contractor

Consulting

Christopher Meyer Leave a comment

Last Friday I had the amazing opportunity to do consulting in the Omaha Metro Area.

The client was a start-up gym looking to better manage their inventory of supplements (collagen peptides, protein, etc.) and workout equipment (knee sleeve, wrist wraps, etc.).

It wasn’t anything high end. No C-Suite meetings. No hundred dollar steak dinners.

Just one hour with some Bulletproof Coffee while working on spreadsheets at Whole Foods.

I built them a spreadsheet to manage their inventory, forecast their demand, determine their economic order quantity, safety stock, and order point. All the while I explained the math and basic principles behind it what I had built. In the end I offered my continued availability.

Now the gym is better prepared to deal with its increasing demand for supplements and equipment. Of course, as they grow they’ll need better software than just an excel spreadsheet.

But I got them started on the right track.

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If you’re a start-up or small business looking to improve your supply chain, shoot me an email and set up a free introductory consultation: meybestprocurement@gmail.com.

Tariffs and the Supply Chain

Christopher Meyer 1 Comment

Plenty has been written on the ongoing tit-for-tat with Trump’s tariff’s on China; the news cycle can’t get enough. And in three days, tariffs take effect on $200 billion worth of imports from China should the U.S. and China be unable to come to an agreement.

I’ll let the political pundits discuss whether this is good or bad.

What I’m interested in is: How does this effect the supply chain? And I’m not just talking the prices of goods. What about logistics, supplier choices, and make or buy decisions? What’s to be done in such turbulent times? How should risk management be addressed?

Cost of Goods

With the imposition of 25% steel tariffs and 11% aluminum tariffs earlier this year, the prices of steel and aluminum have jumped upwards of 18%. While the steel companies are enjoying the profits, the rest of U.S. companies that utilize these resources, such as automobile, motorcycle, and technology (hardware) companies are seeing costs rising, some as high as 50%.

The additional 10% tariffs on $200 billion worth of goods will effect companies and consumers even more. Items on this new list include: meat, fish and seafood, fruits and nuts, beverages and vinegars, ores, slag, and ash, rubber, textiles, and machinery, just to name a few. A more comprehensive list can be found here.

I currently work in the utilities (energy) industry, and the effects of tariffs are already hitting our transformers, steel poles, vehicles, and some motors. Specifically, we recently sourced a specialized trailer that has a motor on it for pulling shipping containers (connexes, sealands) up onto it. For whatever reason these specific motors only came from China, and with the tariffs the company in China wouldn’t ship to the U.S. Our supplier had to go through a European company to source the motors from China, hiking up the price 30% compared to what we normally pay.

This brings us to our next topic. . .

Logistics

With tariffs come challenges in logistics. Products from China are going to cost more, and some companies are making decisions not to ship certain products directly to the U.S. (see my trailer example above).

It’s not just the goods purchased, but the shipping of those goods that have gone up. With tariffs comes an increase in cost of shipping those goods. Ships from other countries are held in port longer, delaying delivery, and increasing labor costs. Even the railroads in the U.S. are seeing an increase in costs due to tariffs from Mexico and Canada. When looking at total cost of ownership, companies are going to be looking at how tariffs effect shipping, and will have to make decisions based on those numbers.

Supplier Choices

Both cost of goods and logistical challenges are going to effect supplier choices by companies in the United States. For example, if Company A is going to pay the same price for steel and aluminum from China as they do in the U.S., but the steel and aluminum from China has a tariff on it, Company A is going to begin purchasing those resources from U.S. companies, or at least from companies in countries where there are no or much lower tariffs.

A simple example of this is the steel industry example given above. If I have to buy steel, I might as well buy it from a company in the U.S., despite the higher cost, because there will be no tariffs imposed on it. The same will go for many of items on the list of new tariffs being levied.

And what if the goods being shipped to the U.S. only come from China? Then companies, and their consumers, may have to live with much higher prices which include the cost of tariffs. Or. . .

Make-or-Buy

With tariffs and the costs of certain goods rising, companies may begin to revisit make-or-buy decisions.

Make-or-buy decisions are exactly what they sound like. Does the company make the product in-house, or do they buy it/outsource it from another company. With tariffs on certain goods and costs of those goods rising, some companies may be compelled to begin to produce more in-house instead of outsourcing.

This is an interesting turn of events as our current economy is a by-product of companies selling off assets they once owned to produce everything in-house. Decades ago companies like Ford used to own steel mills and smaller factories that made everything in support of producing cars. These companies then spun off or sold these assets to focus on what they were good at; in the case of Ford it was building cars, not managing the mining and refining of steel.

My opinion is that I doubt we’ll ever return to the level of “make” seen prior to the 1970’s/80’s. It just doesn’t make economic sense in most cases. (This is an unsubstantiated statement, and some economist or financial guy out there may prove me wrong, but there it is.) But more companies will have to take a hard look at how they produce their products, and make-or-buy decisions will be part of that decision making process.

Of course, a third option is companies do redesigns of their products or entire offerings so they include less or no goods coming from countries which have these tariffs imposed on them (in this case China), or stop providing the offering completely.

What To Do

Again, my focus in this article isn’t whether the tariffs are good or bad. Individuals with a greater breadth of knowledge and experience can opine on that. What I will comment on is what can be done in each of these areas. These are recommendations based on my limited (eight years) of experience.

Cost of Goods: The first thing I’d ask is, “What does it say in the agreement?” Taking steel as an example, your organization most likely locked in a price for that product which contains steel. There is also, most likely, a clause allowing a certain percentage of price increase annually, or throughout the year. I am not saying you should necessarily buckle down on that price. Your supplier is working to be tenable just like your organization. But use it as a starting point for the discussion on how the tariffs effect the price. Just because the cost of steel has gone up 18% doesn’t mean the cost of what you’re buying goes up 18%. But maybe 5% or 8% makes sense for your organization to pay while the supplier is still profitable.

Logistics: You should look at what countries you are shipping from, and what are the lead times once what your organization purchased enters the U.S. If lead times are extended, your planning for projects or product releases should also be adjusted. Are you able to source from the same company with a presence in a different country? Or is there a distributor in a different country that can provide your organization with the same product, tariff free? Can you work with your supplier in China to ship through another country, such as Vietnam? You should also work to leverage relationships with freight companies or rail road companies you work with to see how you can work together to mitigate the costs of tariffs.

Supplier Choices: Despite personal opinions on the merits or detractions of tariffs and trade wars, organizations across the U.S. have to accept the way things are (until if/when they change). Perhaps it’s time for your organization to begin to look into other suppliers within the U.S., or from countries that don’t have China-level tariffs imposed upon them. You and your organization may have to pay higher prices due to the tariffs, but it’s better to pay just higher prices instead of higher prices plus costs for tariffs. That said, you may be in a bind if what you source only comes from a company in China.

Make-or-Buy: Finally, you and your organization may have to have a serious discussion about make-or-buy (or stop providing the offering altogether). If sourcing from China and a U.S. company doesn’t make sense for your organization, perhaps it’s time to look into producing it in-house. These decisions aren’t made lightly; producing products in-house could cost millions, or tens of millions, in construction, start-up costs, and increased overhead and labor costs. But if it makes sense in the long run it can save your company money lost in higher prices, delayed shipments, and loss of market share.

Risk

A final thought: remember risk. Throughout all of the discussions you have with your organization about how to deal with the current state of affairs with tariffs, always ensure you are managing the risk to your supply chain in all of your decisions. For example, shipping through another country to get around tariffs on China may seem like a good idea at first, but what if the infrastructure and rule of law in that country are poor? Your product may disappear, or bribes to crooked officials may raise the price of your products to the point that you may have well have paid for the product with tariffs.

Think about how your organization can mitigate risks, and what to do in the worst case scenario. (Hopefully you and your organization are already doing this on a daily basis.) Can your organization help build up infrastructure in this country? Or should sourcing be shifted to a U.S. company with less risk in on-time delivery, but maybe higher risk in quality of goods that can be more easily addressed since they are just a quick drive or plane flight away?

Conclusion

Despite what you might think of them, the current tariffs aren’t going anywhere soon. But, with careful planning and risk management, you and your organization can navigate these turbulent waters and maintain your supply chain.

Negotiations Don’t Stop at Contract Award

Christopher Meyer Leave a comment

Finally! Both you and your supplier have signed a strategic agreement for the next five years. KPI’s and milestones are enshrined in the contract, and it’s a win-win for both of you. You have begun managing the contract and working with the supplier in their roll-out of materials and services to your organization.

You’re done, right?

Wrong.

With any strategic procurement agreement there is always room for improvement. While, overall, your strategic supplier may be saving you money overall, there may be parts and/or services that the supplier is still pricing high. It’s these handful of materials or services in strategic agreements that are ripe for negotiation.

For example, say you have a strategic agreement with a supplier for maintenance, repair, and operations (MRO) materials. You have over 10,000 line items in this master procurement agreement, and the supplier was the lowest total cost for 80%-85% of those materials – that’s why you awarded them the agreement. It’s that 20%-15% that can, and should, be negotiated down.

It’s up to you as the sourcing professional responsible for the agreement to regularly review chunks of the MRO materials list for pricing. Other suppliers may have offered some lower pricing on some of the materials in the bidding process, and the sourcing professional can use this information to negotiate with the awarded supplier.

The organization’s buyers are integral to this process, too, as they buy the materials everyday at the tactical level and may be able to spot materials in ones and twos that seem priced high. You can also send out RFQ’s for handfuls of materials at different intervals to see if there is better pricing. This RFQ process may be driven by a purchased dollar threshold set by the organization.

Key performance indicators are another way you can ensure the supplier is offering you the best pricing on these MRO materials. Having a KPI, or several KPIs, that focus on the supplier ensuring they are providing cost savings can help reduce pricing on materials in an already awarded agreement. Maybe a manufacturer has slashed pricing due to increased production, or there is a substitute part that is the same quality but another company produces it at a lower cost.

Once the MRO materials that are higher priced are identified, it’s up to you as the sourcing professional to bring in the supplier’s representatives and negotiate this. Generally speaking, the supplier will be open to reducing the pricing in order to retain your business and have hopes of winning the award again five years down the road.

Using these principles in other agreements, whether materials or services, will ensure you are getting the best pricing for your organization.

How Strategic Sourcing Can Improve Your Organization’s Processes

Christopher Meyer Leave a comment

Originally posted on my other blog, The Red Renegade.

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Your organization is working to improve its sourcing processes and strategy. Like areas of spend have been grouped together to determine what the organization spends annually. The department or division responsible for sourcing has identified areas of spend where savings can be realized.

But, as the organization delves deeper, they find that reducing outside drivers of cost isn’t the only hurdle they face.

There are materials and services within the organization that people have been dependent on for years, perhaps decades. Leaning these materials and services, or removing them altogether, will be a major culture shock. Senior management is even wary of cutting off these materials and services.

Senior management wants to save money, but the sourcing group knows that changing how materials and services are sourced, what will be sourced, and when will have a major impact on the organization’s processes as well as its budget.

Sourcing the material and/or service is just one part of the larger sourcing strategy. A lot of work goes into transforming the rest of the organization and how it does business in order for the wins in sourcing to have their full effect – one more part of total cost ownership. Process improvement in other parts of the organization are just as important as improvements in the sourcing function itself.

Total Cost Ownership

As discussed in a previous blog post, Total Cost of Ownership is everything that goes into before, during, and after the sourcing of a material and/or service.

Generally speaking, this includes administrative processing costs, technology costs, overhead, freight, the cost of lead times, if items are damaged, and rework that needs to be done.

Rarely do organizations look at total cost of ownership in terms of what their own organization is doing.

Does each project manager or department use the freight carrier they like the best?

Is there a service the company uses, but could be eliminated if project managers were held to better standards of planning?

Do employees make parts runs because favored suppliers “don’t deliver”?

It’s internal processes like these that need to be looked at in tandem with the improvement of sourcing the material(s) and/or service(s) and organization buys. They are as much a part of Total Cost Ownership as overhead or lead times on materials.

How so?

Let’s use an example from my experience.

The company I work for uses a freight service that only delivers between facilities in my company in the city we’re in. This freight service costs about $300,000 per year for them to move material from one facility to the other. We love this external freight service so much, their drivers park their trucks at our facilities.

Why do we use them?

Because sometimes project managers cut work orders associated with one facility, only to draw the material out of another. So materials needs to be shuttled around to ensure the proper materials are in the proper place at the proper time.

We also junk out some of our larger equipment, and this service transports the junked out equipment (they’re rather large) to our central processing facility here in town.

On the face of it, this is $300,000 expended by my company per year.

Immediately some will note that, if PM’s were held to a standard, and their work orders assigned to the correct facility, this would eliminate the need for this service. And can’t we use internal personnel (we have personnel qualified) to load the equipment and drive it to the central processing facility?

But it goes deeper than that. PM’s not assigning work orders to the right facility forces them to draw from that facility, which causes work in the warehouse, and then those materials aren’t there for jobs that are properly assigned to that facility, creating wait times as items are shuffled between facilities. Sometimes its time sensitive jobs that are forced to wait as the warehouses figure out where material went and what needs to be brought in from other warehouses. Sometimes people get lazy, and instead they just put in an order to have it bought from the supplier, costing the District even more.

So it’s not costing the company I work for $300,000. It’s costing them hundreds of thousands, or perhaps even millions, in additional man hours, rework, opportunity cost of inventory, and delays on projects.

Why do we still use this “shuttle” service then? Because we’ve had them for almost twenty years. Because no one has pushed back on PMs and other internal business partners to assign work orders to the correct facility. Because our warehouse personnel are doing the best they can within this system and the shuttle service is a Band-Aid that people have become comfortable with.

In this case, it’s not just a process – it’s a part of the culture.

Where to Begin

So where does a sourcing professional begin?

Start with the sourcing strategy.

The sourcing group has identified a need, and then they go and gather their facts. But they don’t just gather the facts on the surface. They have to dig deeper.

  • What are like materials/services that can be grouped with the one being looked at?
  • What vendor(s) provide this material/service and those grouped with it?
  • What internal stakeholders use these?
  • Why are they using them?
  • Why are they using them the way they are?
  • Are they still needed?
  • What would need to be done to consolidate or remove materials/services?
  • If this is done, how will it affect the processes and procedures of the different divisions and departments of the company?

These are just some of the questions that must be asked to challenge the status quo, especially if that status quo is costing the company substantial amounts of money.

And it has to be the group responsible for sourcing in the organization that must do this.

While part of sourcing strategy is definitely cost savings and value adds, it’s also process improvement around what is being sourced, and how it will affect the organization.

I caveat this with the organization should not mold itself around its sourcing department. The organization should mold itself around its overall strategy, and the sourcing strategy should support this. But if there are procedures (low level/tactical) changed by sourcing that will help the company achieve its goals, then these should be pursued.

Buy-In

As the sourcing organization moves to change the processes – and perhaps even some of the culture – of the organization, they cannot operate in a vacuum.

Any change initiative needs a guiding coalition, preferably upper management, and buy-in from managers at all levels. It will be up to the Director/Division Manager of the sourcing organization in the company to win that buy-in, and to communicate with upper management for their support.

This isn’t unique to sourcing. Any change initiative requires this. I would argue that sourcing needs it more since most people view sourcing or supply chain management generally as order takers, and resistance to change coming from this area may be greater.

Conclusion

The processes surrounding and effected by sourcing strategies within the organization for different areas of spend are just as much a part of total cost ownership as external factors. Sourcing professionals must take this into account when sourcing materials and services from a strategic level. Some organizations call these individuals Category Managers, and category management is a discipline all of its own with that broad focus. It’s up to the organization to determine how they will conduct their strategic sourcing, and they must do so with an eye to internal process improvement.

Finding Savings in Sourcing Before Cutting Headcount

Christopher Meyer Leave a comment

This post originally appeared on my author blog The Red Renegade on February 24, 2017.

The Office Space Effect

Many remember (and chuckle, and seethe) at the scenes in the movie “Office Space” when the consultants are grilling the employees of the company to determine what they do to see if they are needed. Many in today’s workforce can relate to this. When companies need to save money or are trying to find efficiencies, where is the first place they look to cut?

Headcount.

The men and women that do the actual work in the company.

I am not advocating that executives cut their pay (though, that may help image-wise). I am a firm believer in free market capitalism and the freedom of people to amass as much wealth as they see fit. If the executives’ pay is the thing hurting the company though…

But cut the people that are making the company operate every day? Especially if those people are effective at their job? That makes no sense to me. (Note: I said if the people were effective at doing their job. If they’re not: fire them.)

Rarely do companies look at their sourcing activities, as well as other internal processes within the company, to cut the budget.

Developing more effective sourcing techniques and improving processes, and reducing total cost ownership will do more for a company, both up front and long term, than slashing headcount.

NOTE: I use the following terms here interchangeably.
•RFP/RFQ/Solicitation for Bids
•Supplier/Vendor/Contractor

Developing More Effective Sourcing Techniques and Improving Processes

This is anecdotal and I don’t have any hard data to back it up, but I am finding that many medium and even larger companies don’t have a central procurement/sourcing department, or a department within their organization that leads and monitors that function. Purchase orders are done as lists on excel spreadsheets, or over the phone. Many times supervisors or crew leaders simply go to the vendor with a credit card. This is an ineffective way of sourcing the company’s needs.

How do these companies know they’re getting the best price? Because the vendor tells them? Unfortunately, “Our supplier tells us we are getting the best price.” is the answer I hear time and time again, both in other companies and in the company I work for.

Developing effective sourcing techniques can help reduce costs almost immediately. Just a simple RFP can produce lower purchase prices. (We’ll talk more about purchase pricing below under reducing total cost ownership.)

The company I work for did this with their MRO. They discovered on some items which suppliers were telling us we were getting the best price we were being charged a 400% mark-up. When we asked the supplier why, the supplier’s response was, “You never asked.” It was no wonder these suppliers “loved us” so much – we took them at their word when they said we were getting the best price, and were able to overcharge us exponentially.

Control of bidding, purchase orders, and contracts – everything that goes into sourcing – with a central sourcing department, or at least one department within the organization that is given responsibility and accountability for this function, helps, too. They can work to set company policies, processes, and procedures around sourcing and, with upper management support, enforce it.

This is where your Lean and Six Sigma ninjas come in, too. Perhaps there are already procurement processes within the company, but there is clearly room for improvement. Mapping the processes and their sub-steps, and leaning them out by removing steps and/or red tape will save in work hours alone – and time is money. It doesn’t take spending millions on a consultant like McKinsey and Company, or Accenture to do this. Companies can do this themselves.

Developing better negotiating tactics and techniques can help, too. The Institute for Supply Management (ISM) includes many techniques for negotiations in their CPSM Study Guide. And there are lower cost consultants and webinars out there that can help your company hone their negotiating skills. (Yes, I do have a bias against the bigger supply chain consultants. There might be some bitterness there. (There’s definitely bitterness.))

Finally, control of the procurement process, and by extension payment of suppliers, helps save. While there are some instances where parts or services are needed in less than 24 hours – I emphasize some – 95% of the time this is due to poor planning on the part of the Project Manager, the sourcing department, and the warehouses. (Note my use of and not or. It’s a team effort, and if one fails, they all fail.)

The company should limit who can input requests for orders, who can approve and issue these requests and orders, and then keep a close eye on invoices to ensure they match quoted pricing.

Working closely with the company’s warehouses can help set minimums and maximums (min/max) on materials so that what is needed most is in stock when it’s needed, while working estimates and forecasts on past spend and usage and upcoming project earlier can ensure that if additional materials or services are needed they are sourced well in advance. Having pre-negotiated agreements across the company with a handful of suppliers can ensure that support is provided when needed, and new one-off contracts aren’t being constantly issued.

Reducing Total Cost Ownership

So your company has a handle on its sourcing of materials and services. Controls are in place, and the processes have been made lean, mean, sourcing machines. Money is being saved.

But not enough.

The next thing a company should look at is the total cost ownership of the materials and services they are sourcing.

Here’s an example:

Lean Corp wants to go out for bid for buying and installing widgets. (Very original, I know.) They send out a RFP to five vendors. The bids come back, and Lean Corp short lists two of the vendors: Cheapo Co, and Quality Co.

Cheapo  Co can provide the widgets for $10, and charge $10/hour for installation.

Quality Co can also provide the widgets for $10 (widgets are probably a commodity, like steel), and charge $20/hour for installation.

At face value, Cheapo Co is the low bidder.

But there’s a catch.

Cheapo Co takes 3 hours to install each widget! That’s $30 of installation per widget!

Quality Co, on the other hand, only takes an hour to install each widget; $20 of installation per widget. And the equipment is up and running faster, meaning less downtime, meaning Lean Corp can produce more, sooner.

Lean Corp brings both vendors in for negotiations.

Cheapo Co won’t budge on their pricing, and offer very little extra for their services. C’mon, they’re clearly the low bid! They know it! They’ve been working with Lean Corp for over a decade and the working relationship is great. And Cheapo Co’s owner is golfing buddies with two of the VPs of Lean Corp. Why would Lean Corp want to award to anyone else?

Quality Co, on the other hand, offers extended warranties on the widgets they install, and they offer up to 10 business days of training per year at no charge, a value of $15,000.

That training has downstream effects in Lean Corp: the training which Quality Co provides increases the knowledge of Lean Corp mechanics and reduces rework they have to do, and reduces downtime of the equipment by dozens of hours per year – remember time is money. The additional cost reduction is compounded by the value added services Quality Co provides.

This is an extremely simplified example, but it gets the point across well.

Total Cost Ownership is a pricing model that takes into account everything before, during, and after the sourcing of a material or service. This includes (but is not limited to) materials that go into producing the thing being bought, labor hours that go into producing the material/service, overhead, freight, mark-up, how long it takes to provide the material or service, number of deliveries per week/month, estimated downtime, and inventory holding costs, to name a few.

Reducing the total cost ownership of the materials and services sourced, while working to increase the value added services the supplier provides, should be the goal of the organization trying to cut its costs, especially when trying to not cut overhead.

This can be done through negotiations with suppliers, or through internal efficiencies within the company itself.

Conclusion

Companies looking to reduce costs should develop more effective sourcing techniques and processes, and reduce their total cost ownership of materials and services before slashing headcount. This will not only create short-term wins, but a long-term, sustainable model of keeping costs low. It is up to senior and middle management of companies to enforce this so that it takes hold in the company’s culture.

Don’t misunderstand me: I am not advocating for never cutting headcount. If positions are completely outdated and unneeded, then they need to go. No need having the ten Accounts Payable clerks that were kept because that’s how many they had in the time before computers and now everything is automated so six of those clerks are being paid to check social media. And if individuals are truly underperforming, even after corrective actions, then they need to go.

Improving sourcing is where companies should start to cut their costs.