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Happy New Year, and New Improved Cost Management too?

What is cost reduction and where do you need to focus your energies?

Your cost reduction should have a strategy, a plan that enables you to move forward and demonstrate improvements.  The strategy should be underpinned by data driven analysis.

The data should be multi-dimensional.  What are you spending your money, by each product and service, how many, with who, stock management and how are they purchased?  You should also consider the contractual position you have for each area of spend too.

And then, for each product/service identify the hours they help you generate in the manufacturing operation.

For example, cutting tool (a) has a spend of £20k, you used 1,000 of them from supplier x, you buy and manage the stock and you do not have a contract in place with the supplier.  Each tool has a life of 3 hours, so based on usage of 1,000 they help generate 3,000 hours of production in your manufacturing operations.

Armed with this data, you can now build a plan.  Is your cost reduction driven by improving profit/reducing spend or reducing bottlenecks to improve productivity?  or both?

Whatever it is, hopefully it is both, you need to work with your suppliers to make improvements that are based on your data, and you drive the agenda. 

We hope you are able to focus on both, as the unintended consequences of focusing on just one area could impact the other negatively.  Creating more capacity by introducing new tools is great, but they could mean you spend more overall, therefore leading to reduced profit.  Can you afford to do this?

But conversely, reducing spend could lead to a less efficient tool and therefore worsens your bottlenecks.  Can you afford be less productive?

Oh, and be mindful of improving tooling performance on machines/processes that are not a bottleneck.  You are saving NOTHING, just feeding another bottleneck further down the line, or in the future starving the current machine/process.

All of the above needs close relationships with your suppliers, and is therefore key.

But, there lies the next problem.  If you do not have a contract, you are not giving a commitment to the supplier.

The impact is that you will not be getting best price, and you are also creating a risk within your business, as liabilities will not be in your favour in the event of poor performance etc.  But, it is also impossible to manage so many suppliers to help you achieve your cost reduction targets.

So leverage your spend, consolidate suppliers to an optimum size, (note this could mean increasing number of suppliers if in sole source), contract with them on your terms, and then dictate the relationship by working to your plan.

But this must be data driven and dictated by you and not your suppliers.  Do not let suppliers come in and sell you the earth if does not fit in with your plan. 

All suppliers proclaim to have the worlds best product delivering multiple benefits, and we get wooed by them at a demonstration in a false environment, as we see coolant splashing all over the place and before we know it a finished product is there for all to see.

But does it solve a bottleneck, improve cycle-times where needed and does it reduce your spend, even if product price is more expensive?  If not, then why are you looking at it?

So, as you look to 2019 and beyond, consider your cost reduction strategy, the data, your supplier relationships, and how you leverage and manage those relationships.

About the author

The above blog has been supplied by Alliance Procurement Solutions

T: 07515 003472



The above blog has been kindly supplied by the above mentioned author. The inclusion of this content and any links to another web site, or any reference to any product or service by trade name, trademark, manufacturer, or otherwise, does not necessarily constitute or imply an endorsement or recommendation by D2N2 Growth Hub.