Category Archives: Cost Reduction

aPriori, rationi viam ad sumptus! Caput I

When we last covered aPriori in 2007 and 2008 in aPriori and The Sourcing Maniacs 2008 Vendor Tour Part III, they were very focussed on Enterprise Cost Management (ECM) and taking cost out of the design phase. Fast-forward six years later, and nothing has changed, except, of course, the depth, breadth, and usability of their platform — which has grown in leaps and bounds.

Unlike traditional sourcing applications, including advanced spend analysis and decision optimization, that are limited to component cost-based should-cost models, aPriori can also factor in design and production factors to model the full production cycle of the part you are buying (if it’s metal, plastic, or, in some cases, electronics-based) and give you a true understanding of what the part should cost to make. The reality is that the cost of a part is dependent not only on its design, but on the production process employed. As noted in our first post, a supplier that’s always made a certain part a certain way might not realize that new technology or materials would allow them to make that part significantly cheaper if they used a different process. Since the aPriori application instantly and directly interfaces with your CAD program and interrogates the solid model to extract the geometric cost drivers, the aPriori application can automatically determine all the process routings that can be used to make the part, compute the costs associated with each step based upon standard machine, material, and labor costs, and compute the total cost of each part on a per unit basis by factoring non-geometric cost-drivers such as production volumes, the selected supplier or factory set-up selected, and the exact routing and machines used. This is because the aPriori application currently supports over 200 out-of-the-box process models in over 12 major process groups (including, but not limited to, Bar & Tube Fabrication, Casting, Forging, Machining, Plastic Moulding, Powder Metal, Roto & Blow Moulding, Sheet Metal Sheet Plastic, Stock Machining and Rapid Prototyping.

In addition, because the application supports the creation of complete VPEs (Virtual Production Environments) that encapsulate the production processes, a customer can fully model the production and overhead costs associated with each production process supported by a factory in question, including local labour, power, maintenance, and other overhead costs to create a fully accurate should-cost production model, which can be compared to alternate production processes in the factory and other factories modeled with an appropriate VPE. This allows for the true identification of the lowest cost because, as the Sourcing Maniacs documented in their vendor tour post, the COGS is a combination of raw material costs, labor costs, production overhead costs, and margin and these costs not only vary by locale and production process, but in their interaction. For example, just because you identify three ways to make a part and each requires three steps, this doesn’t mean that each process is going to be roughly equal in cost. Not only do different processes require different amounts of manpower or energy (for energy-intensive equipment like lasers, etc.), but reordering the steps can change the manpower or energy required in subsequent steps.

Let’s take, for example, the production of the main Frame sides and door for a piece of heavy machinery construction equipment. An aPriori customer was cutting the entire frame using a laser process. While this seemed efficient, as only one piece of machinery was required, cutting the entire frame and door using a laser cost them 75.54 per frame and door combination, and they required over 14,000 of these combinations a year. That’s over a million dollars on just one part! If, however, as discovered by aPriori who analyzed the geometry and ran it through every possible production process that was available to the manufacturer, they switched to a two-stage production process that involved an initial laser cutting of the frame and door followed by an NC Punch process to punch out the internal cavities, the time required to produce a single frame and door combination decreased by 14 minutes and the cost decreased by 56% to 33.29 (as laser cutting is expensive compared to NC punch).

So what’s new with aPriori? Come back for Part II.

The First World Postal Services are in Trouble, But …

Royal Mail in the United Kingdom was founded in 1516.

The first post-master general was appointed in the US in 1775.

Canada Post was founded in 1867.

But yet it’s Canada Post that could be the postal service to show how struggling postal services may yet survive in the twenty-fist century!

As reported in this post over on The Economist Blogs, Canada Post, also looking at large pension shortfalls (to the tune of 6 Billion), is the first of the big postal services to make the drastic changes required to keep financially viable in the new world of online advertising, billing, and payments and private delivery services. It appears that Canada Post is going to be the first to eliminate home mail delivery — putting everyone on community mailboxes.

Home delivery to the 5 million households who still receive it will be phased out over four years, beginning in 2014. They will join the 3.8 million households that already go to a group mailbox to collect mail and parcels. (Canada’s remaining residents collect mail from building lobbies, public and private post offices, or rural mailboxes.)

Unfortunately, staying alive will also result in 8,000 postal workers being cut from a postal staff of 55,000. Hopefully the private parcel delivery services will continue to grow, especially with the growth of online commerce in Canada (led by Amazon and it’s recent introduction of its Prime Service in Canada), and pick up a large number of these displaced workers.

Now, the home mail delivery alone, estimated to save 500 Million a year, won’t make that much of an impact against a 6 Billion pension shortfall, but it’s a good start, especially if Canada Post’s savings projection of 700M to 900M a year by 2020, from all of the changes it plans to make, comes true.

Why are Your Inland Shipping Costs in China so High?

As this recent article over on South China Morning Post on Last Mile Transport’s Heavy Load for Truckers implies, it’s probably poor planning on your part.

Specifically, it’s expecting that China carriers can move your product from A to B as fast as North American carriers can get your product from C to D, where the distance from A to B equals the distance from C to D. Although China’s transportation infrastructure is much better than India’s transportation infrastructure, it’s still not on par with the US which gets a 4.14 ranking (out of 5) compared to China’s 3.61 (as per the World Bank’s Logistics Performance Index).

Not only is transportation infrastructure insufficient in some parts of mainland China, or overcrowded in many of the big urban areas, but there is also the restriction that trucks can’t be on the highways after midnight. (In the US, the worst you have to deal with is speed limits that drop 10 mph at night. As long as the driver hasn’t reached his daily driving limit, that truck can drive all night long.)

As a result, when you insist on unrealistic schedules, with penalties for late delivery, you end up costing the logistics company needed revenue that it needs to cover the highway and first-tier road fees, as 95% of the country’s highways and 61% of it’s first-tier roads are toll roads (and the company has to use these roads to ensure reasonable delivery times as the free roads are typically dirt roads not suitable for transport trucks). As a result, knowing that it’s going to be late on a significant number of deliveries unless it illegally drives on the highway at night (which will result in harsh fines), and, as a result, get hit with a large number of penalties, the logistics company has to increase its base rates to absorb the expected losses to stay in business.

Thus, if you acknowledged the reality of the transportation situation that Chinese logistics companies have to deal with, accepted slightly longer delivery times, and planned accordingly, you could reduce your mainland China logistics costs — especially if, instead of using one of the almost 10,000 small or mid-sized companies that can’t take advantage of economies of scale and end up absorbing a lot of empty miles, you use one of the few large companies that have enough trucks, and warehouses, to minimize empty miles and use their scale to their advantage. (Plus, shifting more to the bigger carriers will allow them to become financially stable enough to acquire some of the smaller carriers where their footprint is weak, and this should further decrease costs in the future. Furthermore, when the market sees consolidation working, some of the mid-sized carriers will likely merge to offer more cost-effective options. China is big enough that it can support dozens of major carriers, not just a handful like some of the smaller global marketplaces. As a result, even with significant consolidation, there should still be ample competition to keep prices low.)

Buying and Negotiating on TCO – A Must Know for Any Supply Management Organization!

At this point in time, very few people are still in the stone ages of Supply Management and buy on price per unit (PPU) alone, the first level of sourcing value. However, there are still a number of buyers in a number of organizations that still buy on landed cost or total cost of acquisition (TCA) and buy solely on the sum of price per unit, transportation, duty, tariff, temporary storage, and other costs that are incurred from the time an order is placed until the time the product is received. These organizations are still in the dark ages of Supply Management and need to find the light very, very quickly. Most modern Supply Management organizations attempt to buy on total cost of ownership (TCO), the third level of sourcing value.

The most commonly used metric today by analysts, consultants, vendors, and (I’m sorry to say) bloggers, it is a comparative cost metric that quantifies the overall cost of each acquired unit from a direct, indirect, and quantifiable market perspective that takes a broader look at the cost of a product from an acquisition, utilization, and delivery perspective. In addition to the landed costs, it also considers indirect utilization, supplier switching, and transaction costs as well as cost adjustments for quality, waste, and brand power (if your supplier has a brand that increases the selling price of the product you create with the component). TCO captures the ‘true cost’ of a product (or service) from a supplier and does a much better job of helping you to compare apples-to-apples when determining the best buy for your organization. It’s not the ultimate metric, as that’s total value management (TVM), the next level (and pinnacle) of sourcing value measurement, but you cannot apply TVM until you have mastered TCO (which is a big component of TVM just like total cost of acquisition is a big component of TCO). Plus, the effort required to apply TVM isn’t worth it in all categories. If the category is low-spend, non-strategic, or best handled in a leveraged purchasing agreement, you don’t bother with TVM. (Just like you don’t bother spending hours looking for the absolute cheapest supplier when buying a box of printer paper for your home office as saving $2 isn’t worth hours of your time, you don’t bother with an advanced analysis on the office supplies category.)

An in-depth understanding of TCO, and how to negotiate on TCO, is vital to the success of your Supply Management department as your organization’s success ultimately depends on the proper application to every category you source now that we are returning to (rampant) inflationary times. To assist you in the acquisition of this knowledge, Next Level Purchasing is hosting a webinar on How to Negotiate and Buy on Total Cost of Ownership this Thursday, May 30, 2013 @ 8:30 am PDT / 11:30 am EDT. It’s free to all NLPA (Next Level Purchasing Association) members, and basic membership in the NLPA is free! (Join Here!)

The webinar, which will be presented by Todd Snelgrove, Global Manager for SKF Group, will teach you how to reduce organizational costs by managing TCO. You’ll learn about updated strategies, techniques, and TCO-reducing methodologies. The webinar will delve into real world case studies and share the experiences and pitfalls to watch out for. You’ll leave this webinar with a firm understanding of the do’s and don’ts of buying on TCO.

To register for this free, live, event, Login to the NLPA, navigate to the “Webinars” tab, and click on the webinar to get to the registration screen.

Summer is One Month Away. Is Your Supply Chain Ready?

It should be. Why? The top three challenges you are likely to face this summer are the exact same as the top three challenges you faced four years ago in 2009. Back in 2009, Kelly Thomas, Group Vice President of Global Accounts at JDA and a regular contributor to JDA’s Supply Chain Nation blog published a guest contribution in the Supply Chain Digest on the Top 3 Supply Chain Challenges This Summer, which are also the Top 3 challenges your supply chain is going to face again this summer because, as we all know, the economy is cyclic and some cycles are faster than others.

So what are the challenges?


1. Cost Containment

Costs are soaring again. As SI has stated repeatedly, there are no more savings to be had in this type of inflationary market. The best you can hope for is cost avoidance, and in some categories, containing costs to reasonable year-over-year increases. With staple food reserves still low, burgeoning demand for energy and metals in Asia, and a slowly recovering global market, costs are going up — and can be expected to do so for some time. The time of net zero inflation is over. The best we can hope for is we don’t return to the 80’s. While those of us who have been around for a while may have fond memories of the 80’s as the decade that gave us PCs and Pac Man, we also have not-so-fond memories of rapid inflation at the start of the decade (which we try to forget). Containing costs is going to take your fanciest footwork (so let’s hope your old timer purchasing pros who weathered the storm in the early 80’s are still around to give you some advice) and may not even be possible if you don’t have a good handle on


2. Risk Management

Considering that, as SI has been pointing out for over a year now, at least 80% of organizations are vulnerable to a major supply chain disruption, every company should have someone responsible for managing risk. However, two thirds of company’s don’t. This is one of the reasons risk, and risk management, continues to be high on the challenge list. But I have to be honest. It’s going to be hard to get a good grip on risk if you don’t have a handle on your number one supply chain challenge this summer, which is

Supply Chain Visibility

Let’s be honest. In today’s multi-tier, multi-national supply chain, it’s hard enough to get a handle on this at the best of times. But during the summer, where it’s likely that there won’t be a single day where there isn’t at least one key person vacationing somewhere unreachable and not watching that everything is going as it should, something is going to get missed. Something is going to go wrong. The only question is whether the screw-up is minor, such as shipping 1000 units instead of 1100, or major, such as shipping merchandise intended for the US to Europe instead and having it seized and destroyed because it violated WEEE or some other environmental regulatory act that is stricter than what it is currently in the US.

Considering the complexity of the modern supply chain, the speed at which it is operating, and the costs associated with even a minor mishap, this is one area where you definitely need a software solution to help your organization keep a handle on things. One such solution is that offered by Resilinc, which is covered in these recent posts: