Do More in 2009

We would like to share a few ideas that Herb Shield’s of HCS Consulting and a lecturer at IIT had provided. Herb is a good friend and contributor to Cadent Resources.

In his latest newsletter, Herb noted that Dr. Keith McKee, head of the Industrial Technology and Management Department stated:

“The normal response to an economic crisis is to do less – drive less, consume less, …spend less, etc. From a professional point of view, that is exactly the wrong action. As the economy becomes more challenging, you will be best served by doing more.”

Most companies have spent the 4th quarter focused on reducing expenses and headcount. I do not know of any company that has managed to shrink to greatness. Here are some purchasing and inventory suggestions on how your company can DO MORE in the first quarter that will positively impact profitability:

• Commodity prices have fallen dramatically. There is excess capacity in many industries. These represent big opportunities for Purchasing. Has your company reviewed your raw material, component, and service prices to be sure all “escalators” have been removed?


• Some of your key suppliers might be at risk. Have you met with their management to discuss their current business status (and yours) with the idea of collaborating more in 2009 to reduce total cost?


• Have you had service or cost issues with any of your suppliers? Now is an ideal time to seek out and develop business relationships with new companies.


• Did you do a year-end physical inventory? Perhaps it satisfied the auditors, but it did nothing to improve inventory accuracy. Start cycle counting in the first quarter so you can avoid the cost of next year’s physical and really improve inventory accuracy.


• How much excess and obsolete inventory did your company have at year-end? It will cost at least 25% to carry that inventory through 2009. There are several tactics that can be used to turn it into cash.


• Have you reviewed the sales forecast with purchasing, inventory, and key suppliers? What actions should be taken to avoid future excess inventory?

In addition to Herb’s wonderful suggestions, I have included a couple of additional ideas that may help drive profit:

• Apply the Pareto principle (80-20 rule) to prepare a “Descending Dollar” listing of your suppliers based on their latest 12-month spend and then classify each of your suppliers as an A, B, or C supplier. By organizing in this manner, it becomes quite clear which high dollar suppliers and associated items you should first spend your time on renegotiating pricing and terms.
  
  
  
  • A’s are typically the top 20% of your total suppliers that make up 80% of dollar volume purchased.
  
  
  • B’s are typically the next 15% of dollar volume purchased.
  
  
  • C’s are the remaining 5% of dollar volume suppliers.
  
  
  
  


• Perform an analysis to define your major spend categories. If items are spread across numerous vendors within a give category, evaluate the possibility of aggregating your spending within a category. This will allow you to consolidate your supply base and provide the impetus for suppliers to potentially offer more favorable pricing in return for increased business.


• Prepare a 12 month and 3 month average demand analysis by item in descending dollar volume. Compare the two to evaluate shifts in demand. Use this information to evaluate the reorder points and safety stock settings of your MRP system. You may be buying based on requirements that are no longer valid and are inflating your inventory or causing stock-outs.