Category Archives: Cost Reduction

Service Leaders Speak: Mark Usher of Treya Partners on “A Game Changing Procurement Initiative”

Today’s post is from Mark Usher of Treya Partners.

Procurement service providers can create game-changing value for their customers in the current economic climate through high impact sourcing initiatives in both DIRECT and INDIRECT spend areas. Since indirect procurement has been well covered in the blogosphere recently (and one can only keep readers interested for so long about how to design the perfect office supplies core list) I’m going to focus solely on how procurement can not only protect profit margins but create sustainable competitive advantage through world class direct materials sourcing. Whether your customers are in manufacturing, retail, food, or consumer packaged goods these procurement strategies will keep your clients afloat through the perfect economic storm and excellently equipped to maintain a healthy lead over their competition when balmy financial weather returns.

THE DIRECT MATERIALS GAME CHANGING PROCUREMENT INITIATIVE

Increase Gross Margins by developing a supply base that enables an organization to minimize cost and maximize customer service for its most highly demanded products.

Thousands of companies go out of business in recessionary economic environments because their supply chains are unable to deliver the very products that their customers are ready and willing to buy. It turns out that many of these same products are also their most profitable. In good economic times, a poorly performing supply chain like this doesn’t present too many obvious problems. If you’re selling a billion dollars of product at 20% gross margin you can swan along quite happily feeding an operating expense base of nearly $200 million, leaving millions of customers wanting stuff you’ve run out of and millions of dollars of stuff they don’t want sitting on store shelves or in the warehouse. However, when the downturn hits and your sales nosedive, your 20% gross margin is now trying to satisfy the same operating expense base. Hello negative operating income!

Procurement service providers can help companies maintain positive operating margins in recessionary or slow growth environments by helping them select suppliers that can deliver the lowest total cost inputs to production (or resale merchandise for retailers and distributors) while also supporting the highest levels of customer service for the end products that are in highest demand from customers. Low cost inputs result in a profitable product while high customer service results in an available product. Making a profitable and highly demanded product available is the greatest lever a company has to increase gross margin. What role can Procurement play in this? First, analyze historical order history by product (making sure to include backorders) and identify the 20% of products comprising the top 80% of customer demand. Then calculate profit contribution for each of these high demand products, where profit contribution is the difference between a product’s selling price and its total cost including procurement cost, transportation cost, and any internal manufacturing costs. Now identify the 20% of the high demand products that comprise 80% of total profit contribution. These are your company’s most profitable and highly demanded products! If an organization can ensure that these products are always available for their customers to buy, it will be fully realizing maximum potential gross margin for its industry sector.

Procurement’s role in helping an organization achieve this goal should be to facilitate a cross-functional strategic sourcing process that identifies, evaluates and selects suppliers based on their ability to meet exacting criteria for total cost management and customer service. Specifically, Procurement should work with stakeholders in marketing, manufacturing, distribution and other departments to develop weighted, metric-based criteria in areas such as a supplier’s capability to strategically source their own raw materials, implement lean manufacturing processes, deploy logistics strategies capable of consistently achieving 99% line item fill rates at their customers’ point of sale, and manage indirect operating expenses to maintain financial health while delivering low prices to their customers. The outcome of the strategic sourcing process should be a set of closely integrated supply relationships with a small number of supply partners that between them satisfy the ultimate goal of lowest total cost of ownership and highest customer service for the company’s highest demand products.

If you are a service provider with a competency for developing low cost/high service level supply bases, you can ensure that your customers will always enjoy gross margins in the top quartile for their industry. Particularly in recessionary or slow growth periods, a laser-like focus on service levels and availability for high profit/high demand products will guarantee financial health until the recovery is in full swing. And by helping your customers optimize their supply chains today, you will help them remain strides ahead of their competitors long after the recessionary period has ended. By maintaining above average profitability for their industry they will be able to make heavier investments than competitors in all aspects of their business, allowing them to maintain a perpetual competitive advantage.

Who said procurement was all about buying pens and pencils?

Thanks, Mark.

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Service Leaders Speak: Ben Scott of The Claro Group on “The Opportunities Provided by The Great Recession”

Today’s post is from Ben Scott, a manager with The Claro Group.

As the country and economy slowly awaken from what some experts have called ‘The Great Recession’, procurement managers are presented with a unique opportunity to take advantage of the changes to their suppliers’ landscapes. Undoubtedly, many suppliers have felt the pinch from the last few years but yet are beginning to see a light at the end of the tunnel. Nonetheless, as many suppliers look around today, these suppliers notice that the competitive landscape that used to exist has been dramatically altered. Bankruptcies, mergers, acquisitions and continued globalization have played a part in changing the supplier landscape both domestically and internationally. However, now that a turn-around appears to be underway, supply management professionals should review their supplier agreements, research the supplier marketplace and determine what categories are ripe for sourcing.

One such category that has seen its economics change, while being prevalent at many companies, is temporary labor. Over the past two years as unemployment has increased, the temporary labor talent pool has improved proportionally. As a buyer of temporary labor, an increased supply yields two distinct benefits. The first is courtesy of Adam Smith’s invisible hand where supply and demand has depressed wages. The second is that more capable workers are readily available and eager to prove themselves.

Once it is clear that there are benefits to be captured, the supply management professional should determine the most effective sourcing approach. Through a well thought out approach, a supply management professional can capture significant benefits. A supply management professional can choose from techniques such as incumbent negotiation, request for proposal or reverse auction. From recent history we have found that incumbent negotiations coupled with an RFP to gauge the marketplace is a very effective method for capturing savings. Regardless of the sourcing method you choose, keep your eyes on the pay rates and mark ups. Also keep in mind non-price savings mechanisms such as a volume based rebate program. In addition to hard cost savings, the supply management professional can capture more talented temporary help. The cumulative result is paying less on a per hour basis while getting greater efficiency out of the temporary labor that is brought in.

A second category that has become more prevalent over the past few years is corporate cards (“p-cards” or “T&E” cards). Traditionally p-cards were not thought of as a category that was “sourceable”. However, as supply management professionals have searched for additional areas in which to create value for their organizations, p-card negotiations have become more popular. At first glance it seems counterintuitive to think that banks and financial service companies would be willing to “come to the table”, however, our recent experience tells a different story. Banks are looking to rebuild their client portfolio with companies that have a proven track record of earning profits and generating cash. Therefore, if your company has a healthy balance sheet, this is a good time to place your p-card business into a competitive environment. Once again the recession and nascent turnaround has played a role here. The federal government has pumped billions of dollars into the financial system with the instructions to begin lending that cash out to businesses to restart the engines of the economy.

If you believe your company can stand to improve its corporate card agreement, the first step is to begin discussions with your current incumbent. However, often times an incumbent won’t really offer much value until there is the threat, real or perceived, that it stands to lose the business. That is why, unless extraordinary conditions exist, executing a RFx and entertaining bids from other suppliers is recommended.

The two examples used in this article are just the tip of the iceberg. Nearly every supply management professional will have responsibility for categories that have seen dramatic shifts similar to those illustrated here. The first, and arguably the most important, step in capturing savings is to understand the dynamics in the supplier marketplace. Constant monitoring of supplier marketplaces is a best practice that all supply management professionals should practice, but the benefits of such activities can be magnified in times such as these. By staying in tune with changes to your suppliers’ landscape, supply management professionals will be able to act quickly when opportunities such as these present themselves.

Thanks, Ben.

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Great Tips For Smarter Procurement From … CNN Money?

Yes, that’s right. A recent article in CNN Money about reducing your spending as a consumer, if you read between the lines and focus in on the principles, and not the tips, had some great advice for reducing your corporate spend. It might sound a little crazy, but their article on “cut your spending by $500 a month” had some tips that, if properly applied, could save your company millions of dollars. Really.

Let’s focus in on the first 10 tips.

  1. Slash Your Grocery Bill
    • Shop Once a Week

      Aggregate your purchases into fewer orders. This will not only give you volume discounts, but it will reduce maverick purchases … which is often the greatest single source of negotiated cost reduction leakage in an organization.

    • Give Up the Bottle

      Bottled water costs a lot more than you think if you add it up. If each person in your office consumers $15 a month worth, and you have a 1000 people, there’s $15,000 in instant savings.

    • Eat What’s Ripe

      Just like in-season produce is 20% to 50% less, in-season technology purchases for products being produced in bulk could save you a bundle. Remember that when replacing your cell-phones, laptops, and peripherals.

    • Differentiate Between Clean and Dirty

      Just like organic produce will always cost $1 to $2 more, “premium” suppliers will also charge more for products that might not be noticeably better. For example, can you honestly tell the difference between an organic and a non-organic onion or cabbage?

  2. Ditch your second or third car

    Maybe the boss won’t let you get rid of the company cars, but do they really need to be driving high-end BMWs on the corporate dime? A lot of car companies are producing luxury cars now for 30K to 40K. Get them a Hyundai Genesis, for example.

  3. Visit your Local Cobbler

    Are you replacing equipment too aggressively? Regular maintenance can often considerably extend the useful life of expensive equipment. There are companies that specialize in the delivery of software solutions that help you monitor and proactively schedule service calls to keep your mulit-million dollar production equipment working efficiently well beyond the amortization period.

  4. Twitter to Save

    While I don’t recommend the use of Twitter, there are many commodities and office suppliers that you can buy opportunistically and save a bundle. Just keep your eyes open.

  5. Time Your Buys Right

    Many industries go through cycles in supply and demand. If you buy during a trough, you can negotiate a considerably better deal than if you try to buy during peak demand.

  6. Stretch it Out

    Are you being over-serviced? For example, do you need full janitorial service every night? Think about it … do you vacuum your living room every night? Train your staff to empty their own recycling and garbage on the way out every night … because, if your facility is designed appropriately, they’re heading out the back service entrance to the parking lot and going by the maintenance room anyway. Analyze the “management consulting” spend and see how much you need. And you could save some big bucks if you can go to a 4-day work-week via either 10 hour days or telecommuting and turn the power off another day a week.

  7. Get to Work Cheaper

    In the corporate world, you want to get to the client cheaper. Enforce travel policies that require advance scheduling and bookings and compliance with policies.

  8. Step off the Gas

    Make sure your trucks don’t idle, that their tires are always adequately inflated, that they are serviced regularly, that your drivers are trained to drive easy, and that, where possible, they avoid left-hand turns. Chances are, you can cut your fuel consumption by over 30%. That’s going to save you millions if you do a lot of shipping.

  9. Buy Ink, Not Cartridges

    Overpriced, disposable packaging IS overpriced, disposable packaging. Minimize the non-recylable / non-reusable / non-refundable packaging and reduce purchase and shipping costs.

  10. Reconsider Brand Loyalty

    Printer paper is printer paper. Tomato paste is tomato paste. Iron nails are iron nails. Don’t pay for a name … pay for a quality product.

The secrets to smarter spending are more-or-less universal. When you understand what they are, you can usually translate a good consumer tip to a good corporate tip, and vice versa. There will be exceptions, but the reality is all cost avoidance is based on sound analysis and good judgement. Use both, and you’ll save. Always.

Service Leaders Speak: Bernard Gunther of Lexington Analytics on “Reducing Bypass Spend”

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Today’s guest post is from Bernard Gunther of Lexington Analytics, a leading provider of spend analytics services for global procurement organizations.

Savvy sourcing managers are finding ways to uncover new savings despite spending freezes and heavy workloads. Just because the economy is suffering and budgets are frozen, it doesn’t mean you have a pass when it comes to demonstrating your value to the organization. In fact, it’s the perfect opportunity to show your stuff. You just have to be smarter and more creative about it.

One sourcing pro managed to reduce bypass spending and save over $100,000 a year by investing a couple of days of her time. You can bet this didn’t go unnoticed, especially during this economy.

Any sourcing manager looking to deliver value to the organization can do the same thing. Here’s how.

We’ll make three assumptions:

  1. You have some sort of spend analysis system*. You should be able to do this analysis whether you have a first-generation style data warehouse, use a third party to analyze your spending, or have a modern spend analysis tool. You just need basic spending information.
  2. You have done a deal with a selected vendor where you are now getting better pricing and quality for the same services than you were previously. You may have done this deal with a paper RFP or a very sophisticated optimization engine. You just need to know the pricing for the new deal.
  3. Some users in your organization are not buying from your preferred vendor. If you are covering a range of categories and have 100% compliance to all your deals, congratulations! This is a very rare accomplishment. Most organizations have some level of bypass or maverick spending.

If you have a good information system, the following should get done in a few days over a few weeks. If it takes you longer to get this done, you may look at your information systems. There is a great deal that can be done to make this faster and easier.

Here’s the process and some illustrative results:

  1. Pick a category where you have a preferred vendor with favorable pricing.
  2. Find the past year’s spending for this category. For illustration, let’s assume the category spending is $3 million.
  3. Estimate the opportunity. Let’s assume you have 70% compliance with your program. This means that there is a bypass rate of 30% (or $900,000). When you sourced this category, your preferred vendor saved you 15% on your rates. 15% savings on $900,000 is $135,000 — money worth going after. In addition, your incumbent could increase their business by over 40% — something that any vendor would be happy to do. If the opportunity is large enough, continue.
  4. Get the spending by vendor. Find the largest bypass vendor. Let’s assume this vendor represents one third of the bypass or $300,000 of spending. If you could move this bypass spending to your preferred vendors, you would save 15% of $300,000 or $45,000.
  5. Verify the opportunity. Obtain a few invoices for this bypass vendor. In the ideal world, you would be able to get a detailed file with all the specifications, quantities and pricing for this bypass vendor to make this analysis quick and comprehensive. But you don’t need to live in this world of perfect information to get results. Price out the invoices using your preferred vendor. If your pricing grid doesn’t cover the items in question, talk to your preferred vendor and see if they sell the items and can give you firm pricing. You may need to call this bypass vendor to understand the specifications and ensure you have an apples-to-apples comparison. At the end of the day, one of the vendors will have a lower price. If your preferred vendor is lower, you have the information to go to the business unit. If your preferred vendor is higher priced than this bypass vendor, you should use this information to get the preferred vendor to lower their price, generating savings on the rest of your spending.
  6. Estimate the savings for the largest business unit. Use your spending information to calculate savings for this business unit. Let’s assume this business unit represents half of the bypass spending with this vendor. This means shifting the spending would save $22,500 for this one business unit.
  7. Talk to the people in the business unit who used the other vendor. Find out why they use the bypass vendor and ask what it would take to use the preferred vendor in the future. Ask them if this extra money would be useful. (If they aren’t concerned about the money, perhaps the budget pressures aren’t as serious as you thought. Keep a log of “wasted spending”. When the next round of budget pressure comes around, you can haul out the list.)
  8. Reduce the bypass. Develop a plan to eliminate this bypass in the future. If this business unit regularly buys from the bypass vendor, this is straightforward. If you have tight and centralized ordering, work through the system. If this is an episodic purchase done by many units, you may need to let more people know about this preferred vendor and the savings opportunity.

If you did this once a month, you’d save $22,500 x 12, or around one quarter of a million dollars every year — easy money for a few days of work a month. And you still have 90% of your time left to do what you normally do.

So what’s stopping you?

Thanks, Bernard.

Overhead Cost Cuts Don’t Provide Long Term Savings

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I was very pleased to see this recent article in Purchasing that noted that “cost reduction efforts require more focus than sacrifice” because all too often I see companies blindly focussing on fixed cost reduction, which, in fact, just costs them more in the long run.

You see, when you cut travel, you cut the ability for your people to make, and maintain, relationships. When you cut entertainment, which is typically a very small budget to begin with, you increase stress, which decreases productivity. When you streamline operations, things start to slip through the cracks. Then when you cut workforce, you cut capability, key processes get skipped entirely, critical sourcing events just don’t happen, and you keep sourcing off of expensive ever-green contracts and spot-buying at high prices. When you cut training, your staff’s skills get even more outdated and your cost reduction efforts miss the mark. And when you cut compensation, your best employees feel unappreciated and trampled on, stop giving 100%, and start looking for their next job.

As the article says, you have much better opportunities, including:

  • transaction processing
  • supplier management
  • health care benefits
  • IT assets (hardware and software)
  • logistics