Category Archives: Lean

Take Lean to Your Customers

A while back, the Supply Chain Management Review ran an article entitled “Lean: The Antidote to Cost and Variation” that focussed on lean as a lever to do just that because it can reduce waste and improve customer service. The article identified eight enablers of lean distribution in global supply chains that tie into customer demand and reduce variability and costs. These are:

  • Formal Service Policies
    Establish formal policies that articulate customer needs and how service is enabled with internal capabilities throughout the entire supply chain. This will keep the organization on track.
  • Support for Pull
    This will reduce variation caused by hedging, planning, policies, and other factors.
  • Isolate Variability
    Strategically place and manage inventory and capacity buffers. This will reduce the amount of safety stock required.
  • Cost trade-offs
    Assess and decide cost trade-offs on a structural level as this will enable systematic cost elimination based on capabilities.
  • Linkage for Pull
    Pull is a the philosophy of replenishment, not forecasting. It prevents over-ordering and under-ordering.
  • Reduced lead times
    Reducing lead times will improve flexibility and increase responsiveness.
  • Reduced variability
    Quantify the current variation to enable the operation of distribution processes based on capability limits.
  • Reduced lot sizes
    Larger lot sizes may lower sourcing or production costs, but can increase distribution costs, decrease profits due to overstock clearance, and reduce services.

These enablers are important because a well designed supply chain should deliver product quickly to the end customer with minimum waste, as per “The Goal of the Lean Supply Chain”, an article that ran in Industry Week not that long ago.

The article over-viewed the seven steps to lean supply chains, and the number two step was understand customer value, second only to the development of a systems perspective, since everyone suffers in the long run if each element in the supply chain tries to optimize its own operations in isolation. The article points out that a successful organization will make an attempt to understand any volatility that exists in customer demand, rectify it, and, in effect, take lean to the customer.

The Top Three III: The First Guest Blog

With at least eighteen confirmed bloggers and guest bloggers, the big question was, who will go first? Well, I’m happy to report that Lisa Reisman, Managing Director of Aptium Global Inc, has volunteered to go first. Today, I’m pleased to present her “Top Three”.

Maximizing the Savings Potential of Global Sourcing Strategies

In the past few years, we have observed a range of companies that leave tremendous dollars on the table because they have not formalized or streamlined global sourcing or LCCS processes. Why? Organizations who regularly source from low cost regions may have already implemented less than lean global sourcing practices. Lean sourcing practices encompass all of the processes around global trade but exclude the actual item(s) themselves. Cost savings opportunities exist for better global logistics practices, better negotiated trade finance terms and banking deals, and optimization of various international trade agreements, tariffs and treaties as they relate to the items sourced.

Companies with significant overseas sourcing volumes often have accumulated a whole host of costs not necessarily part of the original cost savings analysis. These costs can be in the hundreds of thousands if not millions of dollars, depending on the size of the organization and volume sourced globally. Missed savings – and added costs – have a direct negative impact on the bottom line.

There are ways to address these costs. The first is to examine the largest elements that comprise total cost outside of product cost. In the case of global trade the largest cost areas include: freight/consolidation, harmonized code classification and duties, payment terms and international trade finance arrangements, brokerage and associated customs fees.

There are enough risk factors affecting global sourcing decisions (e.g. currency volatility, political risk, loss of flexibility etc) that companies should be managing all costs that can be controlled.

Managing Volatile Commodities

Companies are struggling to maintain margins and plan their purchases for a full range of metals, metal services and semi-finished products with high metal content due to the ever fluctuating metals markets. Copper, steel, nickel, stainless steel and aluminum all have significant price volatility.

Volatility does not appear to be going away any time soon. The greater the volatility and uncertainty, the greater likelihood that a company may engage in practices counter to running a lean operation (e.g. buy and hold unnecessary inventory)

Companies can deploy many strategies to mitigate commodity pricing volatility which may include commodity indexing and bidding out of the value-add portion, deploying price escalator/de-escalator clauses, allocation of spot, forward, and averaging along with fixed index pricing to smooth peaks and troughs.

Enterprising companies may choose to develop commodity management strategies as a means of not only mitigating risk but also creating competitive advantage (think Southwest Airlines as an example of a company that created a competitive advantage due to advanced commodity management strategies).

Implementing Savings

This is the age-old sourcing conundrum … savings is identified but for whatever reason it is not implemented. It’s significant because many of the savings not taken include incumbent savings, which, of course, is the simplest of all savings to implement. The not-invented-here syndrome is a major impediment to savings implementation.

Many companies do not fully appreciate the opportunity cost of not realizing savings earlier as opposed to later. An annual savings of $130,000 might not be interesting to a Fortune 500 company but in middle market manufacturing, that contribution to EBITDA can be quite significant!

Larger companies talk about change management but we prefer to look at incentive programs. If you structure the incentives correctly, the right behavior will follow. Without allowing employees the opportunity of a little upside for saving money (and savings should be “net” savings), companies will continue to implement less than they could.

Lean Commodity Sourcing

Last week at Aptium Global’s private 10 Ways to Significantly Improve EBITDA and Reduce Operational Risk in Your Portfolio Companies, Lisa Reisman (now of MetalMiner), Mark Pruitt, and Ara Surenian presented ten real-world examples of cost reduction and EBITDA improvement in small and middle market operations that proved that Lean can be used to save significant amounts of money even in categories where annual spend is in the low seven digits. Jason Busch did a good job of summarizing the event at the macro-level in his post “Small / Middle Market Private Equity Investments and Spend Management”*, so, with the kind permission of Aptium Global, today I am going to detail the first of two case studies that serve to illustrate that not only can lean significantly improve operations in companies with revenue as small as ten or twenty million, but do so outside of traditional manufacturing operations.

This second example is based on the results obtained by Aptium Global on a company that created custom electronic and electro-mechanical components for the automotive and lighting industries hurt by the automotive downtown and huge price pressure on non-electronic parts.

This company had no visibility into material versus value-added processing costs and the lack of competition in a key category resulted in no cost savings ever being achieved on a $3.6 M category. In addition, the incumbent supplier imposed a premium that appeared to fluctuate regularly and the company was unable to track the fluctuation due to a lack of visibility.

By establishing a baseline using the Olin Producer Price Index plus a fixed supplier premium, the company determined that the incumbent supplier “floated” their premium, hiding their mark-ups from the buying organization. The company was able to use the baseline to generate competition among other highly qualified, and certified, suppliers and this resulted in the incumbent immediately lowering their premium to competitive levels, resulting in an immediate 4% savings on the base premium alone. Plus, the company’s new ability to automatically track the Olin Producer Index allowed the company to insure actual invoiced costs matched quotes. Furthermore, the company was able to implement a dual source strategy and put all new requirements out to bid, locking in future cost avoidance.

If you are part of a Private Equity firm and would like to know more about how lean processes can improve the operational efficiencies of your holdings, you can email Lisa Resiman at Aptium Global (now MetalMiner) for further information, and maybe even luck out with an invitation to their next event.

* All posts prior to 2012 were removed in the Spend Matters site refresh in June, 2023.

Aptium Global : An Emerging Spend Powerhouse

Regular readers of this blog will remember that I’ve mentioned Aptium Global a few times, chronicled one of their success stories in Tuesday’s Lean Services post (with another hitting the blog sphere tomorrow),and ran a great guest post on Quantifying Quality in Lean Sourcing Initiatives by founder and principal Lisa Reisman. Aptium Global is a specialized consultancy that works primarily with small and medium sized manufacturing companies to help them save money on purchases through Lean Sourcing approaches.

Well today, in addition to industry heavyweight Stuart Burns, who runs their European practice, Aptium Global can add FreeMarkets legend Tony Poshek, inventor of The Puddy Principle to strategic sourcing. Tony, who has also put in considerable time at GE (as well as managing events for GM and other Fortune 50 heavyweights) has sourced almost $2B in his sourcing career and saved over 300M, or an average of 15% above and beyond what industry leading sourcing teams have saved. Tony was interviewed by Lisa last year and the interview is archived over on e-Sourcing Forum, archived in Part 1 and Part 2. Check it out!

Add this to Aptium’s forthcoming launch of an industry specific Metal Miner offering for companies that source metals, commodities, and components with high metal concentrations, and it’s easy to predict that Aptium Global is poised to become a powerhouse in their corner of the sourcing space.

The Metal Miner sourcing solution is a packaged two-week analysis that is designed to provide a small or mid-sized company with real time market condition and savings strategies for all of their metals and metal services spending in two to three weeks. A proprietary analytical solution built on over half a century of combined global metals sourcing experience, the solution is designed to provide you with a strategic framework to metals sourcing that can provide you and your executive team the insight you need for critical strategic sourcing decisions. Metal Miner uses state-of-the art analysis technology, takes into account a high-level assessment of the supply market for each category (including the main price drivers, the degree of fragmentation, domestic/offshore supply bases, and hedging mechanisms), and produces a customized report with specific implementable savings strategies for each category in which a significant savings can be achieved.

So, if you need sourcing help, particularly in metal or metal services categories, I’d contact them now. The secret’s out … and it won’t be long before the lines are jammed and the e-mail boxes overflowing.

Lean Services

Last week at Aptium Global’s private 10 Ways to Significantly Improve EBITDA and Reduce Operational Risk in Your Portfolio Companies, Lisa Reisman, Mark Pruitt, and Ara Surenian presented ten real-world examples of cost reduction and EBITDA improvement in small and middle market operations that proved that Lean can be used to save significant amounts of money even in categories where annual spend is in the low seven digits. Jason Busch did a good job of summarizing the event at the macro-level in his post “Small / Middle Market Private Equity Investments and Spend Management”* on Spend Matters [WayBackMachine], so, with the kind permission of Aptium Global, today I am going to detail the first of two case studies that serve to illustrate that not only can lean significantly improve operations in companies with revenue as small as ten or twenty million, but do so outside of traditional manufacturing operations.

This first example is based on the results obtained by Aptium Global for the US Division of a high-end manufacturer (in tubing) for the automotive market. This division was finding it extremely difficult to “baseline” services spending, such as machining or heat treating, which was generally based on price per piece quotes, compounded by the fact that many pieces were of odd sizes and shapes, and further compounded by the fact they are usually produced on the basis of capacity and/or geographic proximity.

By creating a pricing matrix that included piece grade, weight, and invoice value, Aptium Global was able to calculate a price per pound for each service to estabish a baseline. This allowed the division to source strategically as it allowed for a straightforward negotiation process, provided a way for savings to be monitored on an on-going basis, and fixed pricing going forward. Furthermore, since the baseline reduced sourcing confusion, it allowed the division to spend more time on quality control and develop of on-going process control methods to insure that quality issues were detected quickly, and the supplier notified promptly.

As a result of the implementation of this simple lean sourcing methodology, the division was able to realize an average savings of over 20% on services spending. Furthermore, the net operational improvements allowed the division to rationalize their supply base and reduce their three (3) day lead time to twenty-four (24) hours.

Next entry: Lean Commodity Sourcing