Category Archives: Cost Reduction

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.

All Your Peers Are Chasing a Lost Cause — Are You? Part II

In our last post we pointed out that the number one supply management priority in the average organization is the lost cause of cost reduction. This is exemplified in many recent studies and reports, including eyefortransport’s recent “Global Chief Supply Chain Officer Strategy – European Focus” report which has it as the number one priority. But this is a lost cause because inflation is back with a vengeance, food reserves are at fifty — or one hundred — year lows, critical raw materials are in very short supply, and, as pointed out in Supply Chain Insight’s recent report on “Supply Chain Metrics that Matter: Driving Reliability in Margins” report, between 2000 and 2011, 75% of companies in process industries lost ground on margins! In other words, even the mighty are falling — year over year.

For the foreseeable future (and most likely the rest of your supply management career), costs are going up. There’s nothing you can do about it. The best you can do is control the cost increases, and make sure you do it better than your peers. SI truly believes that this will be the difference between your company staying in business and your company filing for bankruptcy.

And you will do this not by focussing on cost, but on cost drivers. What are the main components of the cost? How much does each component contribute to the cost? How much does an increase on a core component increase the overall cost? Where is the greatest opportunity to reign in cost increases through process improvements, requirement reductions (for unnecessary services or needlessly expensive materials)? Where is the greatest risk of a cost increase? What can be done to prevent it? What should be done to prevent it?

This requires your organization to acquire the following competencies:

  • Cost Modelling
    The first thing you need to do is accurately model the cost components — including raw materials, labour, energy, and services.
  • What-if Analysis
    Understand how costs will change if each component increases, decreases, or maintains stability in line with (global) inflation. Be able to model the estimated impact of product, process, or service initiatives on overall costs.
  • Optimization
    The only true way to minimize cost increases and keep costs in check is strategic sourcing decision optimization, because the only true way to minimize costs is to minimize them holistically. Reducing unit costs is pointless if logistics costs double. Reducing labour costs is pointless if quality declines and return and warranty costs triple. Only strategic sourcing decision optimization allows you to see the whole picture and minimize costs across the board.
  • Real-Time Visibility
    You can no longer get away with NOT having real-time visibility into your supply chain, which should go beyond knowing when your order was shipped by your first tier supplier. At the very least, you should have visibility into your suppliers’ suppliers across the board and you should have visibility into any third-tier suppliers who supply critical or scarce raw materials.
  • NPD with the Goal in Mind
    In their “Supply Chain Metrics that Matter: Driving Reliability in Margins” report, Supply Chain Insights shared a great insight — most supply chains are based on functional excellence based on inside-out thinking. Companies are not clear on supply chain strategy and the delineation of the financial metrics that matter. When designing a new product, the goal is not to make the coolest (or most desirable) product, the lowest cost product, or the product you think you can charge the most for. The goal is to make the product that the organization will generate the most profit from — which is a function of margin and profit (and, specifically, the multiple thereof).

So acquire these competencies, and maybe you can stop chasing the lost cause of cost reduction and start focussing on the achievable goal of cost control.

All Your Peers Are Chasing a Lost Cause — Are You? Part I

While I believe that the average company is still chasing the cost reduction myth (as highlighted in eyefortransport’s recent “Global Chief Supply Chain Officer Strategy – European Focus” report, for example), I am having a very hard time understanding why. As SI has pointed out a number of times over the past couple of years (including in it’s recent piece on the Top Ten Things To Do in 2013 To Control Costs), for any organization that has been pursuing any form of supply management over the past five years or so, cost reduction is a fantasy that’s not going to happen within your tenure. Inflation is back with a vengeance — it will be decades, if ever, before we see a return to the 1% inflation rate we enjoyed in the noughts. Global food reserves are at fifty, and in some cases, one hundred, year lows — and the past couple of years have seen riots in the first world over the cost of basic staples (like wheat and rice). And with rapidly increasing global demand, certain raw materials are scarcer than they’ve ever been. In other words, cost reduction is a pipe dream.

Moreover, recent research by Supply Chain Insights LLC (recently released in “Supply Chain Metrics that Matter: Driving Reliability in Margins”) has demonstrated that, for the average company, cost reduction never happened anyway. That’s right! You might have saved millions in those auctions when you had the power, or taken millions out of your distribution chain with optimization, but cost increases across the board ate up those savings in other areas. The researchers found that through analysis of publicly available balance sheet and income statement data [from 2000 through 2011], we find that 75% of companies in process industries lost ground on margins and only 5% of companies improved their positions on the number of days of inventory! In other words, despite all their supply management efforts, relatively speaking, their costs went up.

This isn’t to say that you shouldn’t be focussing on supply management or cost control, with rising, and increasingly volatile, raw material and commodity prices, supply unpredictability, demand unpredictability, and the rate of supply chain disruptions increasing super linearly, cost containment is a must. But thinking you’re going to reduce costs in this economic climate is foolish. The best you will do is control them — and that will be the difference, for many companies, between staying in business and filing for bankruptcy. Literally.

What you need to be focussing on is not cost, but cost drivers and how you are going to maintain visibility into those drivers to help you figure out where costs can be best contained, when your organization will likely have the greatest (or least) advantage in a negotiation, and how much cost certainty is worth. For example, is it worth locking in a one year contract when prices are volatile and possibly higher than the projected prices due to a recent disaster that reduced supply? They could go up if demand increases, but if another source of supply appears in six months, or the backlog of orders is cleared, they could return to pre-disruption levels (which will still be higher than last year).

So how do you do this? We’ll discuss it in part two.

There is a Spend Rule of Three

But the Third Spend Savings may not be for thee.

Backing up, I’m referencing a very interesting article published in SIG’s recent newsletter on “Spend Management’s New Norm: Uncovering Big Third Spend Savings” by Mark Walsh, CEO of FedBid. According to Mark, the best way to slice, dice, and categorize spend is not to get bogged down in category taxonomies, spend thresholds, savings potential, transactional analysis, supply risk, etc. — but to simply categorize spend by the Spend Rule of Three.

Mark defines the “Spend Three” as:

  • Strategic Spend
    the largest category of spend that typically accounts for 80% of organizational spend across 20% of vendors and service providers
  • Catalog Spend
    the smallest category of spend that typically accounts for less than 10% of fixed-price transactions on credit lines, p-cards, and employee expense reports
  • Third Spend
    the middle category of spend that accounts for 10% to 20% of spend that accounts for the bulk of indirect, or tail, spending (in a non-service oriented organization, as indirect and service spend will be much higher in finance and other verticals that don’t produce physical goods)

According to Mark, the greatest savings opportunity will generally be in the Third Spend category as most organizations will have a good grip on strategic spend, where they focus all of their efforts, and catalog spend, where they will have fixed price contracts and where savings opportunities, due to such low volumes, are inconsequential. Specifically, he believes that this category represents an average savings opportunity of 11%, which is not unexpected as it is consistent with recent findings by Aberdeen, AT Kearney, CombineNet, and others over the last few years. But the savings are only there if the spend is not under management, you haven’t spent time strategically negotiating the contract, and the purchase volume is high enough to be attractive to at least one supplier.

The reality is that savings opportunities will not neatly fit into any one category, and will depend on a number of factors. How much you’re paying, the current market price, supply vs. demand, energy prices, requirement flexibility, innovation and creativity, just to name a few factors. For example, that category you’ve strategically sourced five times in the last two years might still be a huge savings opportunity if a new production technology just hit the market that allows a supplier to cut production costs by 20%. You need to do a high level analysis across all categories to identify where the greatest opportunities likely lie, not just focus on the third spend. While there are probably some big savings to be had, the biggest savings lie where you’re spending the most in a manner that’s the most off of optimal. Don’t forget that … and if by some chance you’re not one of the thousands of readers who have already downloaded Spend Visibility: An Implementation Guide a free e-book by Sourcing Innovation and Lexington Analytics that is the definitive book on next level performance, do so today. It’s worth your time.