Too Many Suppliers Spoil the Soup

Consolidating the supplier base can result in dramatic cost reduction. In Rick’s Materials Management Manifesto, the sixth element is, Too Many Suppliers Spoil the Soup. Many companies have a proliferation of suppliers, with many providing the same part or commodity. While the buyers may not have intended to develop a large base of suppliers, using RFQ’s for competitive costing, allowing engineers to select suppliers, having different buyers buy the same thing, and lack of coordination across large organizations can result in a large number of suppliers that provide similar commodities and parts.

Here’s how consolidating your supplier base can cut costs:

  1. Concentrated purchase volume results in greater volume discounts.
  2. Avoid the trap of different part numbers for the same part bought from different suppliers, which results in more inventory, numerous part stocking locations, obsolescence and increased transactions.
  3. Maintain control of purchasing, to prevent Engineering and other non-purchasing related buyers from choosing suppliers that aren’t optimal for service, quality and cost.

 

To reduce the number of suppliers, first prepare a simple list of where the money is going for the current fiscal year. List the supplier, the amount spent, and the key commodities bought. Then look for duplicates and commodity consolidation opportunities. As a general rule in small and middle market companies, if more than a dozen suppliers represent about 80% of the total spend, you have opportunities for consolidation.

One final note, as you undertake a consolidation program, use the opportunity to negotiate higher volume discounts, early payment discounts, and development of VMI and Kanban processes to reduce inventory. The results can be dramatic and make for great soup!

 

© – 2017 – Rick Pay – All Rights Reserved

Think Inside the Box To Reduce Costs

One of the areas where manufacturers and distributors can save untold levels of cost is packaging. One of my clients will save about a half-million dollars by reducing the size of its boxes by half. The current box was designed by their marketing department, and is much larger than necessary with costly photos and finishing.

This client has redesigned the box to still be very attractive, yet take up half the space. It will be packaged and mailed by the content supplier, so it doesn’t have to be received, put away, picked and shipped by my client. Because they can now put twice as many boxes on a pallet, shipping costs are much lower, and the boxes take up less room in the supplier’s warehouse. This simple change is saving about $500,000 per year.

What can we take away from this?

  1. When designing packaging, include representatives from marketing, purchasing, the warehouse and your suppliers.
  2. Smaller is better. Packaging can still be attractive and functional.
  3. Simplify the process – have suppliers do vendor-managed delivery if possible. The fewer times the product is touched, the cheaper it is.

For more on vendor managed inventory as a cost-saving approach, click here for a short video.

© 2014 – Rick Pay – All Rights Reserved

Creating a Preferred Supplier List

Many companies have too many suppliers. Bridget McCrea interviewed me for a recent article for Digi-Key Corporation on how to develop a preferred supplier list. By following six steps, companies can have great supplier partners while maintaining a comparatively small list of those suppliers.

The six steps for developing a good list of suppliers are:

  1. Start the process in the design phase – get your engineers involved so they can help you select suppliers with the appropriate technical capabilities.
  2. Look beyond the bottom-line costs – focus on Total Cost of Ownership (TCO) including logistics, obsolescence and cost of quality.
  3. Award extra points to suppliers who are willing to partner – use your suppliers as experts to help improve quality and reduce costs.
  4. Open up to your suppliers – keep them in the loop as to your needs, and have conversations with them about what the market is doing.
  5. Look for innovative partners – use them to develop auto-replenishment systems such as Vendor Managed Inventory and Kanban.
  6. Review the list regularly but change slowly – hold them accountable, but don’t change unless you have to.

Using these six steps, companies can create a short list of key supplier partners to provide innovative solutions at a lower cost with reliable supply.

© 2013 – Rick Pay – All Rights Reserved

Vendor Managed Inventory – Great for the Supplier Too

In a recent blog post I reviewed the benefits of VMI* to the customer, but there are great benefits for the supplier as well.

  • Develop a close long-term relationship with the customer
  • Become well-established (or even irreplaceable) as a key supplier
  • Increase exposure to additional sales/service opportunities
  • Smooth the flow of materials and revenue

Overall, a well-designed VMI relationship has great value for both parties, which is the hallmark of a partnership.

*Vendor Managed Inventory (VMI) is a type of auto replenishment system in which the supplier has access to customer inventory information and is responsible for maintaining the inventory levels required by the customer.

© 2013 – Rick Pay – All Rights Reserved

Benefits of Vendor Managed Inventory

Vendor Managed Inventory (VMI) is a collaborative approach that has great value for both the customer and the supplier. With VMI, the supplier has access to customer inventory information and is responsible for maintaining required inventory levels. It can be applied to more than just parts, and is often used for printed materials, supplies, equipment repair and so on.

Benefits to the customer include:

  • Reduced total cost of ownership
  • Improved service levels (lower stock outs)
  • Improved inventory turns
  • Reduced floor space
  • Reduced efforts on the part of buyers for replenishment
  • Reduced obsolete inventory

VMI can improve profitability and use of assets. Consideration needs to be given to which suppliers can be relied on, which parts should be covered, and what access the supplier will be given. Good planning and management are critical for success, but the rewards can be great.

© 2013 – Rick Pay – All Rights Reserved

Shining a Lean Light on Purchasing

Recently a client asked how purchasing activities change in a Lean environment. In both manufacturing and distribution, Lean or Toyota Production System (TPS) implementation affects material flow from suppliers to production. The focus on waste reduction can translate to lower materials cost.

Here are three ways that purchasing methods and activities look different in a Lean light:

Speed Without Waste

First, materials flow to the lines tends to be more “Just-In-Time.” Smaller, more frequent batches drive Purchasing to use blanket purchase orders with frequent, usually daily, releases. To prevent stock-outs while keeping inventory (one of the seven wastes of TPS) low, many companies use auto-replenishment systems such as Kanban and Vendor Managed Inventory (VMI).

Creative Cost-Cutting

Second, materials cost reduction takes on greater importance. Working with suppliers to improve quality, involving suppliers in design for cost reduction, and changing the way suppliers package and ship will all require increased attention from buyers.

Don’t be Shy

Third, the level of communication with suppliers increases dramatically in Lean purchasing. In order to eliminate waste and cut costs, buyers need to refine their supplier selection processes. In addition, openly sharing forecasts, product development plans and market activity changes the nature and frequency of supplier communications. Lean purchasers can’t be shy with their suppliers.

Lean presents new challenges to every part of your operations, including purchasing. Ultimately, the payoff is worth the effort.

© 2012 – Rick Pay – All Rights Reserved

Last-minute Customization: The Theory of Postponement for Highly Variable Items

If a product has high variability and low importance you can manage it with inventory, but using Kanban or VMI to allow for a quick response to a spike in demand. For these items you could build subassemblies or stock them in adherence with the theory of postponement.

The Trouble with High Variability

The theory of postponement was developed at Hewlett Packard in Vancouver, Washington and simply means that you finish the customization of the product at the last possible moment. When HP was shipping printers to Europe each printer was the same, but required a user manual in a specific language and a power plug that met regional standards. HP would build printers for France and others for Germany, ship them off, and find that they always shipped the wrong number. The product was highly important for the company but highly variable.

Last-minute Customization

HP learned to customize the product at the last moment by shipping printers without user manuals or power cords. The manuals and cords were added at a facility in Europe, so HP could cut inventory – and the costs associated with holding it – while increasing customer service levels. Engineers or designers can come up with solutions to make manufacturing flexible, enabling you to work around high variability.

© 2012 – Rick Pay – All Rights Reserved

Vendor Managed Inventory – A Too Frequently Overlooked Tool

I have talked to many purchasing personnel who will not use Vendor Managed Inventory (VMI) as a tool for inventory management in their companies. They have typically had a bad experience with suppliers overfilling bins, allowing stock outs, or they simply don’t trust suppliers to do the right thing related to stocking programs.

VMI is the process of having suppliers come in to the company to review current stock levels and order inventory as needed, and can include the supplier actually replenishing the stocking location with needed materials. It is often referred to as a “bread man” system since it was originally patterned after how bread is stocked in grocery stores.

Many vendor stocking programs focus on “C” items (those with low volume or value), such as fasteners, packing materials, or production supplies. While those materials are great targets for VMI, this overlooks other materials that suppliers can successfully manage. Basically, anything that can easily be visually managed, has short replenishment lead times (typically a couple of days to a week) and has a local supplier presence can be managed through VMI.

The biggest issue that stands in the way is trust. In a successful VMI program, an internal resource works with suppliers to:

1) Clearly define how the program will work and what the performance expectations are,

2) Monitor performance to assure the expectations are met, and

3) Meet with suppliers frequently to adjust inventory levels to meet the company’s future needs.

In other words, communication and trust are cornerstones of success with VMI; in fact, they are the cornerstones of any supplier relationship. How can you work with suppliers you don’t trust? Why would you?

The benefits of VMI are several –

1)    Reduced inventory levels

2)    Reduced stock outs

3)    Reduced internal cost of ordering and managing inventory

A final benefit is having the supplier actually see what is going on in your operation so they can make additional suggestions to improve service and cut costs, which is a true win/win for both organizations.

Don’t overlook this opportunity to significantly improve materials management in your organization. With solid processes and attention, VMI can be a home run for your company.

© 2011 – Rick Pay – All Rights reserved