Category Archives: Cost Reduction

Why Does Shipping Cost so Much?

Oil, of course. Most trucks run on diesel, the fractional distillate of petroleum fuel oil, and the cost of oil, which is almost 100 times what it was 50 years ago, keeps rising at an average rate that is over 10 times the rate of inflation, as calculated using the consumer price index over the last 50 years.

But is that the only reason? No. Someone has to drive the truck, and labour costs go up, albeit not as quickly every year.

And someone has to buy the truck, which contains a lot of steel, which has also been rising over the last 30 years. The inflation adjusted hot rolled coil transaction value has more than doubled over the last 30 years, which partially explains why trucks are so expensive.

Are these the only reasons? From a simplistic point of view, you need a truck to carry your goods, fuel to power the truck, and a driver to get it to the destination. You have maintenance, but that can be built into the cost of the truck, and you have administration, and that can be built into the cost of the driver. So one might think these are the reasons and there’s no way to decrease the cost of shipping, as none of these costs aren’t going down soon, but if one did, one would be wrong on both counts.

There’s one more reason shipping costs so much. Empty pallets and empty loads. What typically happens when you ship a product is that your 3PL shows up with an empty truck, loads your pallets of merchandise onto the truck, and delivers them to the destination, where the truck is again emptied. It then drives empty to its next pickup which, if it’s lucky, is in the same city, but could be half a state away. At a later time, it returns to your supplier, picks up the empty pallets, and either carries them back to you for reuse, or, if you are part of a pallet-exchange program, the nearest manufacturer. In either case, the truck is completely empty before pickups and after delivery and effectively empty when it is carrying empty pallets. This takes driver time, fuel, and wear-and-tear on the truck. This cost money, and this cost has to be recovered – from you!

This is a big reason why shipping costs so much and your biggest chance to lower costs. If you want the best rates you can, you need to select a 3PL that does a lot of business in your area so that it’s trucks aren’t empty for long and that minimizes the distances that empty pallets are carried.

What Costs Your Supplier More? Their Warehouse or Your SIM Practices?

I know this question is a little out of left field, but it’s an interesting question in that both are costing your supplier money and, therefore, both are costing you money (as all costs get passed up the supply chain in the end).

According to an article in DC Velocity last fall on how distribution centers lose thousands of hours a year on unproductive workflows, each worker loses an average of 15 minutes of productivity in an eight-hour shift due to process inefficiencies. Assuming these are union workers who get an hour for lunch and thirty minutes for breaks, that says that almost 4% of the work-day is being wasted. In a warehouse with 50 workers, it adds up to about 500 days of lost productivity, which is significant as this equals the salary of 2 workers, which costs the average company about $60,000 annually in the US.

Gartner estimates a typical company spends an average of $1,000 in supplier management costs annually per supplier. Part of this cost is Supplier Information Management, and, specifically, the (initial) creation and maintenance of supplier profiles consisting of contact information, insurance certificates, compliance tracking, and product catalogs, just to scratch the surface. While the amount of time to create and maintain this profile, and thus the associated costs, vary, on average it can be estimated to be about $700 as all of the major vendors and analysts seem to agree that a good SIM solution reduces supplier management costs, on average, by 70%.

Now, at this point, you’re probably asking what’s the point of this article as 60,000 is clearly much greater than 700 and there seems to be no comparison — but hold on! You have to remember one very important point — you’re not the supplier’s only customer. The supplier has other customers who, if they are implementing SIM, will also be delegating this work to the supplier who will have to create another, almost identical, profile, and upload all of the relevant information, etc. And today, you can assume that any major customer of the supplier is implementing at least some basic level of SIM given that they will be sued and/or fined seven ways from Sunday by the U.S. Government if they don’t insure the organization is not on a watch list, that payments are properly reported, etc.

If the supplier is a small contract manufacturer who only has 50 customers, then the supplier would be spending $35,000 just creating and maintaining SIM profiles. That’s one person’s salary. But if the supplier is a large office supplies vendor with 500 customers, that could theoretically be $350,000 worth of man hours to properly maintain all of the requested profiles. Ouch! (Needless to say, not all profiles are going to be accurately maintained in this instance!)

In other words, a sudden surge in the popularity of SIM combined with the slew of systems (not all of which are created equal) that are now available and being implemented by various companies will add a costly burden to your suppliers, as you don’t all use the same SIM solution and, even when there is overlap, not all SIM solutions allow a vendor to create one master profile and share the relevant information with each supplier who wants access to the profile. Done right, SIM is a great technology, but the problem with a lot of the (second tier) solutions is it’s not done right. Many of the solutions are built for the buyer and the supplier is a bit of an afterthought, resulting in a solution where a supplier needs to create and maintain an instance of their profile for each buyer. As a buyer, it’s imperative that you don’t buy, and encourage, such a solution because all this does is shift the burden to your already stretched supplier and doesn’t help anyone.

It’s important to make sure that any SIM solution you buy allows a supplier to define a master profile and share the relevant data with all relevant buyers on the platform with just a click of the mouse and allows the supplier to reuse pre-existing information whenever relevant. A supplier should never have to enter the same piece of information more than once. Otherwise, you’re wasting his time and your money. (A really good SIM solution would allow a supplier to import a profile he already created in a competitive product, but SI hasn’t seen that ability in the SIM solutions of any of the major players yet.)

Why You Need SIM-Powered Recovery

Two weeks ago, we explained how SIM Powered Recovery Will Take You to the Next Level by noting that it can improve your recovery results by a factor of 3, 5, or even 9 over time and asked you to download the latest Sourcing Innovation Illumination, sponsored by Lavante, on Taking Capital Recovery to the Next Level.

Today, we’re going to make it clear how that will happen. Traditionally, a recovery audit will be done by a recovery audit firm that will send in a team that will spend weeks manually reviewing invoices, payments, and transactions looking for discrepancies and revenue recovery opportunities. Depending on the deal you strike, this will cost you manpower plus a not-so-small percentage of the recovery above the manpower cost (that will be in the 10% to 20% range, we’ll assume 15%) in a time plus results deal, or a large percentage of the total recovery, typically 30% to 35% (and we’ll assume 30% after strong negotiations), in a results-only deal.

In addition, it will typically be three (3) to six (6) months before the recovery firm even attempts to recover the first dollar because it will take them that long to get through enough paperwork to find enough opportunities to make a recovery effort worthwhile. During this time, up to 20% of potential credits will disappear permanently as dispute timeframes and contracts will expire.

In comparison, it’s likely the case that you can acquire a perpetual license to a good SIM-based recovery platform for approximately 100K with 20% (or 20K) annual maintenance. And you won’t need to hire any extra manpower as all you’ll need to do is feed it your sourcing, procurement, and accounts payable data, set up some matching rules, and the platform will automatically identify duplicate, non-compliant, or suspicious payments. We’ll assume it costs 25K to integrate the data feeds and work with the provider to set up the initial rules set, and 5K to maintain the feeds on an annual basis. In addition, we’ll assume a firm that does a time plus recovery deal will bill you 150K in manpower. Given these costs, we can now compare manual-vs-SIM-based recovery efforts noting that an average company, due to cost, will only undertake a recovery effort every 2 years. (Mainly because a recovery audit firm will only want to do an audit every two years because it typically takes 18-24 months after a recovery effort before a company has the same recovery effort.)

After a recovery effort, a company will temporarily scrutinize invoices and payments more closely. During this time, the vendors will also be careful not to over-bill or duplicate bill until the buyers have stopped watching so closely and have gained confidence that the over-billings have stopped. As a result, available recovery will be less the following year. However, as the buyer gains confidence that overspending is under control, the buyer will stop watching as diligently and the vendor, if it has a history of over-billing or duplicate billing, will revert to its former ways and the overspending and recovery opportunity will creep back up to where it was.

Noting that you can expect to identify 90%+ of recovery opportunities with a SIM platform, that can process all of the data you throw at it, compared to the 60% of recovery opportunities that you can expect to find with a manual effort that stops when 80% of the spend has been identified and analyzed and when almost 20% of opportunities for recovery have been lost, we get the following.

 

Year 1 Year 2 Year 3 Year 4 Total
Overspend 1,000,000 500,000 1,000,000 500,000 3,000,000
Recovery
Year 1 Year 2 Year 3 Year 4 Total
SIM 900,000 450,000 900,000 450,000 2,700,000
Manual T&R 600,000 300,000 600,000 0 1,500,000
Manual R 600,000 300,000 600,000 0 1,500,000
Cost
Year 1 Year 2 Year 3 Year 4 Total
SIM 125,000 25,000 25,000 25,000 200,000
Manual T&R 240,000 0 240,000 0 480,000
Manual R 300,000 0 300,000 0 600,000
Recovery over Cost
Year 1 Year 2 Year 3 Year 4 Total
SIM 7.20 18.00 7.20 18.00 13.50
Manual T&R 2.50 N/A 3.75 N/A 3.13
Manual R 2.00 N/A 3.00 N/A 2.50

 

Which says that a SIM-effort is expected to return 4.3 times as many dollars into your organization as a manual time + results audit over four years and 5.4 times as many dollars into your organization as a manual results-only audit over four years!

You can argue the numbers a little bit each way, but it won’t affect the fact that a SIM Powered Recovery solution will deliver results that is orders of magnitude above what a manual audit will deliver. So download your copy of SIM Powered Recovery Will Take You to the Next Level today! (registration required)

SIM Powered Recovery Will Take Your Recovery to the Next Level!

Every year, corporations are at risk of losing significant dollars due to transactional errors such as: over payments, duplicate payments, missed rebates, missed discounts, lost credits, and fraud.

The money is lost with no chance to reclaim it unless a recovery audit is performed. Most recovery audit service providers claim on their websites and marketing material that they can recover between $500,000 and $1M per every $1B that a company spends on an annual basis.

Even under the most conservative estimates, this problem is costing mid-sized and large companies millions of dollars every year.

Unfortunately, the recovery audit industry relies heavily on manual processes which focus almost entirely on a client’s historical transactional records. Manual processes are time-consuming, inconsistent, expensive, and focus too heavily on client records. The methodologies, while they do add value, leave a large portion of the recovery opportunity unexplored.

Over the last several years, some service providers have developed technology-enabled recovery processes that are accurate, complete and deliver claims in real-time. Even more recently, some recovery solutions have seen the incorporation of a supplier information management (SIM) application and have drastically improved audit results.

The combination of recovery audit technology and SIM drives more supplier compliance, significantly out-recovers manual recovery methodologies and improves the organization’s working capital situation as a result of the recovery process. In addition, even when delivered separately from any recovery product, SIM is a powerful tool that offers significant benefits to a financial organization by driving lower costs, streamlining supplier on-boarding, reducing working capital, improving strategic supplier management and decreasing payment fraud.

To find out how SIM-Powered Recovery can improve your recovey results by a factor of 3, 5, or even 9, and maximize your return, download the latest Sourcing Innovation Illumination, sponsored by Lavante on Taking Capital Recovery to the Next Level. When you find out how you can save hundreds of thousands while recovering millions, you won’t be disappointed!

If You Really Want to Reduce Costs, Reduce Waste!

SI recently asked if you, like your peers, were chasing the lost cause of cost reduction, giving the recent findings by Supply Chain Insights that, from 2000 to 2011, 75% of companies in process industries lost ground on margins despite best efforts to reduce costs over the last decade or so. That being said, there is one cost that can be reduced — and that’s the cost associated with waste.

As per a recent article in Forbes on How GM Makes $1 Billion A Year by Recycling Waste (which should be titled how GM reduces costs by $1 Billion a year) that referenced a GM media publication on how “GM Makes the Business Case for Zero Waste”, the US generates 7.6 Billion tons of industrial waste a year that ends up in landfills. Given that the average tipping fee for a ton of waste exceeds $53/ton, industrial manufacturers are wasting over 402 Billion a year!

And that’s the losses assuming that the best that could be done with the waste is diverting it from the landfill. If the waste is scrap steel, which can be melted down, or cardboard that can be recycled, or smaller batches of chemicals that can be resold, the cost reductions can be extremely significant. Furthermore, 98% of these cost reductions go straight to the bottom line. As per the GM press release, the waste manage costs associated with its mature waste management program are about eighty cents per ton of solid waste reduced! In other words, in the long run, it costs pennies to save tens of dollars (and at the rates tipping fees are increasing and metal costs are rising, it will soon cost GM pennies to save hundreds of dollars). And once GM converts the other half of its manufacturing facilities to landfill-free facilities, it’s savings will double!

So if you really want to reduce costs, stop burying your money in landfills.