Strategic cost management

Stanton McGroarty says partner with vendors that can help to reduce costs.

By J. Stanton McGroarty, CMfgE, CMRP, senior technical editor

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Depending upon when you’re reading this, it’s probably still a new year, and you know how 2012 financial results panned out. If you’re reading this you are probably still employed; that makes it time to identify some fresh miracles to perform in 2013. May I suggest cost reduction as a place to start?

One of the most painless areas of cost management can be vendor cost reduction. If it’s done as a team effort with the right vendors, it can actually be a bonding experience. After all, the same kind of sustainability you seek for your business is important to your vendors. They will be lonely if your work is sent to China or some other unhandy location.

In the unlikely event that your steel vendor is also your caterer, this should be coded as two different divisions, probably used by different departments.

With January behind us, it should be easy for your controller to order up a spreadsheet listing of all vendors with your total spending for each vendor in each of the past three years. A spreadsheet for your PC would be particularly handy, since you could add notes to it as you go. Make it one line per vendor. A vendor may be a company or, if one vendor fills several kinds of need, a separate line will be needed for each type of product or service they supply. For instance, in the unlikely event that your steel vendor is also your caterer, this should be coded as two different divisions, probably used by different departments.

Strangely, vendors aren’t usually identified as to the people or departments who deal with them. You will need to add this to your worksheet. There may be clues in the system. If you have multiple buyers, for instance, they may indicate which areas of the business are served by which vendors. At any rate, your purchasing people should be able to tell you which vendors deal with which departments.

You will also want to add a commodity code to each vendor line. Codes may include things like raw material, energy, MRO supplies, production supplies, capital equipment, and MRO parts.

The spreadsheet will be ready for action when you have a line for each vendor with at least the following information: vendor name, vendor number, yearly total spending, (your) manager, (your) department, and commodity code. Each line should also have space for a brief description of what is purchased from that vendor. The description may be provided by purchasing or by your manager who interfaces with the vendor. Other fields, such as rank of 2011 spending or quality or service ratings, may be added as you like.

Make a master sheet for your own use, placing them in order of 2012 spending. It is important, at least initially, to include all vendors. Assign a spending rank to each vendor to help you focus on them by importance. Next, divide the report up by managers and create worksheets for each of them, listing their vendors in rank order. This will make a Pareto approach easier, sharpening managers’ focus on larger vendors.

J. Stanton McGroarty, CMfgE, CMRP, is senior technical editor of Plant Services. He was formerly consulting manager for Strategic Asset Management International (SAMI), where he focused on project management and training for manufacturing, maintenance and reliability engineering. He has more than 30 years of manufacturing and maintenance experience in the automotive, defense, consumer products and process manufacturing industries. He holds a bachelor of science degree in mechanical engineering from the Detroit Institute of Technology and a master’s degree in management from Central Michigan University. He can be reached at smcgroarty@putman.net or check out his .

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If you are like most managers, the list described above will provide a new and enlightening view of your company’s vendor spending. The group of vendors that fall under control of each manager should be the subject of a meeting with you, the manager, his supervisor, and the purchasing or procurement person who deals with that vendor. The objective of this meeting should be to identify and achieve the cost management opportunities that each vendor represents.

The topics of discussion in these meetings will vary a lot depending on who the vendors are, what kinds of work or products they provide, and how much spending is involved. Here, arranged by commodity codes, are a few types of question that may promote useful discussion:

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