It’s no secret. Prices on everything have gone up and are going higher. What’s more, we can expect things to get worse — potentially much worse — before they get better.
Rising costs are putting all types of industrial facilities in a bind. Some inflation-driven costs may be passed on to clients; but go too far, and those customers could disappear.
Rather than risk losing customers, industrial facilities are now looking into several measures to help mitigate cost increases, or going one step further, to realize actual cost savings. One measure that is often overlooked is implementing a supply chain management system. This system focuses on the purchasing process you use to acquire parts and components needed to support your business operations.
As an example, let’s consider you are a manufacturer with three divisions, all operating in one large location. Each division has its own purchasing manager. To hasten deliveries and avoid the need for purchase approvals, each division manager makes smaller purchases, keeping the total amounts under the approval threshold. These items are then used in that division only.
However, the other two divisions, it turns out, are purchasing the same products, but once again, in smaller quantities to get around the approval process. While each division appreciates the opportunity to control its own orders and delivery schedule, there is a price to pay for such purchasing in terms of total expense to the organization.
If the left hand knew what the right hand was doing, these divisions could combine efforts and make larger, volume purchases. This would give the entire organization more leverage to negotiate with suppliers, resulting in possible product discounts, manufacturer rebates, and, most important, cost savings.
With our focus clarified, here are five ways industrial facilities can reduce costs with an effective supply chain management system in place.
1. Conduct a supply chain audit
What often happens in organizations with different divisions, as in our example, is that their purchasing arms tend to grow organically. This means different people are purchasing products in the various divisions/locations with no one person overseeing or in charge of procurement. When this happens, inefficiencies set in, and product costs go up.
A supply chain audit helps eliminate this. It identifies those responsible for purchasing, what processes are currently in place to purchase supplies for the entire organization and works to streamline the process so that just one person is, or a small group of people are, in charge of all procurement.
2. Conduct a vendor audit
Just as purchasing arms tend to grow organically, so do the lists of vendors supplying an organization. Different vendors may be selected to supply the same or similar products. Often this happens if the traditional supplier is out of stock on a product. To meet supply needs, another supplier is brought in who then builds an ongoing relationship with the organization.
Similar to a supply chain audit, designed to reduce the number of people in an organization who can purchase products, a vendor audit aims to reduce the number of vendors supplying products to the organization. This can improve efficiencies, potentially result in volume discounts, and reduce the high cost related to invoice processing.
3. Conduct a product audit
At this point in our journey to create an effective supply chain management program, we have reduced the number of people who can purchase items for the entire organization, along with the number of vendors serving the organization. Already, the supply chain management system is becoming more efficient, and this efficiency will help to reduce cost.
However, now we must examine all the products purchased for the organization to eliminate product redundancies — that is, two or more products purchased for the same purpose. But there is actually more to it than that. A product audit has four key components:
- Identifying all products currently purchased that are used for the same or similar purpose.
- Identifying the cost of each product.
- Determining which products appear to be the most effective.
- Determining which products are preferred by those using them.
It is especially important to include the users of the products in a product audit. For instance, in professional cleaning, contractors may set up “cleaning challenges.” The goal of these challenges is to evaluate various cleaning products and have cleaning workers report back on their effectiveness. Their feedback is essential. Almost always, one product will prove to be the best performer, the most cost effective, and the one preferred by users. And don’t be surprised if it is not the costliest product.
4. Work with a procurement specialist
Very often, a product ordered through vendor “A” must be purchased from vendor “B,” who then places an order with the national supplier, in this case, vendor “C.” All these layers of intermediaries can increase the cost of products. A procurement specialist, often part of a Group Purchasing Organization, or GPO, which we will discuss next, can eliminate these layers in the procurement process. Very often, they can purchase directly from the manufacturer. Cutting out all the connections in the supply chain can help reduce costs.
5. Group Purchasing Organizations (GPOs)
GPOs have long proven their value. A few years back, a consulting organization, Dobson DaVano & Associates, determined that hospitals were able to reduce their costs by as much as $838 billion, from 2008 to 2017, by working with GPOs. A GPO negotiates contracts between suppliers and organizations. GPOs serve exceptionally large organizations, such as hospitals as well as work with smaller organizations, helping them lower procurement costs as well.
These steps can help industrial facilities stay on top of rising operational costs during this inflationary period. Consider implementing these steps gradually, starting with the supply audit and then the vendor audit. As efficiencies are realized, the leadership team will want to go further. It’s a journey, with cost savings waiting at the end of the process.