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Using Purchasing to Improve Margins

The consensus is that we are in an economic recovery for 2010 and 2011.  As evidence of that, I see a lot of companies focusing on improving margins to insure that they continue to prosper and to better position themselves during recovery.

What does margin improvement entail?  There are two basic options – raise prices or lower costs.  Raising prices has never been easy, now that you face global competition, it can be a risky approach.  Reducing total cost which includes manufacturing, purchased materials and services, including transportation, has several benefits.  Done correctly, you take cost out of your system permanently by developing collaborative programs with both suppliers and customers.  In this newsletter, I will focus on how Purchasing can deliver cost reductions that will improve margins.

One of my manufacturing clients asked me to work with them to improve the margin on 15 of their best selling items.  Here are the action steps that we developed:

  • Create costed bills – of – material for each of the SKU’s. A costed bill is easy to create, have your finance people look up the purchased costs for each item on the bill as well as the labor cost associated with the product.
  • Identify the highest cost purchased items for each product.
  • Develop the cost history for the last 3 years. If you do not have the data, ask your suppliers to bring it when you schedule the meetings that I will discuss below.
  • Compare that history to market information by using Bureau of Labor Statistics price indices or published commodity information
  • Get actual product samples of each high cost component. Many times seeing the differences for the same type of item used in one end product versus another can be quite revealing.

Once you have completed the information gathering, decide which suppliers and/or items to tackle first.  Schedule meetings with those suppliers and plan to introduce your 2010 margin improvement program.

Your plan for each meeting will be different based on the commodity, the number of suppliers that you have for a given item or commodity, and importantly how much competition exists in the marketplace.  If you identify purchased commodities or items that have not been market tested for a year or longer, then doing an RFP and validating your current pricing is a good first step before you engage your current supplier in the effort.

Most suppliers will try and respond positively when the customer – you – takes a collaborative approach.  I say “most” because you might get resistance.  But if the focus is on eliminating cost by working together, you have a better chance for success.  Document the ideas that are developed – assign responsibilities and dates.  Set a date for the next meeting.  Keep the process going, when you finish with the top 10 SKU’s, go on to the next 10, etc.

I am making an assumption that you have Purchasing people who can carry out this type of program with your guidance and support.  If you do not, then your margin improvement should start with developing someone in the company to take on this role.  That might require training or hiring new people which will be the subject for my next newsletter.

I am blogging for DC Velocity at http://blogs.dcvelocity.com/consumergoods  I invite you to click on the link and see the current posts.  There are several other industry experts who address subjects that might be of interest.  You will be able to view their blogs as well.

I f you have any questions about the newsletter, I am happy to respond.  Please pass this newsletter on to others within or outside of your company who might find it useful.  If you do not want to receive future newsletters, reply accordingly.

Herb Shields
HCS Consulting

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