Sugar … Rubber … Onions? As per this recent piece over on BBC News, food price rises put onions out of reach in India where food inflation has risen for the fifth straight week to 18.32% — the highest in more than a year!
This just goes to show that we are in a time where no price should be considered predictable over the long term.
When the word comes down to “cut costs”, the first thing that an average fire-fighting Procurement department tends to do is focus on the “big spend” categories. These will either be the categories identified by the spend analysis/reporting system (if one is possessed), an external cost reduction consulting firm (who will do a “spend analysis” if retained), or, if neither is available / approved, the high-spend categories identified by Finance or the long-term Procurement professionals that know which events in the past typically came with the biggest price tags.
If the identified categories haven’t been sourced recently, chances are there are some savings to be had. But how much depends on current market pricing, how much inventory and production capability is in the supply base, current transportation costs, and a whole lot of other factors. If the cost has risen 20% since the last contract due to raw material surges, if demand can barely keep up with supply, or if fuel prices are soaring and the products are heavy, there may not be much savings to be had, even on a 100M category.
That’s why the real trick to cost reduction success is to focus not on the highest value categories, but the categories with the most cost reduction potential. In order to identify these categories, an organization will have to do should cost modelling on all of its high-value and mid-value categories, but first, it will need to get as much of its spend under management as possible. Until its Spend Under Management (SUM) is at least in the 80% to 90% range, it will be impossible to identify all of the relevant high-value and mid-value categories that need to be modelled in order to identify the most likely opportunities in the immediate future.
So ask yourself, is your organizational SUM adding up? Because if it’s 50% or less, half of your organization’s greatest cost reduction opportunities are passing you by.
A lot of people are scared about the rise of China to the 2nd largest producer of GDP and the expected rise of India to be the 3rd largest producer of GDP by mid-century, but I’m not. It’s a good thing. The truth of the matter is that, for the last decade or two, the US share of Global GDP was too high. If a single country controls more than 25% of the GDP, than any significant changes to its economy are going to have drastic ripple effects across the globe.
Look at the recent recession. It’s not only the US that was affected — it was all of North America. Then it rippled across the pond to Europe (as most big multinationals have a big US and European presence). And even New Zealand and Australia felt the tail end of the shockwaves. Only Asia survived relatively unscathed, and only because they had a growing economy that resulted from over a decade of heavy investment by the US (and Europe) before the US recession.
So, needless to say, I was annoyed when I saw a recent article in Atlantic Business that asked if if “the Canadian Economy [is] Weakened by its Southern Neighbor” because only someone with their head in the sand for the last 20 years would think otherwise. Every time the US goes down, it takes us with them. They are both our next-door neighbour and biggest trading partner, with 10 times our population and 10 times our GDP. Canada might be the 10th largest economy in the world, but since 70% of our exports go to the US, if we lose 10% of that because of a major US recession, 7% of our GDP is at risk overnight — as it is for any small economy that is dependent on the economy with the largest GDP in the world — an economy that is roughly 3 times that of the next largest economy.
As Asia rises, not only will it minimize the impact of any one economy on global GDP, but it will start buying from us as well as selling to us, and redistribute the wealth back home. If China was going to control the US share of the economy in the near future, then maybe there’d be cause for concern, but right now, the rise of Asia is a good thing. The balance is going to eventually minimize the risks of a meltdown due to a recession in any one economy, and that is going to provide more stability (and predictability) to our supply chains.
But whatever you do, don’t stop there.
But let’s back up. In his recent edition of PurchTips (#221), Charles Dominick of Next Level Purchasing discussed “Using a Should Cost Model in Negotiation” because it’s one way to ensure that a custom item price is fair. And he’s right.
Not only will a good model help you better understand your supplier’s true cost model, and what is driving the price of your final product (raw materials, labor, expensive tooling, shipping, etc.), but it will help you get a better deal. Either the projected costs will be right and you’ll be able to negotiate the supplier down to a fair profit margin, or the costs will be wrong and the supplier will have to point out precisely what is wrong and back it up with real cost data, and you’ll have a better understanding of true costs. (And even if the cost is more than you expect, you’ll still be able to avoid paying more than you should based on the true cost. So even if you don’t “save”, you’ll still “avoid”, and that’s better since, in reality, you only have “savings” if you’re spending money that you shouldn’t be spending in the first place.)
But a good should-cost model is more than an opportunity for negotiating cost savings during negotiations — it’s an opportunity for across the board cost reduction. With a good should-cost model, you’ll not only know how much you are spending on each cost component, but which cost components are the most expensive. You can then focus in on the most expensive cost components one by one, determine why that particular cost component is high (possibly with another should cost model if the component is not an unprocessed raw material) and determine if you could help your supplier reduce that cost or if you should be looking for a substitution. Maybe you’re using expensive natural rubber (which is skyrocketing) and can use a cheaper synthetic rubber. Maybe the supplier is relying on an inefficient logistics carrier and you can identify a cheaper one. Maybe labour costs can be drastically reduced with processed changes. Every cost presents an opportunity for reduction and improvement.
So start with the negotiate to make an immediate cost impact, but continue until you’ve reduced costs across the board. That’s how you make a lasting impact.
If I understand correctly, the whole point of S. 510, which was way over the top as it was so broad as to be simultaneously unenforceable and the end of the farmers’ market, was to increase food safety. While a bill that will allow for the inspection of any purveyor of food, ranging from a farm corp beast like Perdue to your Aunt Maye who sells blackberry jam at the town fair (“The Most Dangerous Bill in the History of America”) might increase food safety, it’s not the only way.
What if a consumer could tell if food was safe just by looking at the packaging? Far fetched? Not at all. When food spoils (which is often the result of oxygen mixing with bacteria which creates mold), it gives off particular gasses. If these gasses are trapped, they can be tested. And if the test is in the packaging, then, just like a battery energy level indicator, the packaging could be used to determine whether or not the food is still good.
And such technology is currently being developed at Strathclyde University where researchers are working on indicators made from intelligent plastics that change colour when food starts to spoil. As per this recent article on Smart Wrapping over on BBC News, the researchers expect that their intelligent plastics, that can be used in modified atmospheric packaging, will be commercially viable in the near future. Wouldn’t this be a better option?