Should Tariffs Hurt Your Customers?

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Recently I’ve had a number of discussions with company owners and other consultants about Trump’s tariffs. Many companies are wringing their hands due to the sharply increased costs on many commodities associated with the 25% tariffs, and in some cases, the lack of availability of materials. Do these tariffs need to have that big an impact on your company or your customers?

A recent editorial in the Wall Street Journal (My Customers Don’t Pay Trump’s Tariffs – July 1, 2019 p A17), shared the experience of the CEO of a consumer-electronics company that sources 90% of their products from China. Even though his products should have a 25% tariff, the company only experienced a 2% cost increase. How can that be? His purchasing department took a proactive partnership approach to his Chinese suppliers,  appealing to their best interests, and got price concessions that all but wiped out the impact of the tariffs.

There are three key elements you can use to mitigate the impact of tariffs on you and your customers:

  • Don’t use your buyers for buying! – They should be much more than order executers, they should be managing the supplier relationship.
  • Focus on Total Cost Of Ownership – It includes many costs not considered during product development and off-shoring activities.
  • Develop partnerships with suppliers – Focus on a few carefully selected suppliers for speed, quality improvement and cost reduction.

A strong supply chain strategy is vital to reduce or even eliminate the impact of the current tariff environment. If you would like a review of your Supply Chain Strategy, give me a call.

 

© 2019 – Rick Pay – All Rights Reserved

Which is Better, Margin or Turnover?

Recently I was fishing with a friend who is CFO of a significant ski industry company. He mentioned he’d been looking at their retail operations wondering if it’s better to make more margin or have higher turnover. After significant study, he concluded that turnover wins every time. Then our guide, who owns one of the leading outfitters in the region, chimed in and agreed that turnover is the key to success.

Many companies focus on improving margin, but if inventory sits on the shelf, what difference does margin make? The key is to move the product, even at a lower margin, achieving a turnover that produces revenue. Considering that holding inventory can cost 2 to 3% per month (or more if your industry is seasonal) and lack of movement means holding things until next season, turnover is the obvious choice. Clearly selling at a loss isn’t productive, but holding inventory to squeeze out a few more points of margin is a recipe for failure.

Are you turning your inventory quickly? If you aren’t achieving six to eight turns or more, call me.

© 2017 – Rick Pay – All Rights Reserved

Don’t Waste Your Buyers On Buying

A buyer’s primary job is to buy, right? Many companies require that buyers or purchasers simply execute purchase orders; assemble, issue and score RFQs; and negotiate deals with suppliers. That is all low value work!

In most cases, the focus and yield from those activities is getting parts on time so as not to shut down production or miss order shipments, and to try to get materials as cheaply as possible to reduce materials costs. Often companies find that at best, those activities might reduce costs 2 to 5% per year, but in many cases, commodity prices drive materials costs, so even that level of performance is hard to achieve. Not only that, but the best suppliers often don’t respond to RFQs, so quality and performance may be substandard as well.

So what is the best use of buyers? Turn them into Supplier Business Managers, to develop relationships with suppliers that can yield from 5% to 20% reductions in cost! An SBM’s key responsibilities are:

  • Rationalize the supplier base to focus on the few key/best suppliers
  • Develop and execute the supplier partnership program
  • Minimize inventory through use of auto-replenishment systems
  • Provide supplier performance feedback
  • Conduct supplier visits to review performance, capabilities and opportunities for outsourcing
  • Provide forecasts of future demand
  • Monitor commodity cost changes leading to adjusted agreements

These responsibilities can lead to much broader cost reductions than just cheaper materials costs. The overall supplier relationship can provide savings in many categories leading to 5 to 20% annual reductions and much lower inventory levels, freeing up cash.

How do you use your buyers? Can they be a major profit producer for your company? If you would like to explore how to make that transition, contact me.

 

© 2017 – Rick Pay – All Rights Reserved

Surprising Ways to Get the Best Pricing From Your Suppliers

Many companies start a supplier relationship with tough negotiating, driving down the price and asking for “give-aways to sweeten the pot,” like free freight. In my role as VP, Operations at a manufacturing company, our goal was to be our key suppliers’ most profitable account. But wait, isn’t that giving away money?

Not at all. Our suppliers gave us world class pricing, often much lower than our competitors. Here’s how we did it…

1) We researched industry cost structures to understand the components of cost – materials, labor, overhead and profit. We strove to leave profit alone (and actually added to it over time), but we were relentless in driving down the other costs through concurrent engineering (including the supplier in product design) and detailed understanding of shifts in commodities prices.

When we found savings in the product, or commodity prices moved in the market, we split the benefits with the supplier 50/50, so our profit and theirs would go up while bringing the overall cost down.

2) We required our suppliers to provide detailed cost structure information so we could both work on improving profitability. This required a high degree of trust, which is the foundation for mutually profitable partnerships. During frequent face-to-face meetings, we worked together to reduce total cost of ownership (TCO) of the item, again splitting the benefits between both parties.

Over time, the profit numbers grew while the total cost shrank – a win/win in a true supplier partnership. As a side benefit, when we needed extra effort from our suppliers, they were more than willing to go the extra mile because we were their most profitable account.

What kind of partnerships does your company have with its suppliers? Do they give you world class pricing?

© 2017 – Rick Pay – All Rights Reserved.

Innovation Can Help Offset Negative Changes

The Wall Street Journal and Vistage recently conducted a survey of CEOs of small business ($1 million to $20 million) about the election’s impact on their businesses. As you’d expect, the CEOs saw both positive and negative potential outcomes, but they held an underlying assumption that the activities and practices of their businesses will remain more or less the same.

One issue is the impact of labor availability and increasing hourly labor costs (3.6% per year) on small businesses. The survey suggested that automation might be the solution, and it could certainly help. Unfortunately the survey didn’t explore changing the way labor is applied by eliminating processes that add little or no value, improving productivity in the remaining processes, and applying approaches such as Lean, Six Sigma, or World Class Manufacturing.

Another issue the survey addresses is changing trade practices under the new administration which could limit the availability of materials, create shortages increase costs. Once again, the authors didn’t consider the benefits of managing supply chains in partnership with suppliers to prepare for and respond to those changes in trade policy.

In my new book 1+1=100: Achieving Breakthrough Results Through Partnerships, I  devoted two chapters to supplier partnerships and how companies can more than offset the changing global trade environment through partnerships with their suppliers.

Is your company ready for change? Are you thinking innovatively to get ready for those changes? Do your operations strategies include disruptive ideas to keep you in the top 10% of your industry? To find out how you can make rapid innovations in your company to prepare for the future, give me a call.

 

© 2016 – Rick Pay – All Rights Reserved

Maximize Profit Through Smart Pricing Choices

To raise profits, many companies turn to across the board price increases. They analyze the business’s performance, decide that profits aren’t high enough, and then implement a price increase to produce higher returns. The problem is, all products don’t perform the same, and this kind of price increase can actually reduce profits by driving away business, and reducing total return on your best products.

Examine the Data

In order to maximize profits, seek first to understand. One of the most powerful tools I use to help understand materials and product flow is the “Turn and Earn Report.” This report lists revenue, cost, inventory levels, turns, margins and several other key metrics by stock keeping unit (SKU) or part number. It’s used mostly in wholesale distribution environments, but it can also benefit manufacturing companies to help assess return on products.

Increase or Decrease?

First, look at which products comprise the top 10% of total profits and those that yield the bottom 20% of profits. Often you’ll find that the bottom items actually have negative margins. When you adjust prices, you might actually try reducing prices on the top items, as it may cause them to sell even faster, raising the total profit produced.

Raise prices on the lower profit items, which will either raise profits, or drive demand from the lower demand items to the higher demand items that have better margins. Then you might be able to eliminate the lower items, which will reduce costs and create even more profit.

Don’t just take the easy way out. Examining the data can help you make smart choices about pricing and increase your profit without increasing prices on every item.

© 2014 – Rick Pay – All Rights Reserved.

Three Ways to Get More Space

Before

Many companies are trying to reduce their inventory to free up cash or create additional space for production or new products. Often, companies believe they need additional floor space or new technology in order to optimize storage and inventory processing. What I have found over my career (both in warehouse and manufacturing management) and working with clients in manufacturing and distribution is that you can uncover as much as 25% to 40% additional space simply by getting rid of clutter!

Clutter comes in three forms – first there is actual clutter: things you store that you don’t really need. This step is like cleaning out the garage and getting rid of old equipment, old computers, boxes of records, etc. One client found two barbeques buried under clutter that they had bought for an employee picnic, but forgot they had. Another had a couple of vintage cars parked in the middle of their warehouse.

 

After

Second, there is old inventory. Many companies hold on to old inventory because they might be able to sell it sometime. They claim it really isn’t obsolete, so they hang on to it. I call that “GSM” – glacially slow moving inventory. Since the cost of holding inventory is typically north of 2% per month, there is a cost to sitting on it. Get rid of it.

Third, consolidate suppliers. Having multiple suppliers often means having multiple parts that do the same thing. The more part numbers, the more space is required to store it. By getting rid of suppliers (supplier rationalization), you’ll reduce part numbers, probably lower your materials costs and release space for other needs.

Clutter comes in many forms. Do you have clutter in your warehouse or manufacturing facility? Can you see it? Do you know how to get rid of it?

© 2014 – Rick Pay – All Rights Reserved

How Can Your Business Benefit From Temporary Workers?

The use of temporary workers is on the rise in the United States. Manufacturers and other companies are using temps to help contain expenses and supplement the workforce, creating a boom in the staffing industry. A recent WSJ article points out that temp jobs represent a large portion (over 25%) of all job gains in March 2014. One of the reasons is the increased flexibility that temps provide.

In the short run, labor is a fixed cost. Companies that lay off permanent workers for short periods of time in response to demand variability risk losing those workers and getting a reputation as a bad place to work. Using overtime and temps creates a variable cost, which allows companies to better balance their labor costs with market place demand. Using temps as one means of managing costs and output allows companies to increase service levels and profitability.

Many companies won’t use temps due to a fear of decreased quality and productivity. However, when you work in partnership with the temp agencies to prescreen and pre-train workers on basic skills such as teamwork, Lean, quality and basic technical skills, the workers can enter the workplace at a level of competence that equals that of lower level permanent workers. Using internal mentors can bring them up to speed even faster.

Don’t overlook temps as an effective supplement to your workforce. Contact me find out how you can develop a strategy to use this key resource without compromising quality.

© 2014 – Rick Pay – All Rights Reserved

Cost Accounting: Yours and Your Suppliers’

In my last post I looked at two reasons why companies don’t take a TCO perspective on purchasing. An additional reason is the Cost Accounting system. If you’re only looking at part price when you analyze your cost of materials, you’re only seeing half the picture. There is tremendous opportunity for cost savings when you look beyond part price.

The biggest components of cost of goods sold are materials, labor, operating supplies and overhead. Elements of materials cost include freight, scrap, yield loss, obsolete, inventory adjustments, etc. These are all great places to look for potential savings. In many cases, these kinds of cost savings aren’t even low-hanging fruit; they are fruit that is already lying on the ground.

Your suppliers have these same issues, so if you have a partnership in place, you can suggest that your suppliers reduce their costs and pass the savings on to you. Toyota spends 50% of their manufacturing engineering time at their suppliers, working to reduce costs. Encouraging your suppliers to go lean saves you money.

When I was VP Ops at a manufacturer, we asked our suppliers to share their cost structure with us, which made them nervous at first. However, we promised not to force them to go below the industry average for profit margin. We also guaranteed that anytime they found a way to cut costs and passed the savings on to us, we’d split it with them, in essence rewarding them for finding new ways to reduce costs. Over time, we became their most profitable account, and they became our world-class supplier for parts. No one could provide it cheaper than they could because we worked with them to reduce the costs.

© 2012 – Rick Pay – All Rights Reserved

Reducing Materials Cost Volatility – Blanket Purchase Orders

There are a number of ways to reduce materials costs or at least make them more predictable in volatile times. One method is using blanket purchase orders.

A blanket purchase order is a long-term agreement between a customer and a supplier specifying the purchase of one or more items and defining the volume, usually for a one-year period. It has one purchase order number with multiple releases that can occur as frequently as several times a day.

There are numerous benefits to using blanket POs. Issuing the PO once and then putting releases against it cuts down on processing and streamlines the purchasing and invoicing processes. The primary advantage is that the pricing for the items on the blanket is based on the total volume the blanket represents. For example, many blankets cover a period of a year, so the price is based on the annual amount you plan to use rather than the smaller amount on individual POs. A blanket allows you to take advantage of that annual volume for cost reduction.

A common belief with blanket POs is that the annual volume defined in the blanket is a commitment to buy, but nothing could be further from the truth. The commitment is what you make it to be. In my past experience with blankets, we would commit to the supplier’s lead time, which was usually 30 days, so our actual commitment was 1/12th of the total volume of the blanket.

To use blanket POs effectively you need to communicate frequently with the supplier so they can see any volume changes that your business might be experiencing. You also need agreements with the supplier that any purchases or production on their part outside of the commitment is at their risk. However, the benefit to the supplier is that they effectively lock in your business for a year and they have visibility to the volume changes you are experiencing (which hopefully are up!).

Blanket POs can be a powerful tool for materials cost reduction and, properly constructed, can represent a true win/win for both parties.

© 2012 – Rick Pay – All Rights Reserved