A recent article on the Procurement Leaders Network had a very shocking statistic: “only 52% of businesses look at customs duties as a potential area for cost savings” (according to a recent research survey by Deloitte). Considering that misclassifications alone cause most companies to overpay duties by 7% to 11%, this presents a substantial savings opportunity for any company that imports more than ten million dollars a year. Furthermore, better utilization of Free Trade Agreements can often significantly reduce, if not eliminate, duties on millions of dollars of merchandise. Many companies have doubled and tripled their free trade duty savings (and saved millions of dollars) just through FTA management. And then there’s Free Trade Zones that can save you even more! With a little Trade Visibility, you can save a lot of money. So why aren’t you?
Category Archives: Cost Reduction
Go Green with Enterprise Content Management and Save
Regular readers know I’m a big fan of green and an avid promoter of Enterprise Contract Management due to the many advantages it provides including reduced contract management costs, decreased maverick spend, reduced overpayments, IP management, etc., but in an even bigger picture, Enterprise Contract Management is a subset of Enterprise Content Management. If you also adopt an Enterprise Content Management Solution to manage all of the documents, and knowledge, you produce in addition to contracts, you can save a considerable amount of money each year on paper, printing, storage, and document shipping costs … which, for many larger organizations, is well into the the six figures. While small change to what an Enterprise Contract Management Solution that enforces on-contract buying (which in turn realizes the millions in savings your buyers negotiated), it’s still a considerable amount of change, as there are many good, open source, content management solutions you can use for free and save enough to retain a few more valuable employees in these tough times.
There are a number of reasons to go green with Enterprise Content Management, and a recent article in Integrated Solutions Magazine listed the top 6 reasons presented by the Association for Information and Image Management (AIIM). They are:
- Save On Paper and Shipping
A large company can save 50K to 500K on paper and 50K to 200K on paper delivery and document shipping costs each year. - Increase the Effectiveness of Core Processes
Your people can find what they need when they need it. - Truly Integrate Your Field Operations
No longer is the bulk of knowledge confined to those in the main office. - Reduce Real Estate Costs
Less paper requires less filing cabinets which reduces the physical space you need just to store paper. - Improve Employee Productivity
Not only can your people access what they need when they need it, but they can access the information where they need it. - Reduce off-site storage costs.
Instead of a warehouse, all you need is a storage box that can hold a few backup tapes or hard-drives, just in case your on-line backup goes down.
Import Duty Reduction: Not Just for Large MultiNationals Anymore
CFO recently had a great article on how small and midsize business can use the same customs-duty strategies large multi-nationals use to save a hefty chunk of change in a recent provacatively titled article. As larger companies well versed in global trade know, import duties, unlike income tax rates, can change dramatically depending on the way goods are described or the way the products are packaged and assembled. The article gives the classic case of microscopes used for surgery. In the early 1990s, they were lumped in with laboratory microscopes, which meant the device carried a 7.2% import duty. However, once manufacturers argued that the device was a surgical instrument, it became duty free. In other words, intended used can often be used to recategorize an item into a lower duty bracket. Another example is a woman’s cotton T-shirt. As sleepware, it carries an 8.5% duty, as swimwear, it carries a 14.9% duty.
Also, retail sets can sometimes carry a lower effective duty than the individual items they contain, and sometimes carry a higher effective duty. Thus, if you plan to combine the items into a set, you should do the import math and determine if it’s more cost effective to assemble the items before, or after, import.
Another great piece of advice from the article is keeping full documentation of the entire trade cycle. If you use a distributor (to purchase goods from a manufacturer on your behalf), that distributor will apply a markup to the goods. However, if you retain the documentation necessary to show the purchase by the distributor was an arms-length purchase and that the goods were clearly destined for the US, you can have the import duty assessed at the cost to the distributor, not the cost to you, which could save you 10% to 20% of the duty cost.
And don’t forget about how FTZs help U.S. companies save millions during tough economic times.
Best-In-Class Procurement is About Cost Avoidance, Not Savings!
In a recent post over on his Purchasing Certification Blog, Charles asked “why doesn’t Procurement save as much on non-traditional categories” in response to his review of Aberdeen’s latest “CPO Agenda” research report which found that Best-in-Class Procurement achieves 10% savings on managed spend while laggard Procurement achieves savings of 16% on managed spend. His assumption was that Procurement didn’t do as well on non-traditional categories and that dragged the average down.
As far as I’m concerned, the situation is the exact opposite. If the Procurement department is truly a Best-in-Class Procurement department, each time they negotiate a contract they get the best deal possible. Once you’ve negotiated the best deal possible, there’s no more “Savings” to be had until either the indexed market price for the core commodities, components, or labor that makes up the product or service cost decreases or a disruptive innovation comes along that allows the product or service to be produced more cost effectively. Since that doesn’t happen every day, or even every year (as commodity and labor costs tend to increase and production efficiencies quickly reach a ceiling on popular products or services), if Procurement did it’s job right, there are no “Savings” to be found on the majority of categories sourced in the last year.
The fundamental truth — which is hard to see with the recent myopic focus on “Savings” — is that there is no such thing as “Savings” in a perfect Procurement organization. If Procurement did its job perfectly, it negotiated the absolute best deal. This would mean that there are no “Savings” to be had because, if there were, that would mean that Procurement did not do its job perfectly.
A Best-in-Class Procurement organization is all about Cost Avoidance. After all, since most products and services increase in cost over time, a great Procurement department finds a way to contain, and even eliminate, cost increases even when raw material costs go up 10% and labor costs go up 5%. They work with the supplier to find ways to improve supplier efficiencies, or they work with sales to find ways to increase volumes, so that the supplier can commit to the same price and still maintain a reasonable margin even if its costs increase 5% to 10%. And then, if prices happen to drop for a category that comes up for renewal, they renegotiate the renewal to represent the effective cost decrease and never pay a penny above the best price that can be achieved.
Using this definition, and this logic, this tells me that a Best-in-Class company should see diminished “Savings” year after year as they get better and better at getting the best deal each and every time they tackle a category, leaving the only “Savings” opportunities to be those opportunities where product costs (either due to commodity price or labor price decreases or production efficiency increases) have decreased since the last time a contract was cut. And this is much better than finding “Savings” because it means they didn’t waste capital in the first place, which they left free for the business to fund operations and growth!
Remember, even Wal-Mart, despite the popular perception, cannot roll-back prices forever, especially in categories where commodity prices rise day after day! (Heck, sometimes they even roll-up by 50%! Case in point, last time I was there I was going to pick up “our” brand of coffee because they advertised, in their flyer from the previous month, that it was 4.99 everyday, which is a price you can only get in the grocery stores on sale. Well, I’m there, and I go to get some on my way out, and it’s 7.57 … a 51% increase.) At some point, until a disruptive innovation comes along, a Best-in-Class Procurement department is going to get the best deal and there will be no more “Savings”. The better the department, the sooner they hit the floor. The sooner they hit the floor, the sooner they maximize “cost avoidance”, which is what Procurement should be all about.
In other words, I think the numbers are just fine and that Mr. Bartolini did a good job of uncovering numbers that reflect the actual reality of how a good Procurement department really performs!
Four Tips For Keeping Your Transportation Costs in Check
Transportation costs might be temporarily low, but as soon as demands start picking up, you know they’re going to spike again. Fortunately, there’s a way to control transportation costs regardless of demand, or fuel costs, and an article last summer in Industry Week on “rethinking transportation costs” offered up some suggestions that are worth a quick review.
- Know Your Carrier
Know what keeps your carrier up at night and what you’ll need to do to take a more collaborative approach to solving your collective challenges. - Trucks, Trains, Ships, and Planes — Which is right for you?
Consider alternate routes and alternate modes … maybe there are (much) cheaper options if you can be a little flexible on your delivery dates and transit times. - Let Your Network Be All It Can Be
Reconsider your manufacturing locations, distribution strategies, off-shoring strategies, and customers. Do you have the right number, the right locations, the right strategies, and the right customers? - Find the Answers
Consider all of your network data, all of your network possibilities, build some optimization models, run some simulations, and discover your true potential.