Five Criteria for Evaluating Cost Savings Opportunities
posted by TURTLE & HUGHES in Perspectives
Cost savings can typically be found in many places, including the MRO procurement process, and they always require some sort of change. In our experience, the challenge is often prioritizing which savings opportunities to pursue now and then how to obtain sufficient support for implementation. The cost of a failed cost savings project is too high to pay – wasted time, loss of support from the organization and the very real dollars that were spent unnecessarily. Identifying and pursuing cost savings projects is a prime deliverable not only for an outsourced materials management company, but any organization committed to continuous improvement, increased profits and a healthier bottom line.
First and foremost, a successful supply chain professional should always have an arsenal of cost reduction projects under consideration that is constantly reviewed, prioritized and re-prioritized as new information is available. There is never a shortage of opportunities to pursue if one maintains a mindset of relentless attention to detail and the tenacity to dig in, validate the potential and convince the appropriate stakeholders to support the project. Hard savings in material and service costs, freight, increased efficiencies, warranty recapture, repair vs. replace, payment terms, operational expenses, etc., can be uncovered in just about any organization. In another article, we will dive deeper into the specific attributes to examine when searching for different types of savings opportunities, but for now the focus is on how to analyze the opportunities that have been identified using five criteria.
It should be obvious that a $100k savings is more attractive than a $5k cost reduction, but this is the starting point. Without sufficient IMPACT, alignment is often difficult to achieve.
At the start, the following question must be answered, “Can this be implemented based upon what is known about the process, organization, stakeholders, etc.?” If significant issues exist that could materially impede the execution of the project, pause must be taken until a higher level of confidence can be attained.
The investment time in the initiative must also be examined. The likelihood of success is often pegged to the DURATION of the project. A month or two is great, but anything longer that does not correlate to a very large IMPACT might become an unnecessary burden that affects more than the issue at hand.
A savings is typically not considered a hard savings unless it can be shown to reduce a tangible expense. If material must be consumed prior to implementing a new price, source or replacement product, the opportunity may not be available – yet. A great price may have to wait until the need to replenish arises unless the current balance on hand can be relieved through an alternate methodology.
Sometimes you need to have money to make (save) money. It may be necessary to pay for tooling, testing, production or even an initial or bulk quantity in order to reduce piece price costs. Constraints such as cash, warehousing space and ROI timelines must be known and considered in such instances. Pursuing and implementing cost savings are critical to the success of any organization. Very often the experience and acumen of a third-party provider is necessary to institute the change management processes required to reduce costs. Turtle & Hughes Integrated Supply has proven techniques, personnel, supply chain partners and analytics to increase your bottom line.