Strategic cost management

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

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

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:

Raw materials: Are there opportunities for reduced inventory in the supply chain? Might vendor stocking or consignment inventory help to reduce cost for you and the vendor? Are there inventory reduction and standardization opportunities available from design changes or from the level of assemblies that are purchased and stocked? This is often true when components are purchased for both production and service parts sales. Might vendors be able to back haul scrap in the same trip as deliveries? These kinds of issues should be discussed with vendors in a team atmosphere. Any opportunities will be opportunities for all.

Production and MRO supplies: Are there standardization or consolidation opportunities for supplies? Do vendor stocking and consignment inventory offer cost reduction opportunities? Can vendors offer reduced-cost alternatives to current products or services? Simplify the vendors’ lives, and yours becomes easier as well.

Maintenance contractors: Are there scheduling approaches that might reduce the cost of personnel, equipment, or scaffolding that are being used today? Should you consider seasonality or other customers in the scheduling of contractors? What kind of short-order and shipping premiums are you paying today, and how can they be avoided? Again, this is a natural team endeavor. Neither you nor the contractor can make significant progress on your own, and improvement will benefit both of you.

For commodity codes like MRO parts and capital equipment, the most productive approach is often just to ask vendors where the opportunities are. Substitute and standard products may be available from equipment vendors. Economies of scale, used equipment, and any number of other strategies may be available to those who ask the right questions. The vendors will usually know, and all are interested in repeat business.

Energy: Most utilities have programs to reduce cost through various kinds of cooperation between themselves and their customers. Engineering and other technical members of your staff may also be appropriate participants in these discussions. Utility organizations say that, for them, the hard part of saving money is getting customers’ attention focused on the opportunities.

Premium shipment cost is also addressable here. It is a special case and can be a clear indicator of weaknesses in your operation. Take this opportunity to discuss it with those in the organization who use it liberally. It is a lubricant that is even more costly and wasteful than petroleum.

It may also be that a few vendors provide opportunities for consolidation with others due to size, quality, or other considerations. These are difficult discussions, but the vendors that are chosen will have a fresh awareness of their positions in the overall picture, and you will have become a larger, more loyal customer to them.

The combined knowledge is out there to streamline systems and make teamwork with vendors more economical. Creating a team effort to accomplish the streamlining is what great managers do. The results could make your next February a much more pleasant and remunerative month.