Category Archives: Cost Reduction

Will Apple Save You More on Print and Marketing than Negotiation Ever Will?

As I mentioned in my recent post on how marketing is a huge savings opportunity, last year, the Marketing Supply Chain Institute released “Define Where to Streamline: Making Marketing Supply Chains More Efficient, Agile, and Enviro-Friendly” (registration required) that noted that, with good visibility, an average marketing organization can easily find 20% to 25% savings with Procurement’s help.

About ten pages in, the report lists the top five areas where the marketing supply chains could realize sustainability gains (which are the ultimate key to long term savings). These are:

  • print, production, warehousing, and delivery
  • transportation and logistics (of material)
  • packaging and material
  • meetings, user conferences, & events
  • merchandising & point-of-sale displays

And they all have one thing in common: printed paper. First you print the fliers and brochures and inserts and then you transport them to your facilities and events and points of sale for distribution and use. If you could reduce your paper costs, which aren’t ever going to go down as wood becomes more precious, and printing costs, which are going to stay as high as the price of ink, you could substantially increase your savings.

Thanks to Apple, and the iPod, iPhone, and iPad madness, you can now do just that! 3 Million iPads in less than eighty days, and sales are still going strong. Pre-orders for the iPhone 4 racked up to 600,000 units so fast that the providers had to stop taking them. And there are over thirty million iPod Touches in the wild already. (With many more on their way now that Apple has a promotion that students get a free one with a new Mac.)

Thanks to Apple, the paperless world of ST:TNG is almost here and it won’t be long before everyone has their own personal electronic pad (be it an iPhone, an iPod touch, or, more likely, an iPad). And if you take advantage of it (like other early adopters), you will save a fortune in the long run. (Many conferences have already put their schedules and proceedings on Apple’s iPlatform, including the 2010 International Builders’ Show, Social Media Week Toronto, and the GameHorizon Conference 2010.) If you’re an organizer, you can choose to go i and dictate no printed materials. If it’s a large conference, you can negotiate with Apple for an “educational” discount and anyone who doesn’t already have an iMobile can have the price of one included in their conference fees.

But events aren’t the only opportunity for saving on printed paper — the boardroom is another great opportunity. How many bales of paper does your organization print out each day, only to see it used for a single meeting before it goes to the shredder? Considering that the average employee in the US uses 10,000 sheets of printer & copy paper every year, if we take an average blended per-sheet cost of just 5 cents, that says that your average employee is using at least $500 worth of paper each year. If we’re talking executives and predominantly colour print-outs, we’re looking at a minimum of $1,000 worth of paper each year. A 16 GB WI-FI iPad, which will hold all the documents they need at one time, is $499 (+ $99 for 2 years of Apple Care). If you institute a zero-printing policy for the boardroom (and meeting rooms), and buy a stack of corporate iPads that can be quickly loaded with whatever documents are needed for the meeting, you can reduce your internal printing costs by at least 50% (as there will be no costs in year two), even assuming you always upgrade every two years when AppleCare runs out. (Many of the devices will probably last three or four years, considering Apple’s track record of quality hardware, so you can sell the old devices at this time and recover some green if you wish. Or you can be a good corporate citizen and, after having the batteries refurbished, donate them to a needy school!)

Think about it. Paper + Ink + Printers + Energy to Print + Transportation + Shredding & Recycling is costly. e-Printing is almost free, as it’s just the cost of the e-Reader, which is much more energy efficient than a printer!

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Optimization: The Only Solution to Complex Spend Management

Today’s guest post is from Paul Martyn, Vice President of Marketing of Bravo Solution.

Paul can be reached at p <dot> martyn <at> bravosolution.com or 312 279 6793.

Most organizations have a diverse spend portfolio that includes many simple, several moderately simple, and a few complex spends.

To address each spend appropriately, we need to understand the dynamics that make each event complex. For starters, let’s look to another ‘multi-faceted’ puzzle; the Rubik’s Cube.

Invented in 1974 by Ernö Rubik, Rubik’s Cube has puzzled generations around the world with its utter devilishness. The multi-faceted nature of the Rubik’s Cube makes for a good analogy to spend management and sourcing.

Read the very interesting Wikipedia article linked above and you’ll find out that a 3×3 Rubik’s Cube has over 43 quintillion starting positions. But, if you know the right combinatorial magic, ANY cube can be solved in 29 or fewer moves. Like spend management, the Rubik’s cube has an extraordinary number of possible starting positions but a logical process (algorithm) can elegantly solve the problem with minimal effort.

Complex Spend Management is another multi-faceted puzzle with even more complexity and ‘faces’ (internal and external to the buying organization) than Rubik’s famous cube. There are many factors which influence decision-making and, like a Rubik’s Cube, each factor of Complex Spend Management is related to the other factors. For example, let’s look at the supplier ‘facing’ decision factors inherent in sourcing decisions; price, incumbency, risk and timing:
If incumbency, supplier risk factors and timing are not important, the spend management puzzle is relatively straightforward to solve. We could use a reverse auction or simple RFI/RFP template and get the cheapest possible price, all other things being equal, pretty easily. This is akin to solving one face of a Rubik’s cube, something most of us have the skills to do.

But, if we are to focus on the multi-faceted nature of our negotiations and explore new, and potentially more efficient, ways of dealing with suppliers while balancing the satisfaction of our internal stakeholders (in operations, finance, marketing, etc) we must recognize how our efforts to solve one ‘face’ or dimension of the puzzle impact the other faces and work to find a solution that satisfies each dimension. We’ve all observed that the price visibility we see in a reverse auction inspires pricing creativity by suppliers. In the same way, if we can offer more visibility into other, non-price stakeholder requirements, we will stimulate suppliers to respond creatively in those areas as well.

Successful sourcing managers find creative ways to drive financial results for their company. Effectively reducing costs means challenging internal stakeholders’ assumptions, preferences, and processes with scenario analysis that quantifies trade-off costs. Buyers need to expand simple price analysis to quantify the total costs (of ownership) absorbed by the operational stakeholders. Complex Spend Management requires that buyers include the inventory and logistics impact in their financial analysis. Buyers are often challenged to explore a wider variety of options to redesign their supply plan while evaluating strategic considerations like ‘make versus buy’.

To address this explosion of complexity, many buying organizations have developed and maintain ‘big ass spreadsheets’ (BASS). BASS were often designed for a single project and then reused on subsequent complex spend events. This approach does not take into account the dynamic nature of Complex Spend Management. The BASS approach is akin to knowing the moves to solve one specific starting position of a Rubik’s cube and applying it to other starting positions – it simply does not solve the ‘new’ puzzle. In short, buyers need a more dynamic and flexible solution.

Fortunately, today’s optimization algorithms provide buyers with a technology that identifies the optimal sourcing solution for each combination of supplier pricing, buyer preferences, business rules and risk factors. This allows buyers to define a problem (starting position) and work with the suppliers in a collaborative manner to propose solutions. The buyers then use optimization to determine which combination of supplier proposals is best.

In essence, optimization technology provides the buyer with the ability to increase collaboration with suppliers and solve any starting position of a Rubik’s Cube by simply pressing the “Solve Now” button.

Thanks, Paul!

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CFO’s Lesson from the Downturn: Too Little, Too Late

A recent article over on CFO, which states the obvious, says that big lesson from the downturn is to “cut inventory, not people”. The timing of this is so poor it’s shocking! Why couldn’t they have run this *before* organizations cut so many people that joblessness came close to reaching an all time high: 10.1 in October of 2009 compared to the all time high of 10.8 in November of 1982! (Source: The Misery Index)

As noted in the article, there is a huge savings potential in inventory reduction, which ties up working capital, eats up storage fees, and risks significant losses from obsolescence if the product is not sold before it nears the end of its useful life. In fact, I’m willing to bet that if the right end-to-end inventory optimization strategy was employed, the average mid-sized company (10M to 500M in revenue) would save significantly more than the 520K saved by the average company in the report. But still, even if your company only saved the average amount from its inventory reduction effort, it would save 30% more than the average savings the average mid-sized company obtained last year by slashing headcount. Headcount which you need if you’re going to recover when the economy picks up — because if you’re regularly turning away business like the contractors in Pittsburgh (see the Purchasing Certification Blog), eventually word is going to get around that you’re not interested in new business and then, because potential customers stop calling, you’re going to stop getting new business. Instead of growing, you put yourself on the fast track to bankruptcy!

So cut your inventory, optimize your working capital, and spend more strategically. Not only will you save more, but you’ll make more too when times are good!

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You Can Have Any Color You Want …

… so long as it is black.

This is one piece of advice from the early 20th century that we should not have forgotten in the early 21st. Maybe if a few more companies remembered this, they would not be in such dire straits. Consider the case of PolyOne Corporation that we discussed in a recent post on coming back from the brink to cash in the bank and how the complexity of too many manufacturing locations producing too many product variants was running them deep into the red.

Now consider the case of Apple — one iPad with 2 network connectivity options and 3 memory options. That’s only 6 variations, with only 2 components different in each variation. They’re “you can have any iPad you want, as long as it’s white” produced the best selling pad/tablet PC this year (with sales in excess of 2 Million units in less than 60 days, before it was available outside of the US), just like their “you can have any iPhone you want as long as it’s black” produced the best selling phone three years ago.

I was reminded of this while reading a recent piece on getting a handle on complexity which offered up a four step approach to reduce complexity, which, while workable, lacks the simplicity of:

You can have any color you want, so long as it is black.

Remember this, and you just might get your complexity, and associated costs, under control.

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Making Cost Cuts Stick

A recent article in the McKinsey Quarterly noted that it is often difficult to make cost cuts stick, especially when the economy is improving, and that only 10% of cost reduction programs show sustained results three years later. To try and improve the situation, they offered us “five ways CFOs can make cost cuts stick”, which, briefly, were:

  • Assign accountability at the right level

    Make sure the people actually spending the money are accountable for how it is spent, and that their compensation is related to how well they adhere to the initiatives.

  • Focus on how to cut, not just how much

    Set policies and procedures that are in tune with desired spending behaviours.

  • Don’t Let P&L accounting data get in the way of cost reduction

    P&L categories don’t give the kind of per-unit insights that help focus cuts in specific categories, like travel expenses, that the company can most afford to cut.

  • Clearly articulate the link between cost management and strategy

    Strategy must lead cost-cutting efforts so managers can deliver a consistent message on how the identified cost reductions will strengthen the company.

  • Treat cost management as an ongoing exercise

    It’s not a one-off exercise driven by the need to manage short-term profit targets, but a long-term initiative designed to build a competency in cost management.

And these are all great ways to control costs and maintain cuts, but I think the real key to making cost cut sticks is to cut what needs to be cut. If you cut what needs to be cut, then the cut is a justifiable and defensible one. This makes it easier to articulate the link, focus on the how, treat cost management as an ongoing exercise, assign accountability, and bypass the P&L as you go straight to the data source.

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