Category Archives: Cost Reduction

Information Technology Cost Management

Supply & Demand Chain Executive recently ran an article on “managing information technology costs in a challenging economy” that claimed right-sizing your IT budget and avoiding long-term harm to your company’s bottom line was a four step effort. Not sure it’s that easy, but it’s certainly worth some consideration.

The approach presented is as follows:

  1. Get a handle on the TCO of IT to the business
    Don’t overlook the “device propagation” that results every time a new application is added to the data center, the energy costs, and the support costs.
  2. Focus on the Cost Drivers
    Energy? Hardware? Software? Projects? Where’s the money going, and why? Treat the IT organization like it is a business and balance the supply and demand.
  3. Be relentless in Valuing IT services
    Examine the cost structure through the eyes of your customers and segregate functions and services into value-add and commodity categories and drive the associated costs accordingly.
  4. Be creative in meeting demand and sourcing work
    Examine the people, process, and technology infrastructure carefully to determine if there is a more cost effective way to deliver the necessary services.

I think this might be an over-simplification in some respects, as it does not address the identification of necessary vs. optional services, but one thing that I am sure of is that the answer, as the author points out, is not the typical five-step approach of (i) killing the capital projects, (ii) tossing the contractors out the door, (iii) deferring maintenance on existing systems (and letting the renewals laps), (iv) canceling training, and (v) slashing the travel budget to zero. That’s just a five-step plan to disaster.

Hidden Costs of Global Sourcing

Purchasing recently ran a good article on “the nine hidden costs of global sourcing” that should not be overlooked if you think global sourcing is your way out of the downturn. It might be, but if you don’t consider all the costs, you could easily make a wrong decision.

As per the article, the following 18 costs (which includes 9 bonus costs found only in the web version) can add up and turn that 20% labor-based savings you expected to see into a 10% loss over your current solution when compared to your current arrangement.

  • Internal Expenses
    The resource intensity of sourcing in unfamiliar markets with unsophisticated suppliers can easily erode forecasted savings by 5%.
  • Supplier Health
    If a supplier goes bankrupt, there go your savings, and then some, when you have to quickly switch to a (much) higher cost of supply.
  • Post-Contract Lull
    In order to insure that savings materialize, you need to monitor the contract in the weeks and months after it is signed. There is a resource cost associated with the monitoring.
  • Duty and Tariff Changes
    A change in the duty or tariff rate could dramatically affect the cost of a product being sourced and the savings that materialize.
  • Contract Non-Compliance
    If your buyers go maverick, so do you savings.
  • True Inventory Costs
    Sourcing from an overseas supplier lengthens lead times, which increases safety stock, and increase time in transit and this significantly increases your average inventory cost.
  • Logistics Volatility
    Not only does increased distance increase your freight costs, but so do rapid increases in freight demand which could cause freight costs to spike.
  • Technology
    Tracking product flow from global suppliers could require new technology, which will increase costs as well.
  • Quality Breakdowns
    If a contract manufacturer’s quality affects delivery of the part or increases the number of failures, it could wind up costing more than originally forecasted and wipe out the global sourcing ROI. And if it forces a costly recall, it could wipe out your business — period.
  • Transition Costs
    There’s nothing “soft” about this cost which will affect initial ROI.
  • Margin/Burden Stacking
    If supplier sites compete against each other, that can cost you.
  • Lost Tariffs/Taxes
    Improper classifications and missed recoveries on VAT add up quickly.
  • Packaging
    If you’re not careful, your supplier might try to profit off the packaging, taking another chunk out of your ROI.
  • Logistics Costs
    It’s not just freight — it’s handling, intermediate storage, and the costs of inevitable delays.
  • Hardware Costs
    Some overseas suppliers have difficulty obtaining standard parts at your cost. Failure to recognize this, and help them obtain parts cost effectively, also costs you money.
  • Labor Costs
    Failure to understand the labor cost breakdown can cost you.
  • Markup vs. Margin
    Know the difference — it can be very substantial.
  • Burden on High Dollar Parts
    Some suppliers may try to burden a $6 part the same as a $6,000! Be careful!

Spend Matters in Procurement

Yesterday, over on Spend Matters, JB brought up two very good points.

  1. Every dollar spent on procurement will generate a 300% to 600% ROI
    As noted in “beyond shedding the deadweight in procurement and operations” on Spend Matters, the last place you want to cut budget is procurement. When Hackett data continually finds that average performing companies get a 300% annual return from procurement-focusssed dollars and best-in-class performers get a 600% annual return from procurement-focussed dollars, in these tough economic times, you should be increasing your procurement budget. Many products, especially SaaS offerings where you pay by the month, will generate a return before the second payment is due. Plus, most of the better service providers are willing to wait until the project is completed and you document a return before invoicing you. That means you can actually make the money to fund your operations before you even spend it!
  2. It’s never been a better time for a make/buy analysis
    Not only will this help you turn on a dime if you have to turn on a dime because your current supplier goes under, a natural disaster takes out a key raw material (and you need a replacement product that uses an alternate raw material), or cost increases force a new business model, but it could also help you save a bundle. In addition to the e-Sourcing and Decision Optimization vendors that JB lists, whatever you do, don’t forget the should-cost experts at Akoya and Apriori. You don’t want to make a sourcing decision based solely on price quotes alone. Otherwise, you might accept a low-bid that is unsustainable by the supplier who is so desperate for your business that they effectively bid themselves out of business.

Looking for Savings? Don’t Overlook Your Insurance Premiums!

A recent article in Industry week noted that when it comes to “insurance renewal, a 1-2-3 strategy can pay off”. Many decision makers may be tempted to compare corporate insurance renewal with personal insurance … where you get the bill and send a cheque, because you don’t really have much choice as changing (life, disability, health, illness, etc.) plans will undoubtably result in a cost increase and benefit reduction, as costs go up (while benefits go down) with age. But this is a bad comparison because corporate insurance plans don’t work like personal life / disability / health plans, rates change with demand and business conditions, and business conditions change all the time.

Business change may not only introduce the need for more insurance (such as when a company begins exporting its products overseas), but may also reduce the need for current coverage (when asset values decline). As the article points out, failing to recognize the impact of new business approaches, whether new strategies that increase risks or downsized operations that alter exposure levels, can cause a manufacturer to make the wrong decision on insurance coverage. And for a large company, this can cost it tens (or hundreds) of thousands of dollars annually (and millions if we’re talking employee group benefit plans). (There’s a reason there are consulting companies which specialize in insurance plan selection and negotiation.)

So what should you do? The article recommends the following 1-2-3 agenda:

  1. Coverage Type
    Examine company operations, compare them to what they were in the past, and accurately assess what needs to be covered. Where are the risks, and what will the recovery cost if they materialize?
  2. Coverage Limits
    How much is at risk and how much insurance is needed to cover it? If you have doubled the size of your shipments, then you might need double the transit insurance. But if you’ve moved to JIT inventory, you might be able to cut your warehouse insurance in half.
  3. Risk Management Services
    Examine a potential insurance provider’s capacity to deliver training, information about industry best practices and expert advice when an emergency makes quick action imperative before you enter into negotiations.

The only thing I’d add is a step 4: hire an expert. The few thousand a day it will cost for an external expert to evaluate your needs and negotiate a better deal could not only save you many times her fee, but prevent financial disaster should an emergency arise.