Thursday, 21 December 2006

Procurement Savings

A few years ago I was interim managing a procurement department in a medium sized organisation – the team had around 40 buyers (a mix of tactical and strategic buyers across a huge range of commodities).

The number one concern of the management team above me was – “What savings can the procurement team make”. Almost every day the drive was cost down.

All well and good and whilst some may argue that this isn’t modern thinking and is focusing just on the end result – it is a common theme in a great many organisations - it got me thinking about what a saving actually was.

You’d be surprised how complicated this got and how many meetings we had defining a saving. Let me shed some light on our discussions.

Finance – “A saving is only a saving if we see it on the bottom line” – i.e. my Pen cost $1 last year and 90 cents this year – that’s a 10 cent saving which I see in the bills I pay (it’s realised when it hits my P&L) – that’s all well and good I hear you cry but what if the people who manage the stationery now order extra goods with the difference – it’s still a saving yes but financially we’re in the same position as we were (albeit we have more inventory) as far as the bottom line is concerned where neutral (where we were) – no fiscal saving against budget.
What if my saving is on Future expenditure – one of our buyers did a fantastic deal with a major OEM with a significant reduction in cost across their range – great – the fact was it was unlikely that we’d procure that suppliers items in the next 12 months – so reduction in prices but no actual savings made.
Another buyer managed to reduce the acquisition cost of an item that ran into tens of thousands of dollars – fantastic – savings made – but wait a minute the contract with the customer that requires those goods is cost plus – oops – materials saving and margin reduction
A significant assembly in our manufacturing plant is failing – procurement pull out all the stops get the replacements in (pay extra for fast delivery and a premium for the supplier to divert the stock to us.) Extra money spent on Procurement and we’re above budget – but savings made when we look at the cost of non-supply – (outage in manufacture).
A particular range of equipment that we manufacture has a particular widget – we negotiate a new deal with the supplier of said widget and reduce the overall cost of production – problems arise however when we analyse the financial budget for the production and there was no detailed bill of materials (BOM) budget and therefore the financial forecast was a “finger in the air” – yes we made savings but against what – the original forecasted expenditure was flawed so we have nothing to baseline ourselves against and the difference in cost is lost in the accounts.

The moral of this tale is that when your looking to make procurement savings you need to

a) Define what a saving is/means to your organisation
Ensure everyone understand the rules of the game and what a saving is and when it is realised. Ensure that where people spend savings (as in the stationery example above) that adequate justification is given e.g. extra spend mitigate risk further down the line
b) Work against a defined (and costed) Bill of Materials – that way any savings (or increases) are easily identified.
b) Obtain sign off from the Project Manager and Finance when savings are made
Introduce a savings pro-forma where significant savings are identified and “signed off” by stakeholders – this then represents formal acceptance of your hard work.

Whilst there is so much more than “cost down” that Procurement can deliver – it’ll probably always be a significant part of Procurement activity so we hope you take heart in our cautionary tale and ensure that your hardwork is recognised.

RFID tags in Supply Chain

In this article we’d like to explore how widespread RFID usage is within supply chain around the world. The world’s big retail players seem to have embraced RFID over the last few years – but we’d love to know how this has flowed down and what readers experiences of RFID has been.

However, for those that don’t know – let’s look at the basics.

RFID Basics

Radio Frequency Identification or as it’s more commonly known asRFID is a method of identifying items through the use of electronic tags or transponders. These RFID Tags fall into two camps – passive (i.e. non powered) or active (powered). Even the most basic RFID tags can contain EEPROM data which can be used to store pertinent information on the item. These days RFID tags can be added to most things (clothing, components, engineering equipment to name a few.).

RFID Benefits

The benefits or using RFID within the supply chain are many – using them to help the management of inventory can result in fewer data input errors, automatic stock reconciliation etc etc.

A few years ago RFID was being bandied around as a panacea for Supply Chain a curer or all ills –

Some originally saw RFID as a barcode ‘killer – in our experience this is still to happen – and whilst the likes of Wall-Mart in the US, Marks and Spencers in the UK are two of a raft of retailers who have embraced RFID – we think it’s still to flow down to the small-medium sized organisation.

This is probably due to two factors – imagined complexity and cost – RFID is still thought of a tool for the big boys – small organisations may not have the staff who can capitalise on it and resellers and consultancies seem not to target smaller organisations – there is also a perceived barrier around cost – with many organisations thinking that RFID is expensive to implement.

So what are your experiences with RFID in the Supply Chain – how do you use it – how has it changed your business for the better – have you had any problems in it’s use– we’d love to hear about it.

Managing your supply chain with Microsoft Axapta

One of the products that has been under our radar of late is Microsoft Axapta (or Microsoft Dyamics AX for it’s proper title).

Microsoft Axapta is a a multilanguage, multicurrency enterprise resource planning (ERP) solution which Microsoft says it “automates sales and purchasing and streamlines intercompany operations. And because it was built for the Internet, your sales team can access, view, and update customer and company information anytime, anywhere.”

Designed for mid size to large companies it has a number of modules of use to supply chain professionals and aims to integrate the supply chain Enterprise to Enterprise across both company and geographical boundries.

Modules cover the basics of Warehouse Management, Procurement, Trade and Sales.

Given the glut of ERP systems in the marketplace – we’d love to hear comments on this one how’s it fare? Good points and bad – we’d like to hear it.

Supply Chain metrics

One of the key elements of any business today is it’s reliance on metrics and KPI’s ( Key Performance indicators) – gone is the time when the only indicator was profit and loss – today’s business relies on a myriad of measures to ensure it’s business remains on track.

This is especially true within Supply Chain. Supply chain benefits (usually) from producing a wealth of data in it’s day to day transactions – think about purchase orders being raised, invoices being paid, stock being issues etc. Supply chain therefore should be able to produce some compelling analysis of it’s business – but for many the questions is what to measure.

Having worked within Supply chain for many years I don’t think that there is a definitive answer – Metrics are often aligned to the industry sector that the business operates from. And different businesses weight different activies differently. Any metrics should usually filter up towards business targets so you'll want to make sure that your analysis supports this.

However in my opinion you can often distill supply chain metrics down to a number of core constituents. The following 3 supply chain metrics are the basic raw materials for procurement that we tend to start off with – there are plenty of others out there but this should get you thinking.

1/ Number of Suppliers

One of the key elements for any organisation are the suppliers that they are transacting with – when working with clients the first port of call is to look at the Supplier profile – i.e. take a period say an accounting year – then list all the suppliers that were transacted with (this can be taken from either the purchase ledger or order book)

2/ Spend Profile

The next step is to add in the financials - Add in the money that was spent with each supplier. For later analysis we throw in a category now that could be commodity based (this is what we usually use) or geographical – something that’s relevant to your business. Once this is complete you then have something tangible to look at - clients are often suprised by how many suppliers they have for commodities such as logistics or stationery -

3/ Supplier performance

Lastly – try to analyse the suppliers performance – we usually look at Supplier Schedule Adherance – we measure that (albeit crudely) as “did my supplier deliver on or before the date I requested”. Now I now that for some early delivery represents a penalty but we tend to start out with the crude measure and go from there.

Once you've got those 3 down - think of some targets that you want - for example do you want to rationalise your supply base? Do you need your schedule adherance improving? Linking targets to analysis can often form the basis of improvment plans.

Over to you – we’d love to know what supply chain metrics that you use.

Welcome to supply chain city

Hi - welcome to our new blog - here at supply chain city we aim to cover the hot topics of supply chain and procurement - we'd love to hear from you as well - so don't forget to contribute and comment.

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