Tag Archives: cost containment

Conversation starters

Keep looking forward, don’t forget the basics, and what goes around comes around.  Those three messages were at the heart of three conversations I have had with magazine and web editors recently.

After I spoke at the first Drug, Chemical & Associated Technologies Association (DCAT) “Sharp Sourcing” event, Rob Wright, editor in chief of Life Sciences Leader took note of this video that I shared about the technology outlook for 2020. It underscores the need for procurement organizations to look for innovations from suppliers – especially in supply chain transparency, sustainability, and value that positions your organization for success. Identifying key suppliers and building strategic relationships are essential. Here’s the link to the blog post.

U.S. manufacturing is the phenomenon that is coming back around. I had a good conversation about that with Rachel Leisemann Immel, Associate Editor, IMPO. As the cost of labor in China has risen, the issues of distance, lag times, transportation costs and other risks are bringing manufacturing investments back to the U.S. I say “investments,” not “jobs” because the work that is coming back generally involves a good degree of automation, and fewer workers. Our discussion covered a lot of ground. You can find it here.

Finally, no matter what you are buying it’s always smart to know whatever you can about your suppliers’ costs. It’s a pretty basic part of procurement, but it can easily get sidelined when you get into strategic negotiations or are buying parts that are difficult to find. We covered those basics with Bridget McCrea at Digi-Key Corporation, which is in the electronic parts business.

Apple’s Supply Chain Skills Can Still Score

Apple may be getting beat up by critics for falling behind Samsung in sales and new features, but a recent tear-down of the iPhone 5S reveals that it still has a knack for fostering innovation from its suppliers.

The blog All Things D recently wrote about the tear-down by consulting firm IHS.

According to the report of the IHS analysis of the iPhone 5s 16G, Apple is likely paying about $191 for its components and another $8 for assembly. That means the iPhone’s manufacturing costs are no more than the $199 subsidized price consumers pay for a unit with a two-year contract. Whatever the carriers are paying Apple is all margin. Not bad.

However, that’s not the most interesting SRM story. Buried in the 5S components is a unique set of radio-frequency chips from as many as six different companies that are all collaborating with Apple. Considering the effort that it takes to create a strategic relationship with one supplier, you can imagine what it might have taken to bring six suppliers into an innovation-driven collaboration.

The result may have been worth it. The iPhone 5S has an integrated RF system that can be used in many parts of the world that have different LTE wireless standards. According to one analyst quoted, older Apple models might have been able to connect to five different LTE systems, the new one, 13. That means one model can be sold in many more global markets, and more international travelers are more likely to be able to use their own phones wherever they go. Simplifying manufacturing schedules and inventory in distribution could turn into nice savings for Apple. And the feature could be a nice benefit to people who travel extensively.

It may not have the head-turning appeal of the fingerprint sensor or snappy new graphics, but creating a more global-friendly iPhone could be a big win for the Apple supply chain team.

For Moto X, Customer Choice Trumps Cost of Sourcing

The Motorola X, AKA Moto X smartphone is the first mobile device designed under the Google-owned version of Motorola Mobility, and it’s expected to be available to consumers in the next few weeks.  The phone is going to be assembled in Ft. Worth, Texas, and that has supply chain significance because it will be a 2,200-employee case of re-shoring.
In a podcast interview with Chris Versace, Mark Randall, Motorola Mobility’s senior vice president of Supply Chain and Operations says the sourcing decision was essentially driven by a marketing decision, not cost. In the hyper-competitive smartphone market, Randall said Motorola wanted to give consumers the ability to customize their phones as they ordered online and still receive them within a few days. He said the only way they could reasonably do that was to build them in the U.S. for American purchasers.
By choosing various color combinations for buttons and the case, as well as memory, Randall said there could be as many as 2,000 variations of the phone.
Motorola’s decision to re-shore is interesting for several reasons. First, it shows how tightly integrated sourcing and sales can be. It’s an example of mass-produced combined with made-to-order. Second, it raises great questions about managing the supply of the various colored buttons and cases to meet an aggressive order-to-delivery timeline.
Third, the cost differential between assembly in the U.S. and assembly offshore had to be small because the premium Motorola can charge for offering customization cannot be that large. The smartphone market is too competitive.
And finally, this is a “build regionally” decision, not a “build in the U.S.A.” decision. To offer the same speed from order to delivery to consumers in Asia or South America, Motorola will assemble Moto Xs in China and Brazil.

Purchasers Suffer When Aluminum Shuffles

We might like to think that basic metal materials markets have enough producers and buyers around the world that they are generally pretty efficient — prices aren’t distorted by the actions of a few producers or buyers.

Then along comes an article such as this one in the New York Times on Sunday, July 21, which describes how Goldman Sachs owns an aluminum warehousing operation that reportedly shuffles huge aluminum ingots from building to building, in part to boost rental costs that can be passed on to purchasers.

A Shuffle of Aluminum, But to Banks, Pure Gold

According to the report, the activity is all legal but aggravating to aluminum processors. Since the practice involves a significant share of aluminum on the market, it may also be incrementally increasing prices.

If that’s the case, it’s time for some kind of action to end a cozy scheme and clear the market. I’m no fan of over-regulation, so perhaps the solution might be in creating more competition. There might be a business opportunity here.

Scott Sturzl CPSM, C.P.M., Vice President – Certification, Diversity & CSR for the Institute for Supply Management(tm), cautions “Looking beyond Goldman Sachs many in the Western world continue to believe market completion is alive and well and not being impacted by others. The big picture of this subject makes it difficult to connect the dots in ways that are useful to supply professionals. Category managers and senior execs of all types needing raw materials to create/develop/manufacture product for sale would do well to discuss and plan potential business impacts in the medium and longer term.”

It’s critical to understand how market prices are set and plan accordingly. Perhaps knowledge can lead us to market price transparency.

GAO Keen on Strategic Sourcing for Services

According to the U.S. General Accountability Office, the federal government  spent $307 billion to acquire services in its last fiscal year. Did they get good deals on all that work?  The GAO wasn’t so sure, so it turned to ISM, asking for examples of organizations that might have best practices that the federal government could put in place. Obviously, they came to the right place. ISM staff offered a list of supply management organizations that the GAO might interview, and in its report the GAO mentioned four tactics that it found important.
(1) Standardize requirements
(2) Understand cost drivers
(3) Leverage scale
(4) Prequalify suppliers
The GAO remarked that effective organizations did not treat all service purchases the same, and they had to be able to adapt tactics to changing conditions.
None of this should be a big surprise. It did come from “good sources” as it were.
The GAO might not be able to persuade the whole U.S. Government to follow those good practices, but that should not stop you from paying attention to them in your own work.
Here’s the link to the report summary and PDF.
Strategic Sourcing: Leading Commercial Practices Can Help Federal Agencies Increase Savings When Acquiring Services

Harvesting Cash from Suppliers is Reaping With a Sharp Sword

The Wall Street Journal today reports that Procter & Gamble is planning to extend its payment terms to suppliers by as much as 30 days — from an average of 45 days to a new target of 75 days.
The Journal reports that P&G was following the lead of many other large companies that were keeping their cash longer to help them fund expansions, investor dividends or other needs.
Of course, payment terms have been and always will be an important part of the total cost of ownership of anything in the supply chain. They are tools like many others. But as one of the sharpest of those tools, payment terms can cut two ways.
You may be comfortable that your tier one supplier can find funds at low interest rates to manage the situation without affecting deliveries to you or the overall health of the supplier. But the fact is, the more likely scenario is that tier ones will extend their own terms to tier two, and so on. Eventually, the shock of the change has to be absorbed.
How well do you know the financial health of every company at every level in your supply chain? Can you be sure there isn’t a service provider in your chain that has to meet a biweekly payroll, or some other upstream company that supplies a critical part on a razor-thin operating margin because it’s a startup or has put everything into an R&D effort? If so, you might be sowing the seeds of disaster at the same time you are harvesting what appears to be an easy source of cash.

ISM Report on Business: Working on the Edge

ISM released its August Report on Business – Manufacturing, and the news is not surprising considering the continuing European debt saga, Indian snafus such as the biggest power outage in history and other uncertainties. The index is just under the 50 mark — making it the second consecutive month of manufacturing decline after a run of 34 positive months. According to ISM, the overall economy is still growing, and that mixed result is reflected in comments from survey participants that ranged from “demand is strong” to “a marked slowing in business overall.” While it generally makes sense not to take great risks in the face of such uncertainties, there are also good opportunities for leverage if your company or your industry is one of those that still has positive momentum. Suppliers who see softening demand from other customers may be willing to trade margin for the certainty of your business. These are times when you can take advantage if you have been careful to build cost models for what you buy. The more you understand what drives the prices of your suppliers, the better position you’re in lower them without driving your supply base out of business.

Drought shock — are you prepared?

No big surprise to anyone who has been baking in record temperatures and drought conditions anywhere in the central part of the country, but today’s US Dept. of Agriculture food price forecast projects increases in the range of 2.5 to 3.5 percent for the remainder of 2012, and uncertainty about the full effect of the drought.
If grain or livestock is a category you source, are you prepared for “drought shock?”
How about the short term dip in beef prices as farmers sell off stock rather than pay higher costs for feed?

PMI breaks 3-year string of growth

The Institute for Supply Management’s Report on Business for Manufacturing dipped below 50% for the first time in almost three years — as reported at:
http://www.ism.ws/ISMReport/MfgROB.cfm
The highly respected index dropped from 53.5% to 49.7% — “indicating contraction in the manufacturing sector for the first time since July 2009.”
The new orders index also plummeted 12.5 percentage points to 47.8%.
In many ways, the news of the drop is not so remarkable as the strength of U.S. manufacturing for three straight years. It was a powerful engine that was pulling our economy along in spite of obstacles from all over the world that were thrown on its tracks. Now, finally, European debt woes, angst about China and other bad news has finally raised enough signal flags to slow down the train.
What this means for the future is still uncertain, but from my own practice, I do sense that old notions about business cycles aren’t relevant any more. Instead of simple “boom or bust” tactics, companies have recognized they need continuous improvement in the way they manage their supply chains. If this no-growth/slow-growth state is going to stick with us, supply managers are under steady pressure to drive cost improvements through to the bottom line.
To do that the CPO needs a deep pool of talent to manage the process. We are seeing continual transformation taking place.

The China “Equation” Isn’t One

Here’s an interesting analysis of sourcing from China from an interesting point of view — the real estate investors who own manufacturing facilities across the United States.
National Real Estate Investor – Made in America Again

The authors refer to a study by AlixPartners that projected the gap in manufacturing costs between the two countries will essentially close in another three years — based on wage inflation, exchange rates and freight costs. That same study also pointed out that between 2005 and 2008 the cost gap had shrunk from 22% to 5.5% between the two countries.
The speed at which China is “catching up” is also catching many analysts by surprise, but it also points out that the China “equation” is not really an equation. An equation represents a balance, whereas the situation in China is very dynamic. Sourcing from China has never been simple; it has always required careful analysis of costs and risks, and one of those risks has always been the fluidity of the situation. Right now, for instance, the Communist Party has been shaken by the purge of a senior official and potential criminal charges against his wife even as it is poised to make a huge transition of power to new leaders. It’s impossible to predict what impact that will have as it plays out.
At the same time, as we consult with companies operating in China we are finding many of their employees are excellent students of supply management. They are enthusiastically embracing best practices, and it’s clear they are not just focusing on exports to other countries, but creating supply chains to serve China’s own huge and growing appetite for consumer and business products. Will this drive new efficiencies and innovations that U.S. companies will want to purchase? Or will it fuel demand that will put upwards pressure on prices?
China is so big, and changing so fast that the answer is most likely, “yes.” To both.