MAC Resource

The Big Squeeze, How to Cut Your Company’s Procurement Expenses 10% Right Now!

By Patricia E. Moody, CMC
www.patriciaemoody.com

Who says smaller businesses can’t find big savings? When companies want to create a competitive advantage by purchasing components and services better and cheaper than anyone else, they need to look beyond the obvious, the usual solutions touted by consultants and the media. Take gloves, for instance. That’s right, gloves, the disposable, necessary type found in welding and other shop operations.  

Think gloves are unglamorous? Think again. How does one half million dollars in savings, just from rethinking what types and quantities of gloves, sound?

Here’s the deal. John Deere’s fifteen North American plants purchased in one twelve-month period over 424 different sku’s of gloves totaling $1.4 million. Supply management suspected Deere buyers of investing in too much variety, but they had no idea how deeply this simple item was impacting Deere’s costs. It took a student intern working several months over the summer to dig up the data that made it all clear.

By speaking with a Deere supplier, the intern discovered that a welding glove they sold to a competitor for $1.50 was cleaned after being used for welding and sent out to the line for other uses – two applications for the $1.50 purchase price. But Deere’s cheapest price for an all-leather, one time-use glove was $7.50. Planners immediately recognized that this $7.50 custom solution was overkill that represented money thrown into the trash at the end of every shift. But it meant they had to switch, and the estimate was that instead of 424 different sku’s, Deere production could easily work with only 25 varieties. The immediate savings were an astonishing 35% of the total $1.4 million glove spend, about a half a million dollars, for one simple category!

Variety costs money. Motorola discovered this same phenomenon in its cell phone battery category. Design engineers may love variety, or they may have access to endless online catalogs, but it’s really procurement that pays the bills, and it should be procurement that consults as a trusted advisor when these kinds of expensive decision-making exercises take place. The late Gene Richter, CPO during IBM’s mid-nineties turnaround, had a dream, and it was to have "a buyer at every engineer’s elbow."

Essentially his hope was that a good ERP system would successfully integrate all the cost and design issues in a single planning tool that would enable decision-makers to see the impact their sourcing and design decisions had on total product cost. Gene’s dream was not unrealistic, but it took some 15 years to reach the kind of software integration capability that makes it easier to do the work. Until your operation finds its own magic wand, you too will have to rely on going after the numbers, data digging, and bare bones review.  The information may reside in your suppliers’ accounts payable invoices, or you may find it in purchasing order files, but it’s there.  

And that’s not all! There was another benefit to the student intern’s data-digging. That was a newfound belief in procurement’s ability to deliver incredible savings in a short time, with no internal pain, no layoffs, and no squeezing of suppliers. Not bad for a start, huh?

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Patricia Moody is a non-traditional operations guru who focuses on balanced results. She has 12 books to her credit, including The Big Squeeze – Ten Ways to Cut Your Spend 10% Right Now! , and The Technology Machine, How Manufacturing Will Work in the Year 2020, with Richard E. Morley. She can be reached at http://www.patriciaemoody.com.

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