheap gas not only damages the environment, but your supply chain.

The Nature of Energy as a Purchased Item

Robert Rudzki, a regular contributor to Sourcing Innovation, recently edited a great two-part series on the nature of energy as a purchased item (Part I and Part II) by Ted Eichenlaub over on the Supply Chain Management Review that should be added to your reading list if energy is a reasonably significant cost of your operations, as the price of energy is only going to increase in years to come.

In these pieces, Ted, who is a senior advisor in the energy practice at Greybeard Advisors, elaborates on the increasing complexity of energy buys in today’s Procurement environment as the commodity cost of energy is only one part of the total cost of energy to the end-user.

Some important points to keep in mind are:

  • Price and Volume
    Energy is expensive and its price is volatile. In order to take advantage of price volatility, the buyer must know what price will achieve the desired cost ledger performance, the volume requirements, and and the nature of the volume.
  • Hedging
    Hedging can be used to reduce price volatility, but it can also increase price volatility if the hedges are not made by an expert.
  • Credit Worthiness
    A supplier may be unwilling to grant a major long-term contract with price that is very likely to below the price it could command in a month or two if it thinks there is a good chance that the buyer might not be around to utilize the full volume of energy that the buyer is committing to.
  • Standardized Contracts
    Most suppliers use standardized contracts and there is little room for negotiation beyond price and volume.
  • Worldwide Sources
    The energy might be produced locally, across state lines, or internationally (in Canada). Depending on where it is produced, and where it is purchased, there may be documentary requirements, energy credits, or other concerns that need to be taken into account.

In addition, there are concerns regarding transportation and delivery, regulation, and responsibility that also need to be understood. For more information, check out the two part series on the nature of energy as a purchased item (Part I and Part II).

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U.S. Small Package Courier Costs Skyrocketing on January 3, 2011

Small businesses and businesses that rely heavily on couriers (for document bundles and demo equipment transport) be warned! On January 3, 2011, both FedEx and UPS are decreasing the divisional factors used to calculate dimensional weight for Ground and Air packages that are 3 cubic feet (5,184 cubic inches) or larger. The factors will decrease from 194 to 166 for shipments within the US and from 166 to 139 for international ground shipments to Canada.

You’re probably thinking what’s the big deal? That’s only a 1.17% change for in-country packages and a 1.19% change for packages to Canada? Right? Well, yes and no. Mathematically, the change is small, but you have to remember that couriers charge based on dimensionalized weight and the price increases approximately linearly with weight. Thus, as per this article on new dimension and weight shipping factors in MultiChannel Merchant (that deserves a hat-tip for being among the first to pick this up) if you have a large parcel with an actual weight of 6 lbs (with a list rate of $29.50) that used to dimensionalize to 14 lbs (with a list rate of $55.90), it would now dimensionalize to 16 lbs (with a list rate of $65.40), which increases your cost by 17%.

In other words, unless you can “grandfather” in the current dimensionalization factor into your renewal agreements, your shipping costs could easily go up by 15% to 20% across the board as a result of that 1.17% change in the dimensionalization factor.

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How Much Can You Really Save If You Switch Suppliers?

I was a little flabbergasted by this recent article over on SupplyManagement.com on how “switching suppliers will save billions” in the UK. While there are often savings to be had if you are willing to switch suppliers, the reality is that the savings, once the total cost is calculated and the total value derived, is never as much as you expect, especially if the product you are buying isn’t a true commodity. And even if it is, there are other considerations. Consider the following categories:

  • Office supplies
    Okay, you can always get a better quote. But remember that delivery charges often aren’t fixed (and will usually increase beyond the average rate of increase by the local delivery company) and the better the deal you get on negotiated SKUs, the more they’ll overcharge you on anything off contract (and, if you’re not watching, charge you even more than what you would pay in the office supply store down the street). The “loss leader” is always designed with your loss in mind.
  • Communications
    Okay, you can always get a cheaper (mobile) plan. But the cheaper the plan, the more you pay on overages, roaming, and long distance (LD). Have an executive with an unpredictable travel schedule? Watch your roaming and LD costs skyrocket! Have an organization where 20% of users don’t fit the basic plan profiles? Watch your overage costs skyrocket! For every penny you save, you’ll lose it somewhere else.
  • Janitorial Services
    You’ll always find someone cheaper. But they won’t necessarily do as thorough a job, and if you’re not careful, they might skip the background check and you might come in some day to replace the backup drive only to realize that the backup drive is gone!
  • Contingent Labour Management (CLM)
    You’ll always get a better quote, but the less a CLM firm gets to fill a position, the less incentive they have to spend the time to find the best person for the job, especially if your competitor is paying them more to fill that same position. And, in the long run, the few hundred you save costs you a few thousand (or tens of thousand) in productivity losses.
  • Custom Manufacturing Services
    You’ll always get a better quote, but what will you sacrifice in quality? And what if they put lead in the paint, melamine in the milk, or bisphenol A in the plastic? Then what?!?
  • Advertising Services
    I’ve no doubt that you can cut any quote in half, but advertising isn’t about cost, it’s about the revenue it helps you generate. Is it really worth hiring a B player at half the cost when the A player is five times as likely to come up with a campaign that helps the organization double sales?

So while you should definitely be willing to change suppliers, don’t rush a decision and be sure to let your current supplier compete in the go-to-market if they have been serving you well. Sometimes all they need to find savings (either by being more aggressive on margin or on innovation and finding more creative ways to serve you at a lower price point) is a little incentive. And remember, it’s not worth switching for 5% that will never materialize unless it’s a multi-million dollar contract. And even then …

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