Ten Proven Ways to Cut Your Spend
When the "big squeeze" is on to cut purchasing and supply management costs, how will you respond? These 10 recommendations will help you come through.
By Patricia E. Moody -- Supply Chain Management Review, 12/1/2005
When CEOs want to generate cash—for new products, new plants, workforce compensation, or just their favorite boondoggles—they still look to procurement to come up with the dough. For those companies that have sophisticated buying processes and bare-boned outsourcing relationships in place, finding the necessary money may not be all that difficult.
But what about those other companies—and they are likely in the majority—that still struggle mightily with cost reductions? They may have made a hasty outsourcing decision that locks them into unnecessarily high costs. Or they may be stuck buying basic commodities through many different points across various divisions and plants. In fact, they probably don’t even know exactly how much they spend. So does it make sense for even these traditional operations to attempt double-digit savings? The quick answer is: Yes, of course it does! Because there’s gold in the most unexpected and unexplored places. And it’s not all in the well-worn area of lean manufacturing. To find out where purchasing professionals should be panning for that gold, we went directly to the source. We put out a call to leading supply management executives and consultants. We wanted them to contribute their very best recipes for 10-percent savings—or better—and we were absolutely overwhelmed by the avalanche of suggestions. It took three weeks to chew through the e-mails, cut out the spammers and the duplicates, and condense all the valued input into 100 pages of juicy ideas for a book I wrote recently called The Big Squeeze. This book was intended to help purchasing pros cut their spend by at least 10 percent right away. Many of the suggestions we received focused on “soft” expenses. These included MRO (maintenance, repair, and operating) expenses as well as other generally neglected categories for office supplies and equipment, travel, and especially communications services. We also heard about continuing opportunities to reduce costs in production operations. But even if your company has outsourced all production to Timbuktu, your “white collar” operations—such as final assembly of customer orders in distribution centers—are prime candidates for the kinds of kaizen continuous improvements that adherents of lean and Japanese production methods enjoy. The supply management leaders we contacted also cited e-auctions and e-sourcing as great paths to increased savings—provided the users picked the right commodities for the Web. For example, Sam Santosuosso, director of supply chain management at Axcelis Technologies in Beverly, Mass., saved 17 percent on cleanroom supplies on a $350,000 spend by effectively leveraging Web-based resources. “That was well above our 10-percent target,” Santosuosso reports. Other responses ranged from both innovative and traditional approaches to supplier relationships, to a brilliant technology-intensive application of risk management software used by United Technologies Corporation to manage its globally dispersed supply network. Reviewing the ideas received from the experts, it’s clear that many successful initiatives go after the easy savings and then build momentum for the bigger things. In fact, this seems to be a pattern for sure savings. For instance, a template for supply management success developed by the late Gene Richter, former chief procurement officer at IBM, hinged on spend consolidation and expert buying. And Dave Nelson, Honda’s former purchasing chief, proved again and again at Deere and Co. and Delphi that there is gold in low-hanging MRO fruit. Nelson understands that MRO and other soft expense categories present huge opportunities for consolidation and negotiated savings. Moreover, these savings are more easily obtained than—and indeed buy time for—the more challenging direct materials expenditures. (Direct materials are those items that are incorporated directly into the final product.) The following example shows the potential savings often hidden in MRO. During a typical 12-month period, John Deere’s 15 North American plants had been purchasing more than 424 different SKU’s of gloves totaling $1.4 million in spend. In reality, the true requirement was somewhere between 20 and 25 SKU’s. But it took a student intern working at Deere to dig into the data and come up with the gold. Continued...
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