Category Archives: Cost Reduction

Import Duty Reduction: Not Just for Large MultiNationals Anymore

Share This on Linked In

CFO recently had a great article on how small and midsize business can use the same customs-duty strategies large multi-nationals use to save a hefty chunk of change in a recent provacatively titled article. As larger companies well versed in global trade know, import duties, unlike income tax rates, can change dramatically depending on the way goods are described or the way the products are packaged and assembled. The article gives the classic case of microscopes used for surgery. In the early 1990s, they were lumped in with laboratory microscopes, which meant the device carried a 7.2% import duty. However, once manufacturers argued that the device was a surgical instrument, it became duty free. In other words, intended used can often be used to recategorize an item into a lower duty bracket. Another example is a woman’s cotton T-shirt. As sleepware, it carries an 8.5% duty, as swimwear, it carries a 14.9% duty.

Also, retail sets can sometimes carry a lower effective duty than the individual items they contain, and sometimes carry a higher effective duty. Thus, if you plan to combine the items into a set, you should do the import math and determine if it’s more cost effective to assemble the items before, or after, import.

Another great piece of advice from the article is keeping full documentation of the entire trade cycle. If you use a distributor (to purchase goods from a manufacturer on your behalf), that distributor will apply a markup to the goods. However, if you retain the documentation necessary to show the purchase by the distributor was an arms-length purchase and that the goods were clearly destined for the US, you can have the import duty assessed at the cost to the distributor, not the cost to you, which could save you 10% to 20% of the duty cost.

And don’t forget about how FTZs help U.S. companies save millions during tough economic times.

Best-In-Class Procurement is About Cost Avoidance, Not Savings!

In a recent post over on his Purchasing Certification Blog, Charles asked “why doesn’t Procurement save as much on non-traditional categories” in response to his review of Aberdeen’s latest “CPO Agenda” research report which found that Best-in-Class Procurement achieves 10% savings on managed spend while laggard Procurement achieves savings of 16% on managed spend. His assumption was that Procurement didn’t do as well on non-traditional categories and that dragged the average down.

As far as I’m concerned, the situation is the exact opposite. If the Procurement department is truly a Best-in-Class Procurement department, each time they negotiate a contract they get the best deal possible. Once you’ve negotiated the best deal possible, there’s no more “Savings” to be had until either the indexed market price for the core commodities, components, or labor that makes up the product or service cost decreases or a disruptive innovation comes along that allows the product or service to be produced more cost effectively. Since that doesn’t happen every day, or even every year (as commodity and labor costs tend to increase and production efficiencies quickly reach a ceiling on popular products or services), if Procurement did it’s job right, there are no “Savings” to be found on the majority of categories sourced in the last year.

The fundamental truth — which is hard to see with the recent myopic focus on “Savings” — is that there is no such thing as “Savings” in a perfect Procurement organization. If Procurement did its job perfectly, it negotiated the absolute best deal. This would mean that there are no “Savings” to be had because, if there were, that would mean that Procurement did not do its job perfectly.

A Best-in-Class Procurement organization is all about Cost Avoidance. After all, since most products and services increase in cost over time, a great Procurement department finds a way to contain, and even eliminate, cost increases even when raw material costs go up 10% and labor costs go up 5%. They work with the supplier to find ways to improve supplier efficiencies, or they work with sales to find ways to increase volumes, so that the supplier can commit to the same price and still maintain a reasonable margin even if its costs increase 5% to 10%. And then, if prices happen to drop for a category that comes up for renewal, they renegotiate the renewal to represent the effective cost decrease and never pay a penny above the best price that can be achieved.

Using this definition, and this logic, this tells me that a Best-in-Class company should see diminished “Savings” year after year as they get better and better at getting the best deal each and every time they tackle a category, leaving the only “Savings” opportunities to be those opportunities where product costs (either due to commodity price or labor price decreases or production efficiency increases) have decreased since the last time a contract was cut. And this is much better than finding “Savings” because it means they didn’t waste capital in the first place, which they left free for the business to fund operations and growth!

Remember, even Wal-Mart, despite the popular perception, cannot roll-back prices forever, especially in categories where commodity prices rise day after day! (Heck, sometimes they even roll-up by 50%! Case in point, last time I was there I was going to pick up “our” brand of coffee because they advertised, in their flyer from the previous month, that it was 4.99 everyday, which is a price you can only get in the grocery stores on sale. Well, I’m there, and I go to get some on my way out, and it’s 7.57 … a 51% increase.) At some point, until a disruptive innovation comes along, a Best-in-Class Procurement department is going to get the best deal and there will be no more “Savings”. The better the department, the sooner they hit the floor. The sooner they hit the floor, the sooner they maximize “cost avoidance”, which is what Procurement should be all about.

In other words, I think the numbers are just fine and that Mr. Bartolini did a good job of uncovering numbers that reflect the actual reality of how a good Procurement department really performs!

Four Tips For Keeping Your Transportation Costs in Check

Transportation costs might be temporarily low, but as soon as demands start picking up, you know they’re going to spike again. Fortunately, there’s a way to control transportation costs regardless of demand, or fuel costs, and an article last summer in Industry Week on “rethinking transportation costs” offered up some suggestions that are worth a quick review.

  • Know Your Carrier
    Know what keeps your carrier up at night and what you’ll need to do to take a more collaborative approach to solving your collective challenges.
  • Trucks, Trains, Ships, and Planes — Which is right for you?
    Consider alternate routes and alternate modes … maybe there are (much) cheaper options if you can be a little flexible on your delivery dates and transit times.
  • Let Your Network Be All It Can Be
    Reconsider your manufacturing locations, distribution strategies, off-shoring strategies, and customers. Do you have the right number, the right locations, the right strategies, and the right customers?
  • Find the Answers
    Consider all of your network data, all of your network possibilities, build some optimization models, run some simulations, and discover your true potential.

Information Technology Cost Management

Supply & Demand Chain Executive recently ran an article on “managing information technology costs in a challenging economy” that claimed right-sizing your IT budget and avoiding long-term harm to your company’s bottom line was a four step effort. Not sure it’s that easy, but it’s certainly worth some consideration.

The approach presented is as follows:

  1. Get a handle on the TCO of IT to the business
    Don’t overlook the “device propagation” that results every time a new application is added to the data center, the energy costs, and the support costs.
  2. Focus on the Cost Drivers
    Energy? Hardware? Software? Projects? Where’s the money going, and why? Treat the IT organization like it is a business and balance the supply and demand.
  3. Be relentless in Valuing IT services
    Examine the cost structure through the eyes of your customers and segregate functions and services into value-add and commodity categories and drive the associated costs accordingly.
  4. Be creative in meeting demand and sourcing work
    Examine the people, process, and technology infrastructure carefully to determine if there is a more cost effective way to deliver the necessary services.

I think this might be an over-simplification in some respects, as it does not address the identification of necessary vs. optional services, but one thing that I am sure of is that the answer, as the author points out, is not the typical five-step approach of (i) killing the capital projects, (ii) tossing the contractors out the door, (iii) deferring maintenance on existing systems (and letting the renewals laps), (iv) canceling training, and (v) slashing the travel budget to zero. That’s just a five-step plan to disaster.

Hidden Costs of Global Sourcing

Purchasing recently ran a good article on “the nine hidden costs of global sourcing” that should not be overlooked if you think global sourcing is your way out of the downturn. It might be, but if you don’t consider all the costs, you could easily make a wrong decision.

As per the article, the following 18 costs (which includes 9 bonus costs found only in the web version) can add up and turn that 20% labor-based savings you expected to see into a 10% loss over your current solution when compared to your current arrangement.

  • Internal Expenses
    The resource intensity of sourcing in unfamiliar markets with unsophisticated suppliers can easily erode forecasted savings by 5%.
  • Supplier Health
    If a supplier goes bankrupt, there go your savings, and then some, when you have to quickly switch to a (much) higher cost of supply.
  • Post-Contract Lull
    In order to insure that savings materialize, you need to monitor the contract in the weeks and months after it is signed. There is a resource cost associated with the monitoring.
  • Duty and Tariff Changes
    A change in the duty or tariff rate could dramatically affect the cost of a product being sourced and the savings that materialize.
  • Contract Non-Compliance
    If your buyers go maverick, so do you savings.
  • True Inventory Costs
    Sourcing from an overseas supplier lengthens lead times, which increases safety stock, and increase time in transit and this significantly increases your average inventory cost.
  • Logistics Volatility
    Not only does increased distance increase your freight costs, but so do rapid increases in freight demand which could cause freight costs to spike.
  • Technology
    Tracking product flow from global suppliers could require new technology, which will increase costs as well.
  • Quality Breakdowns
    If a contract manufacturer’s quality affects delivery of the part or increases the number of failures, it could wind up costing more than originally forecasted and wipe out the global sourcing ROI. And if it forces a costly recall, it could wipe out your business — period.
  • Transition Costs
    There’s nothing “soft” about this cost which will affect initial ROI.
  • Margin/Burden Stacking
    If supplier sites compete against each other, that can cost you.
  • Lost Tariffs/Taxes
    Improper classifications and missed recoveries on VAT add up quickly.
  • Packaging
    If you’re not careful, your supplier might try to profit off the packaging, taking another chunk out of your ROI.
  • Logistics Costs
    It’s not just freight — it’s handling, intermediate storage, and the costs of inevitable delays.
  • Hardware Costs
    Some overseas suppliers have difficulty obtaining standard parts at your cost. Failure to recognize this, and help them obtain parts cost effectively, also costs you money.
  • Labor Costs
    Failure to understand the labor cost breakdown can cost you.
  • Markup vs. Margin
    Know the difference — it can be very substantial.
  • Burden on High Dollar Parts
    Some suppliers may try to burden a $6 part the same as a $6,000! Be careful!