Operations Payoff

Here are three steps that will move you toward the highest value in procurement:

1) Use your suppliers

“End the practice of awarding business based on the price tag.”

Strive to use Vendor Managed Inventory (VMI), get suppliers involved in design and concurrent engineering, ask them for suggestions on cutting freight costs, or using different materials than what you’ve been purchasing.

Reducing the number of suppliers can improve your relationships with your most important suppliers and get you lower prices by increasing your purchase volume. You can often cut the number of suppliers by one third. Running a vendor year-to-date payments report will reveal who your biggest suppliers are, and using that list you can find your best opportunities for cost reduction.

2) Make sure that all elements of cost are owned by the purchasing department

Until you own all components of cost you can’t work to lower costs overall. This goes back to the example I used in a previous post of a company who logistics costs were managed by a department other than purchasing. This separation made it almost impossible to take a TCO approach.

3) Identify and manage your cost drivers

When you understand what your real components of cost are, you can move forward. Ask the CFO or controller what your total costs of materials are. He or she will likely be happy to tell you everything that goes into the materials cost line on the income statement. Then you can find out what the gross profit margin standards are for your industry and understand how you’re doing by comparison.

Edwards Deming, in his Fourteen Points, said, “End the practice of awarding business on the basis of the price tag. Instead, minimize total cost.”

© 2012 – Rick Pay – All rights reserved.