Category Archives: Cost Reduction

The Role of Optimization in Strategic Sourcing – The Benefits of Optimization

This series discusses the recent report from CAPS Research on “the role of optimization in strategic sourcing”. The primary goal is to highlight, clarify, and, in some cases, correct parts of the report that are important, confusing, or incorrect to insure that you have the best introduction to strategic sourcing decision optimization that one can have.

The second chapter did a great job of highlighting the many benefits of optimization from a productivity, cost/price, and decision visibility perspective. In brief, they are:

Productivity

  • Faster Sourcing Cycles
    No more fiddling with error-prone spreadsheets. (Remember that 90% of spreadsheets contain errors!)
  • More Thorough Analysis
    A broader, deeper analysis that looks at more alternatives.
  • Higher Quality
    Data integrity is much higher.
  • Better Planning
    Better up-front planning is done before the event.

Cost/Price

  • Significant Savings
    Especially on the first event in a category.
  • Cost/Value Trade-offs
    You can analyze whether the additional cost associated with a service is worth it.
  • New Savings Opportunity
    The expressiveness allows suppliers to get creative and find ways of providing you their lowest total cost.
  • True Market Baselines
    An unconstrained scenario will give you the absolute lowest cost.

Decision Visibility

  • Centralized Knowledge-Base
    Your sourcing team can learn from each other and management gets better visibility into cost trade-offs.
  • Cost Premiums
    You can run historical events through the model and determine the cost premiums paid for preferred awards.
  • Cost Drivers
    You can analyze multiple events and zero in on cost drivers such as particular locations or raw commodity categories.
  • Competitive Feedback
    You can let your suppliers know where they are, and aren’t competitive, and why they won or lost a bid.

It also did a good job pointing out that good strategic sourcing decision optimization models also allow qualitative criteria to be analyzed. For example, you can exclude all suppliers with a service level of less than 95% or a product quality less than 8 (on a scale of 1 to 10). The ability to consider non-price decision criteria, used creatively, allows you to model and calculate a wide range of cost vs. value trade-offs and make better overall sourcing decisions. A great example of the power is the user who ran two scenarios where one scenario forced all rubber-based parts against a baseline that allowed the user to gain insight into how the cost of rubber was impacting her costs.

Next Part III: Preparing for Optimization

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Intel Reduces Atom Supply Chain Costs By 70%, But Is It Enough?

A recent article in Supply Chain Digest noted that Intel needed to reduce supply chain costs for its Atom chips by 80% to stay competitive and that, so far, it’s managed to shave costs by 70%. For most companies, this type of cost reduction would be unthinkable. But is it really?

Let’s think about supply chain costs and the opportunity for bloat. We have inventory. We have distribution. We have packaging. We have duties and (value added) taxes. We have inputs. We have production. Etc. Any one of these costs can be extremely bloated. You might think you need nine weeks of inventory when you only need three — there’s 66% bloat. You might think you need air freight when better planning could allow for ocean freight. There’s 50%+ bloat. You might think you need a certain type of packaging when a redesign could be just as sturdy with half the material. There’s another 50% bloat. You might think a tax is unavoidable, but a slight change could eliminate the tax. For example, under some free trade treaties, shipping the printer cartridge separate, instead of pre-loaded, eliminates a VAT. You might think that you need expensive raw material X, when a slight redesign would allow you to produce a better quality product with cheap raw material Y. A slight, lean, re-design of your manufacturing layout might double throughput. Etc. It is a possibility, especially if you have a lot of levers.

However, Intel only had one. Cost-service tradeoffs were off the table, as the chip had to work. Computer chips have about the highest value-to-weight ratios that you can get, which leaves little or no room to improve distribution costs. Intel’s packaging has been getting smaller and smaller over the years, so little room was left in packaging. Once a chip is designed, the raw material needs are locked in (and it still takes years to bring a fundamentally new chip design to market). Due to the nature of chip fabrication, once the plant is built, the process can’t be (significantly) changed. A chip is a single well-defined component, so there’s no wiggle room where duties are concerned. All that was left for Intel was the inventory lever.

For it’s traditional chips, which sold for $100 or more, as compared to the $20 or less selling point for the new Atom chip (which was being designed for the low-cost mobile device market), Intel operated on a nine-week total order cycle time. During the first seven weeks there were typically a large number of order changes — over 90% of orders were changed after initial placement. This led to significant inventory builds as factories spent considerable time optimizing and re-optimizing the factory schedule. However, if Intel could move to a true “make-to-order” model, reduce cycle time to two weeks, plan within four days and allow no changes after that time, the small hit in factory utilization that might would result would be swamped by the reduction in inventory, storage, and handling for all the chips what were currently routed to the DC.

Even though the internal perception was that you can’t truly build to order in the chip industry, an Intel factory was chosen in Asia as the pilot plant and an iterative approach that incrementally ratcheted down from nine to (a little over) two weeks was implemented. The end result was that supply chain costs were brought down from about $5.50 per chip to about $1.40 and that the minor hit that was expected to factory utilization did not materialize.

But is it enough? While Atom chips may be selling for close to $20 now, the market will very quickly force the cost down to about $10 (or less) per chip as more chip makers focus their sights on the mobile markets. Intel expects to get its supply chain costs down to under $1.00 per chip in 2010, but if disruption causes chip prices to fall rapidly, that could still be in excess of 10% per chip! And while supply chain costs of 10% would be welcome in some industries, it’s rather high in the chip industry where they have been traditionally been around the 5% mark, or less.

While I think supply chain will be Intel’s saviour, I think their work is just beginning and that they will have to pull off multiple revolutions to keep Intel at the forefront. Especially since Intel’s legal bill is going to skyrocket yet again as it just agreed to pay $1.25 Billion to settle disputes with AMD and has just been accused of bribing computer makers. This is on top of the $1.45 Billion the E.U. fined Intel in May.

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A Lesson from the Leaders: Sustainability is the Key to Savings

Today’s post is from Tim Albinson, CEO of Aravo and blogmaster of 2Sustain.

Still wondering if sustainability can translate into savings for your company?

If so, then you need to spend a few minutes with “Designed to Matter”, the Procter & Gamble Company’s 2009 Sustainability Overview.

Sustainability is at the core of P&G’s business model, and the report is chock-full of examples of how the company is benefiting from its commitment to social and environmental initiatives. Consider this: since 2002, P&G has reduced (per unit of production) water consumption by 52%, energy usage by 48%, CO2 emissions by 52%, and waste disposal by 53%.

The company is looking specifically at its supply chain, too, and has decided to transition from multi-modal to “intermodal” transportation — a strategy that focuses on boats and trains, rather than trucks and planes. In North America, P&G’s use of intermodal transport has increased 30%, saving 11 million liters of diesel fuel and reducing overall miles by 12% since F07-08 — all while delivering the same volume of product.

I could go on, but I think you get the idea. P&G uses sustainability to reduce the environmental footprint of its products and operations, to make a meaningful difference in the lives of its employees, customers, and external partners — and to build long-term capabilities, improve its operations, and create significant savings.

Of course, a quick search will uncover leaders in every sector that are also reporting savings from their sustainability efforts Walmart, Coca-Cola, Ascent Healthcare Solutions, Marriott, Timberland, just to name a few. In fact, a new report from Siemens and McGraw-Hill Construction shows that, even during the worst recession in 60 years, corporations across the U.S. continued to accelerate sustainability efforts and increase efficiencies as part of their overall business plans.

Research like this confirms what I have been seeing for quite some time now: leaders of the world’s largest and most influential organizations are firmly committed to sustainability as a strategic imperative. Why? Because these leaders understand that sustainability is consistent with their profit missions.

As David Bent says, when it comes to sustainability, “the more you look, the more you find”. Social and environmental initiatives offer tremendous opportunities for business benefits. Start looking, and you’ll find — just as P&G and others have — that sustainability can easily translate into innovation, competitive advantage, efficiencies and savings.

Thanks, Tim.

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Trade Extensions Trades Up Its UI and e-Negotiation Management Capabilities

About a year ago, I introduced you to Trade Extensions (TE) on the eleventh day of X-Mas. A provider of an extensive on-demand e-Negotiation platform, Trade Extensions is an emerging player in the global e-Sourcing marketplace — one that offers negotiation management, extensive RFX, and (reverse) auctions with embedded real-time decision optimization.

Since my initial coverage, Trade Extensions has made the following significant updates to their platform:

  • a brand new UI across their end-to-end system
    The new UI is crisp, clean, and click-minimal. It’s quick and easy to use and very self evident. Plus, their online help pages are very extensive and updated regularly by the entire TE development and consulting teams.
  • integrated data cleansing & classification capabilities
    Have to fix a lot of data? Just create a rule and map it, just like you’d do in a spend cleansing and classification system.
  • OLAP Reporting for Scenarios
    Users now have access to full OLAP capabilities when viewing scenario results and reports.

In addition, the following features, which I have not covered before, have been improved:

  • extensive modifications to their bid supplement functionality
    Data — pricing, discount(s), rebate(s), etc. — can be captured at any level (supplier, business unit, plant location, etc.) and used for mark-ups, discounts, qualitative scores, or as the basis for any formula(s) the user wishes to define.
  • flexible bid forms
    Not only does TE support full Excel integration, but bid forms can be designed by the user to fit their business needs. There’s no need to force your information into a single system format. A user can create additional worksheets, add columns and rows to existing worksheets as required and add macros and formulas without interfering with the platform’s ability to read completed bid forms.
  • outlier analysis and statistical reporting
    The platform can automatically detect bids that might be too high or too low and flag them for your review (after you define your outlier rules, such as specific bid field values x% away from average / historic / custom calculation). The platform also includes a number of statistics reports, including a parameter statistics report that contains a detailed analysis at the lot and bid level.
  • composed filters
    Filters, which allow you to define constraints on any set of suppliers, ship from locations, ship to locations, products, etc., can now be defined on other filters to allow for very easy, and very powerful, constraint creation.
  • selection sheets
    Excel spreadsheets can be used to define allocation constraints, discounts, penalties, and multipliers … greatly simplifying discount and constraint creation in many cases.
  • project management functionality
    100% integrated into the cohesive e-Negotiation platform, the project management functionality allows for the creation of phases and tasks, the allocation of resources to phases and tasks, and the creation of scopes (by supplier, geography, etc.) as appropriate.

They’ve also continued to increase its power. Consider a recent project run by a financial services firm that tendered all of the components of a direct mail project that would result in the mailing of 1.8 Billion documents. The project, which consisted of 65,000 items, 60,000 transport destinations, and 400,000 bids from over 100 suppliers was valued at $1 Billion with a “B”.

The project was to ultimately deliver documents to the firm’s customers, but to get to that stage each part of the supply chain needed to be tendered. This included design, paper supply, printing, assembly, and transport. The project was completed as a single tender with offers collected on-line and all components tendered concurrently. In addition, suppliers could make conditional offers that reflected their own efficiencies that could present the firm with further savings. This was a project that could not even be attempted by hand as it would take someone close to two weeks just to scan each bid. There’s no way someone could even fathom attempting to optimize this scenario if all they had was a spreadsheet solution that couldn’t handle more than 65,536 rows.

Finally, TE is one of the few players in the market to make their pricing scheme public.

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Target Costing Works and You Can Do It Too!

A recent article in Purchasing on how “purchasing learns cost modelling” noted that smart buyers are working with engineers, finance and suppliers to identify cost drivers in product development and eliminate them and that Whirlpool was able to close a gap of 30% between the target cost for an aesthetics module on one product and the initial design cost by way of a cross-functional team that included purchasing, marketing, sales, engineering, global design, production, and quality control. This greatly improved Whirlpool’s chances of hitting its profit target while saving it a bundle of money up front.

The concept, which dates back to the Toyota Production System and the beginning of Lean, is starting to take hold in a number of big companies like Boeing, Olympus, Komatsu, LG, and CAT and getting great results. But it’s not just limited to large companies, even though most of the articles I see, including this one, give you that feeling.

Thanks to not-so-new players in the market, like Akoya, which was founded in 2004 and offers an impressive industry-leading competitive banding solution, and Apriori, which was founded in 2003 and offers impressive industry-leading virtual production environments, mid-size companies can get in on the action at relatively low cost and save millions for literally pennies on the dollar.

With one (or both) of these partners on your team (as their solutions can be used complementarily, and I know of at least one big mutual customer that does so to great success), you can jump-start the process and see savings in a matter of weeks. Literally. But don’t just take my word for it. Take their customers’ words — and results. If you call them, I think you’ll find that they’ll happily give you relevant references. Their products help you get Lean fast, and it’s a shame they get so little press because it doesn’t take a massive Lean transformation to get started on your target-costing journey (even though that should be your ultimate goal).

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