Case Studies
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Decision Support
Oganisational
Development
Tactical
Purchase Cost Reduction
Strategic
Purchase Cost Reduction
Training
The Problem
We were working with a client on a target cost project. In this we were identifying the components of the purchased item (i.e. materials, labour, overheads and profit) and attempting to synthesise the price that would result. The question was "what is the probability that our synthesised profit for the supplier is correct?"
Our approach
One issue is that each component of the synthesis (e.g. a particular raw material) could have a range of possible values. Traditional methods using spreadsheets can only deal with one value for each component at a time. In other words, spreadsheet analyses show us a possible value but not the probable value.
To get a probable value, we would have to take each value of each component and combine it with every possible value of the other components in turn. From this we could draw a frequency chart that would give us a way of estimating the probable value. However, this requires thousands of calculations and would take too long using conventional methods.
Fortunately, we have a software tool that does it for us in a matter of minutes!
The Outcome
Using our software tool, we were able to construct a probability diagram
very quickly and to quickly show the probability of the supplier making a
particular profit or range of profit - or even the probability that the
supplier didn't make a loss.
Result
The result was that we were able to go into negotiations with the
supplier armed with detailed calculations and assumptions. The important
point was not that these were 100% correct but that we had the basis of
challenging the supplier's costs. The result was agreed ways of reducing
costs by 17% without loss of quality.
The Problem
Our client was a newly formed Purchasing team for a service department within a major multinational manufacturer. The service department was very aggressive and professional in its approach to winning business and was very successful. The Purchasing team was tasked with buying sub-contract services in such a way that profit targets were achieved, risk reduced and service levels met. What purchasing strategy and organisation structure should they adopt?
Our approach
Our starting point was to understand what the business needed and what
the supply markets could offer. We did this through a mixture of
face-to-face interviews, questionnaires and supplier visits. We also did
some desk research into the market structures, industry cost structures and
major trends.
Having gathered this information we drew out initial major themes and debated them in workshops with the buyers. Using analytical tools such as PEST, Porter's 5 Forces, Portfolio Positioning and SW-ISS analyses, we drew out the key messages and developed focused strategies for each of the supply markets.
These strategies were designed to help deliver business objectives and so demonstrate the value that professional procurement and supply chain personnel could add to business success. This was delivered to business managers in presentations and workshops.
The Outcome
The development of the procurement strategies showed that major changes
were needed in a number of areas. These included the organisation structure
(to align procurement and sales efforts), performance measures (a move away
from the traditional price, quality and delivery measures) and buyer
behaviours and attributes (some of which were changed through training and
some by recruitment).
Result
Twelve months after the assignment, the performance of the Procurement
team had changed to such an extent that they are no longer seen as a support
team carrying out mainly administrative tasks but a valued part of the total
business. So much so that the procurement function has widened the scope of
its role to be more of a commercial team, received a 40% increase in its
operating budget and increased buyers' salaries by an average of 60%.
Tactical Purchase Cost Reduction
The Problem
Our client initially believed that they were getting good service at a reasonable cost from their photocopier provider. The supplier was always on-hand to move machines to a different location in the building at a "very low cost of £50 per machine". In addition, a 3% price reduction had just been secured for the coming year. Our challenge was to find a way of significantly reducing the cost without affecting the "service".
Our approach
As with many of our cost reduction exercises, our approach was to make
challenges on three fronts - a cost challenge, a demand challenge and a
specification challenge.
For the cost challenge, our first task was to take an inventory of the photocopiers and then review the contract for how the total cost was determined.
The demand challenge was to see if photocopying needed to be done in all cases. The specification challenge was to review users' "needs" against their "wants".
The Outcome
We first benchmarked the price of the machines against other suppliers
of similar models and found a price gap.
We also found that the cost of using the photocopiers had changed recently - the old method was a straight "pence per copy". The new method, however, charged an initial fixed fee for up to "X" thousand copies and then a pence per copy. This had led our client to believe that they were getting some copies "free".
However, when we reviewed usage rates, we found that in many instances the photocopiers were being used for fewer copies than the maximum for the fixed portion of the cost. The old pence per copy basis resulted in a lower total cost.
By challenging the need to photocopy (by, for example, using e-mail to copy other people) and matching the appropriate machine to a department's need (i.e. volume usage) rather than want (i.e. the highest specification machine) we further reduced the cost.
Result
Following our presentation of this analysis to the supplier, machines
were replaced, pricing structures were altered and rebates obtained that
equated to a 47% reduction in costs.
The Problem
Our client had outsourced part of its service delivery to a number of suppliers. At the time of our project, there were eighteen of these suppliers who were used regularly across the business. The aim was to reduce this number with the objective of reducing overall costs without compromising quality.
Our approach
Our interviews of the key suppliers showed us that their costs were
largely fixed (a branch network supported by head office costs). By
identifying the components of the fixed costs, we could work with suppliers
on ways to reduce these elements. In the short term it also gave us the
basis for calculating the potential reduction in fee per case by spreading
the fixed cost element over a larger volume of work.
The Outcome
Having used the analysis to produce a new fee structure, the next task
was to decide how to allocate work between the chosen four suppliers. Using
a Genetic Algorithm approach, we optimised the allocation of work in such a
way that the overall cost was minimised. The model also allowed us to set
constraints (such as a particular supplier not getting more than a set
percentage of the overall workload).
Result
We achieved a saving of 17.2% (or £3.3m) compared to the previous fee
scales.
More importantly, we have achieved transparency in the suppliers' costs as a basis for working with them on longer term cost and service improvements that deliver even better value for money.
The Problem
Our client was the central UK Procurement department for a major insurance company. Their strategy was to keep the central department a small one, concentrating on key items and markets. The remaining procurement activities and buying responsibilities were to be kept within the individual business units. The issue was ensuring that these people outside central UK Procurement had the appropriate buying skills to carry out their duties.
Our Approach
We were tasked with developing and delivering training modules to
address this need.
The training was to be on three levels. These were a Foundation course for those new to procurement or those who purchased low value, low risk items; an Intermediate course for those who were likely to buy higher value items that have some supply risk attached to them; and an Advanced course for those who would be involved in cross-functional procurement and could develop competitive advantage through the way they structured supply chains.
The Outcome
The Foundation course comprises ten modules that are a mixture of "talk
and chalk", case studies and role playing and cover all aspects of
Procurement from the tasks of a buyer, through continuous improvement to
Managing the Buyer (for those who do not buy themselves but manage people
who do).
The Intermediate course builds on the Foundation level and is largely case study driven with key learning points drawn out in discussion groups.
The Advanced course is centred on the needs of the individual. It takes the form of identifying and agreeing objectives with a current Procurement project; preparing a plan of action; carrying out that plan; and regular one-to-one coaching and mentoring to learn "on the job".
The Result
To date, more than five hundred places have been filled on the
foundation course alone (our client estimates that this in itself has cost
saved more than £100,000 compared to the same people attending equivalent
public courses).
There is a general agreement across the company that all personnel now approach their procurement tasks with a greater sense of the need and means to achieve better value-for-money and the help that professional procurement provides in achieving that goal.
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