Looking for cost improvement? Try the low hanging fruit in purchasing.

Purchasing goods and services can account for 55% of your manufacturing sales dollar. Establishing a program to analyze and reduce these costs can have a strong impact on your bottom line.

What rock should you look under next for cost reduction? Many think they've gone there and back, and then some. Plum out of ideas with several labor reductions, travel and continuing education shut off, expense budgets chopped, and cuts in marketing outlays already down to the bone. Are you not willing to turn to production one more time for more output and cost economies

What do all these and most other foundry cost reduction initiatives typically have in common? They focus on the controllable, visible costs under our feet, within the four walls of our casting facilities.

The less obvious and less controllable opportunity lies externally, beyond your foundry's property lines. For most plants, it's their largest cost of doing business--goods and services provided by suppliers.

Ask yourself, how much is left to squeeze out of your budget? Yet outside your walls sits a mother-lode of ripe opportunity. Consider it external operations".

What would be the result if multifunctional teams began working with major supplier partners on joint improvement initiatives? Double-digit reductions in the total cost of purchased goods and services is almost a certainty.

Do You Have Low-Hanging Fruit?

Uncle Sam's annual survey of our nation's 370,000 manufacturing companies shows that approximately $0.55 of every sales dollar is purchases (Fig. 1). This means that total purchases including energy, information technology and manufacturing supplies average more than double production costs, yet there isn't time for our experts to work closely with major supplier counterparts.

The typical purchasing "rationale" of repetitive major buys being based on three bids or who was satisfactory the last purchase a plant made doesn't make as much sense with these figures. Often, individuals who have never seen the supplier's facilities make big dollar sourcing decisions.

Are you starting to visualize the orchard of low hanging fruit? Sounds too good to be true. Almost, in that it does require on-going concerted team effort supported by upper management.

Following are some key indicators that your foundry might be sitting on a mountain of cost improvement opportunity:

* individual functional departments within your casting facility make major dollar purchase decisions;

* no list of top 10-20 commodity annual purchases exists, long-term strategic plans and objectives for purchasing are not defined, and/or the results from the purchasing department are not monitored by senior management;

* large, repetitive, non-production purchases such as energy, information technology hardware and software voice and data communication, marketing literature and freight receive little to no attention in the purchasing process;

* supplier visits are limited to problem fixing necessities;

* few, if any, commodity supplies are single- or dual-sourced; most are split between three or more suppliers;

* the majority of supplier agreements, if they are contracts, are less than three years in duration;

* senior management communicates routinely with their counterparts at top customers, but not with top suppliers;

* contracted, agreed to joint annual improvement plans do not drive supplier performance evaluations;

* contracts contain annual price escalation clauses, instead of de-escalation guarantees or targets;

* multi-functional teams are not empowered to recommend and implement long-term major commodity buying strategies

If one of your company's top two cost drivers is supply chain cost, isn't it time to knock down the walls and head over to your suppliers' backyards? Said differently, how long can you afford not to develop supplier relations into a core company competency?

Some of the excuses that will be said include, "We are small and don't have much volume/dollar leverage," or "We have good, loyal suppliers who try hard to keep their costs competitive and, like us, they are having a hard time making ends meet".

A very thin line exists between supplier loyalty and blind allegiance. Don't you owe it to each other to work even closer together to combat the mutual enemy--costs of doing business with major suppliers? Can both management teams--foundry and supplier--sit down and agree on a game plan that focuses on "How can we help each other grow and prosper?" followed by "What areas should we focus on and prioritize?" Then establish joint multi-functional teams to address your purchasing situation, empower the team and turn it loose.

These teams should include: a member of marketing, who can focus on how purchasing decisions affect the end goals of the firm; a member of accounting, who can focus on how the purchasing decisions affect cost accounting and payables; a member of operations, the users of the products purchased; and a member of information technology, who can determine how to increase communications with suppliers.

The first step for this multi-functional team is to brainstorm how to address the current purchasing shortcomings. What data must be gathered? What has been spent on purchases of specific commodity products? What inventories are being held? Are suppliers continuously improving to serve our needs?

Once the brainstorming has completed, it is time to establish an activity roadmap (such as a GANTT chart) to outline the step-by-step process that will be followed to gather the necessary information and begin the communication process with suppliers. Accompanying this step-by-step process is a timetable for each objective.

Top Commodity Buys

Another approach for foundries is to focus on their top commodity spending such as energy costs. Most consume large dollars in this area. Shopping around periodically and buying it on "gut feel" can be risky.

Other alternatives exist, including the formation of consortiums with other similar size or, better yet, larger volume users on the same local distribution pipeline. Three or four manufacturing users with good summer and winter volumes can attract highly competitive supplier interest. With consortiums, each individual firm extends its individual volume leverage, yet signs its own separate limited obligation contract.

In some states, such as Illinois, trade associations can provide an "umbrella contract" for utilities. The Illinois Manufacturers Assn. (IMA) offers energy agreements for gas and electricity to its membership. These agreements can be competitive, and provide at least a benchmark to gauge the buying market conditions. With IMA, more than 500 member companies save 5-15% on their monthly electric bundled rates.

Although every foundry must check with a legal advisor before pursuing a consortium buying initiative, the benefits in cost reduction are worth the effort. If a foundry is hesitant of working with direct competitors, then form relationships with foundry non-competes, such as a brass foundry working with an iron and a steel counterpart. Another option is to work with a forging company, a glass manufacturer or a large assembly company that does a lot of in-house painting or metal reheating. How about working within your supply chain? Get together with a few key suppliers and/or customers and pool your volumes. After success with energy, open it up to other key dollar commodities, such as freight, insurance, voice and data communication systems, management information system services, and office equipment like computers and copiers.

Speaking of copiers, opportunities exist to convert traditional copiers to state-of-the-art "multi-functional devices" that cost-effectively make impressions that previously required up to four machines to do. A firm can save time and money reproducing what copiers, fax machines, laser and inkjet printers, and scanners did in the past. One $500 million Wisconsin manufacturer recently removed more than 95% of its printers and fax machines and all of its old copiers to save more than $100,000 annually.

Similar to something as basic as copiers, huge sustainable cost improvements exist in your foundry in every area suppliers touch. It merely takes a senior management defined, company-wide priority, elevating the biggest spend areas of purchases far beyond delegated individuals taking the lowest of three bids. Empowered multi-functional teams must spend time dedicated to the project of searching out cost savings in the purchasing arena in their department. Make this team create an activity roadmap over a four-month period and it will be amazing the bottom-line contribution each team uncovers.

For More information

For more information on the Illinois Manufacturers Assn. "Umbrella Contract" for gas and utility, visit www.ima-net.org.

Fig. 1

This chart illustrates the breakdown of the average typical dollar spent
at 370,000 manufacturing plants, and the cost centers it is directed
toward.


Purchases Production      45%
Other Expenses & Profit   25%
Direct Labor              20%
Purchases Non-Production  10%

Note: Table made from pie chart

About the Author

Ken Donminiak ([e-mail]) is a principal with Procurement Specialists, Inc. (tel: [phone]), Chicago, a purchasing/supplier relations facilitation firm specializing in manufacturing. He has presented seminars at AFS and is a Midwest Regional Board Member of The Assn. for Manufacturing Excellence.