Category Archives: Cost Reduction

15 Ways to Shave Costs From Your Supply Chain Part I

Earlier this year, Inbound Logistics ran an article on 163 Ways to Supercharge Your Supply Chain that had good advice to improve your global logistics, customs, documentation, expedited shipping, warehousing, optimization, equipment, trucking, 3PLs, maritime, security, risk management, and general supply chain operations. Besides all of the obvious ways to improve your supply chain and cut your costs, and the more advanced ways that are covered regularly on SI, there are a few often overlooked nuggets of cost savings that should be singled out because they cost many companies money and go undetected. Today we will cover the first seven (7).

Global Logistics
Collect Data About Your Products
Not only is understanding product composition vital to correct classification, which determines your tariffs, but it makes sure you don’t get any surprises when you product gets detained at the US border because your new hard drives with built in encryption were designed primarily for industrial information security and do not automatically qualify under Category 5, Part 2 of the Electronic Code of Federal Regulations like your hand-held personal digital cameras.

Customs
Focus on What You Can Control
When it comes to customs, you have no control — but you can create a position for a Customs Compliance Officer and make sure everything you do is fully compliant, fully documented, and fully auditable at a moment’s notice to prevent unnecessary delays when some newbie mistakes your fig paste ship for hash.

Documentation
Confirm Document Receipt
Just because you sent the documents, it doesn’t mean they were received, even if they weren’t returned (or the e-mail didn’t bounce). For critical shipments make sure the documents were received and noted in the system before your goods hit the border.

Expedited Shipping
Eliminate Padding
It’s a typical situation where everyone along the logistics chain adds “safety” time to ensure on-time delivery. It only takes a few layers to transform a shipment required by 9 am into one that is required by 5 am which requires expensive expedited shipping. Make sure unnecessary padding is not added to the delivery time.

Warehousing
Processes Need to be Quality Based
When a mistake happens, get to the real root cause. As per the article, if a forklift knocks off a sprinkler, don’t just ask why it was so high and how to prevent the forklift from getting so high again, but if it should even have been there in the first place. It might not just be a storage height issue, but an overall storage plan issue. If boxes are being stacked to the ceiling in multiple locations, maybe you need a new storage arrangement or maybe you need more storage space!

Equipment
Recognize the Environmental Impact of Your Pallets
Plastic pallets, which require oil, cannot be repaired and must be melted down to be recycled — requiring more energy that likely uses more oil. Wood pallets are easily repaired and recycled.

Trucking
Place your production facilities close to major cities.
Metropolitan areas have a substantial concentration of LTL trucking firms and terminals, which minimize your freight charges.

Come back tomorrow for Part II.

Analyzing Indirect Spend … The Key To Success is to …

Over on Purchasing Insight, your blog-master extraodinaire, Pete Loughlin, recently ran a two part series on Analyzing InDirect Spend (Part I and Part II) from Michael Wydra of REL Consultancy.

In his two-part series, Michael correctly notes that it is often the case that indirect spend areas provide higher improvement potential that is often easier to realise. For most companies, this is non-strategic spend that is easy to overlook, but the lack of oversight often results in these categories not being managed in a professional manner, resulting in a lack of visibility and control. This can be very costly to a company as indirect spend typically accounts for 13.5% to 22% of revenue, depending on the industry. (If indirect spend is 20% of revenue, and the savings opportunity is 10%, the organization can quickly shave 2% off of the top by tackling indirect spend. If direct spend has been carefully managed for years, chances are the direct spend savings opportunity is only 3%. Even if direct spend is 50% of total spend, that indicates that the total savings opportunity on direct spend is a mere 1.5%, making indirect spend more valuable.)

According to Michael, the first step on getting a handle on indirect spend is a proper spend analysis — which might indicate that the spend is spread over thousands of suppliers with a high number of different payment terms, which adds an additional layer of complexity (that is often not necessary). One of the reasons this is important is that, on average, 12% of negotiated savings on indirect spend categories is lost because contracted rates were not adhered to.

This spend analysis should identify opportunities for cost reductions that are sustainable and that facilitate monitoring spend, improve supplier relations, lower transaction costs, and align service levels. If the right opportunities are identified, and the right programs are put in place, a company can become world-class in indirect spend management — and realize, on average, 45% lower indirect procurement process costs than its peers in addition to lower product and service costs.

Sometimes savings opportunities will be obvious — a dozen different suppliers across the country for janitorial supplies when one will suffice, no contract for toner cartridges and no standardization on office printers to allow bulk buys, and temp labour not measured against standard rate cards. But some opportunities will be less obvious — such as two of twelve offices, in the top four spenders, not switching to the new cell plan and overspending by tens of thousands, not matching invoices to rate cards for IT services, and not capturing the annual rebates from the office supply vendors. To find these opportunities, you have to dig, dig, dig — just like an archaeologist.

Cost Savings – It IS The Whole Package!

As per yesterday’s post and a recent article on Inbound Logistics, when Finding Cost Savings: It’s the Whole Package! Sometimes the only way you can save money is to first spend money.

The article, which says this is counter-intuitive (although it really isn’t), gives the example of an electronics manufacturing company that had a relatively low 2% damage rate, but needed to reduce shipping damage even further due to the high value of it’s products. They decided to work with their pallet provider to reduce the strength of, and add strength to, their pallets and boxes. The new packaging cost more to produce, but the smaller footprint reduced their LTL shipping costs and their reduced damage rate of a mere 0.1%, which was 20 times better than their previous damage rate, saved them considerably more than what they spent on improved packaging.

This goes back to yesterday’s post where true, sustainable, savings only come from the perfect order. If anything screws up, any cost savings you identified earlier in the process are more than negated by any screw-up that comes later. But even getting the order perfect from the supplier isn’t enough if you’re buying products for resale and then they get damaged when you ship the product from your facility to the customer’s location. The perfect order isn’t just from the supplier to you, it’s from the supplier to the end customer. The perfect order crosses the entire supply chain from the initial obtainment of the raw materials for the product three tiers down until the final product arrives in the hand of the end customer.

The other issue, as pointed out by the article, is sustainability. Your brand reputation might depend upon your commitment to sustainability and Corporate Social Responsibility – ignoring it to cut a few cost corners could result in a consumer backlash that will take significantly more off of your bottom line than the few pennies you save buying non-fair trade coffee or conflict diamonds.

Moreover, true sustainability always delivers cost reductions, especially where the consumption of natural resources is concerned. While there will be an upfront cost to install new technologies that reduce water and energy consumption, or to build new solar arrays and wind turbines to produce more sustainable power, which will be stored in a battery array for dark and calm times, this is a one-time up-front cost. Ongoing costs will be significantly reduce as the sun and the wind is free – unlike coal and oil which gets more expensive by the year. As the article says “any wasted money is wasted over and over again” and even if it takes three to five years to recover the investment made to prevent money being wasted, a company in it for the long haul will make it up four times over in the following twenty years.

So always look at the big picture – then true cost savings opportunities will emerge!

Is MRO Inventory Bogging You Down? Maybe You Need a Bit of Xtivity? Part II

Yesterday, we finished Part I by asking What is Xtivity?

Simply put, Xtivity is a solution for your MRO Inventory Optimization Needs and only your MRO Inventory Optimization Needs. If your organization is regularly managing tens of millions of dollars of inventory, or more, you probably know that MRO Inventory is costing you Millions and your current ERP/MRP/CPG Inventory Management systems aren’t helping you curb these costs while making sure that the part is always there when you need it. (Because, in the MRO world, unlike the CPG world or back-office world, availability always trumps cost savings. If you’re a retailer and you are out of stock on 2% of your catalog, no big deal, especially when the average stockout rate is 8%, and if your supply cabinet runs out of toner when the CFO wants to print out 500 pages of financial reports, you can just send a low-wage employee to the local office supply store to pick up a replacement. It’s annoying, but the most it’s going to cost the organization is an hour of someone’s time and maybe a 20% markup on a $50 cartridge. Big whopping deal, NOT! But if it costs 1 Million a day to run the production line and the company’s entire factory workforce sits idle for three days while your repair technician waits for a part to be express shipped to the Brazil factory from a supplier in China, a single stock-out can be the difference between the organization turning a big profit and suffering a big loss for the quarter.)

Accepting this reality and realizing that traditional ERP/MRP/CPG Inventory Management systems weren’t going to solve this problem (which is typically solved by the average company by significantly overstocking a critical replacement part in multiple locations), ten years ago, Xtivity formed to do something about it and nine years ago launched one of the first SaaS solutions to address the issue.

The xIO Software-as-a-Service platform is a 100% web-based MRO Inventory Optimization Solution that can plug into your current inventory management and procurement solutions, suck in your inventory (related) data, pass it through a number of proprietary and statistical models and algorithms, developed by Dr. Stephen Pearce (formerly of Texas A&M and author of Strategic MRO: A Roadmap for Transforming Assets into Competitive Advantage) and refined over the last decade for optimal performance across all of the major MRO industries (including Pharmaceutical, Oil & Gas, Automotive, Power Generation, Pulp & Paper, Automotive, Food Manufacturing, and Transportation), and output, on a monthly basis (or any other regular interval that makes sense from an operational perspective) the optimal order point, order quantity, and average lead time required for each MRO inventory item (by location) — taking the client’s business rules into account. The net result is increased part and material availability and fill rate, accurate lead time calculations, and cash-flow savings from reduced inventory across the board. Based on this information, the xIO solution then generates reports that recommend the suggested changes to future orders and calculates the expected savings both in inventory carrying costs and year-over-year cash outlays for MRO inventory.

But it doesn’t stop there. For each individual item it creates a detailed inventory report that shows the trend over the last 36 months, the projected trend, the expected savings from the initial change to the order frequency, and the expected MRO inventory savings over time. All of the data that go into the summary reports and report by inventory category (defined by inventory velocity) can be drilled into and all of the data (and reports) can be exported to Excel (if desired). And once the suggested changes are accepted, the Xtivity solution can push the new order points, order quantities, and lead times back into your inventory management solution which will take over the ordering, tracking, and classic inventory management functions.

Xtivity, which is well known in the reliability, maintenance improvement, and big MRO space, if not in the broader supply chain management space as a whole, has become so good in its niche that they are at the point where their average client sees a ROI in 90 days or less and 10x ROI over time. Plus, 99.99% of clients can use their solution out of the box. They support so many inventory systems and data formats (in addition to being SAP and Maximo certified) that they only had to do a custom data conversion project for 2 out of the last 1,000 global companies (of a solution that supports, and supports users in, 6 languages) that have tried their platform.

When Xtivity says xIO is a true SaaS solution with no hardware, software, or integration requirements that plugs the MRO optimization hole with virtually no effort (beyond an inventory manager reviewing the order point, order frequency, and lead time recommendations and approving them for push-back into the inventory management system), Xtivity means it. The entire application has been streamlined to not only optimize MRO inventory management and free up as much cash as possible without increasing operational risk, but to minimize the amount of effort required to get results. This is important because you generally don’t generate business value by wasting time on software support, you generate value by implementing and maintaining better (MRO) inventory management policies. And the Xtivity solution allows you to focus on operations, not software, and thus get a quick return. It fills its niche very well. So if you are looking to improve your MRO inventory management, and potentially free up Millions of dollars in cash-flow, check out the Xtivity xIO solution, it’s easy to try and very easy to use.  (For more information on Xtivity, they can be contacted at optimize@xtivity.com.)

You Don’t Need Nuevo Esquema de Empresas Certificadas to Improve Cross-Border Shipping with Mexico

You just have to make sure that that the goods are picked up with a destination in the United States, not near the Mexican border, even if the customs broker tries to insist that the goods have to stop at a location near the border for dreyage or inspection under current regulations. The reason your broker wants the goods to stop at a Mexican border destination like Nuevo Laredo is because you have to pay the IVA (Impuesto al Valor Agregado), Mexico’s Value Added Tax, which he will then get a tax credit for when he ships the goods out of the United States.

Even though the proposed reforms in Nuevo Esquema de Empresas Certificadas, include:

  • flexibility on location,
  • direct clearance by companies,
  • pre-validation of electronic import and export data, and
  • the need to use a Mexican customs broker on the U.S. side of the border to release goods for entry into Mexico is eliminated.

At the end of the day, it doesn’t matter if these rules are in effect now or not or if you have to use a Mexican trucker to move your goods, it matters whether or not you have to use a Mexican broker that insists on shipping your goods to a destination inside the Mexican border to collect IVA and dreyage at your expense. It’s like Mr. Locke pointed out in his piece on Cross-Border Shipping with Mexico last fall: some of the issues … are common in every country and the Mexican trucking industry is changing. A properly run IPO will get on-time delivery to your US customers in the 98% range over long periods of time … and that includes supplier performance, cross border performance and logistics performance in two countries and it will do so quite affordably if you’re smart about how you do things.

While the Nuevo Esquema de Empresas Certificadas, should it come into effect by year end, will make shipping easier, by making sure you’re doing everything right, and not using a double-dipping customs broker, you can improve cross-border shipping, and the associated cost, with Mexico now.