Many executives ask me how to reduce costs more than the 3% – 5% often required annually by customers. Through many client engagements I’ve found that companies can reduce costs exponentially by reducing complexity. Companies of all types complexify the simple by allowing numbers of parts, suppliers, employees and so on to increase over time without considering what that does to costs.
There are several things you can do to simplify processes and reduce costs:
- Reduce the number of parts you carry – on an annual basis, eliminate those items that represent the least amount of sales in your portfolio. By developing a report on SKU movement, you can sort by number of units sold and see those SKUs that have low or no part movement. Eliminate the bottom 20% and you will reduce transactions in purchasing and accounting, warehouse space, cost of holding inventory, and obsolete inventory.
- Reduce the number of suppliers you buy from – if you buy a particular part from more than two suppliers, not only are you increasing costs, but you’re also introducing variation in quality which can result in even larger costs. Properly reducing the number of suppliers per part does not increase risk as some supply chain professionals think. Conducting an annual supplier rationalization exercise provides opportunities to reduce costs and receive higher volume discounts, all of which can dramatically improve your materials costs as a percent of sales.
- Improve product management through Ramp-down – this is the process of managing the backside of the product life-cycle curve. By managing older products and eliminating them in favor of newer products, not only do you keep your product assortment fresh, but you reduce the cost of obsolete inventory, reduce warehouse space taken by slow moving items and reduce inventory, thus freeing up cash.
Reducing complexity can have many benefits, not the least of which is dramatic improvement in profit and freeing up cash. Studies are easy to conduct which will show if you have overly complex processes and how to simplify to accelerate profit and growth.
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