The July 7 entry, titled “The Trap of Piece-Price Reduction,” showed the types of non-piece price related “direct” savings that procurement can deliver to a company’s bottom line. This week’s entry will focus on savings related to “Shoes”; in other words, “indirect” impacts. Why would I refer to overhead as Shoes? More often than not, as least in the executive circles I’ve traveled, sooner or later when discussions arose over the need to reduce overhead, someone would bring up the need to reduce “Shoes,” i.e., personnel.
Use of this term may seem a pretty heartless way of describing a manpower reduction, but it is a basic premise of business today that reducing headcount is a way to increase profitability. And reducing waste—through Next Generation Supply Management or any other strategy—will likely reduce the need for manpower.
I bring up this issue since it is one fundamental to waste reduction strategies. In other words, why should employees work to implement a program that could lead to the elimination of their job? This is a good question, especially if it is your job that is under review.
There is an alternative option to “letting go” freed-up manpower, and it should be considered whenever waste reduction impacts Shoes—namely, to apply the manpower to more challenging and productive activities. But this is an issue directly related to specific management strategies at individual companies and will not receive further focus in this blog entry. The point here is that when costs can be reduced, they should be.
In my June 6 blog post a case study was cited where when an original equipment manufacturer (OEM) worked with its supply chain to reduce Manufacturing Critical-path Time (MCT) an average of 78%, on-time delivery improved (on average) 73% and as-delivered quality improved (again, on average) 84%. You might think, “Oh, this is very interesting, but what does it have to do with my company’s bottom line?” I’ll try to answer that.
Why do companies even target high on-time delivery and as-delivered quality performance from their suppliers? The answer, of course, is to support efficient operations in their own factories. In other words, when a purchased part is needed for assembly they want it to be available. And, they also want that same purchased part to be “usable,” i.e., not defective. Why? Because production-line downtime at OEMs can cost big money. Hourly downtime costs can easily be in the five figures, and sometimes go even higher. In fact, most companies track in intimate detail the cause of production-line downtime, both for purposes of assigning responsibility and for pursuing corrective action.
So what happened wtih that manufacturer in the case study when their supply chain MCT reductions delivered on-time delivery and as-delivered quality improvements? Their purchased part-caused incidences of production-line downtime were reduced by over 90%. And this occurred in an environment of dramatically increasing demand where you’d normally expect an increase in such interruptions. Since the causes of its operational downtime were tracked with a passion at this company, it was easy to show that improved supplier performance had significantly reduced costs. In fact, again, because I have a personal knowledge of this case study, I can report that the savings due to increasing factory operational up-time were on par with the traditional piece-price reduction related savings. This is good, but what about the Shoes?
If you’ll recall, the case study cited was a seven-year effort. At the start of that initiative the factory in question had 11 purchased part expeditors. The whole purpose of this position is to track supplier shipments and make sure they arrive as scheduled/needed. Over the years---with improved supplier performance---the need for expediting purchased parts went so far down that by the seventh year only two purchased part expeditors were still needed. A need for nine sets of Shoes was thus eliminated. So, the overall business need for nine full-time equivalents was eliminated and procurement got the credit for this.
Related to this manpower reduction was a reduction in the cost of expediting shipments. Again, companies typically have accounts set-up to track expenses related to expediting deliveries. When improved supplier performance leads to a reduction in these expenses, be sure to take the financial credit for this reduction, too.
Is that all? Not hardly.
Receiving inspection at many companies is based on a “skip lot” strategy. In other words, as inspection history confirms increasing supplier quality capability, inspection frequency is reduced. It makes a lot of sense to think that with an 84% reduction in defects, inspection of incoming lots would over time go down a corresponding amount. Similar to the case study experience with purchased part expeditors, improved supplier quality performance leads to less of a need for receiving inspectors. Since this manpower has “receiving inspection” in their job title, when the need for purchased part inspection goes down it should be easy to show that procurement should be given credit for that impact. And as inspection goes down, so does the need for inspection supplies and equipment, which should also be tracked and credited as a procurement savings.
The fact is as you start transforming to Next Generation Supply Management, the need for much of the infrastructure that was created to account for lack of supplier performance and/or capability goes down and can start being dismantled. The costs associated with this infrastructure reduction are again, as real dollar-to-dollar, as those obtained through a focus on reducing piece-prices.
Over the last two blogs I’ve started laying out the financial case for Next Generation Supply Management, i.e., procurement having an impact above and beyond simply piece-price reduction and getting “a seat at the table” based on those impacts. These blogs were based on case study data, not simply opinion or idea. So, where does that leave you? Are you “in” and want to know what the next step is to elevating the level of procurement in your company? If so, tune in to the next blog.
