Client Situation
A midmarket manufacturing company was squeezed between market pricing pressure and rising costs. It was spending 70 percent of its cost of goods on outside procurement but focusing the most improvement attention on labor costs. The company had difficulty prioritizing improvement for its many commodities and vendors while keeping up with day-to-day order flows and operating pressures.
Solution
A new CEO with deep supply chain experience, now a E78 team member, made supply chain a priority by using a targeting matrix. The matrix tool highlighted on one page the critical attributes of procured goods and service agreements and their business impact. It readily targeted opportunities with maximum improvement potential across direct costs, indirect costs, and company strategy. Indirect costs (those not on purchase orders, such as inspection hours, vendor certification, customer claims, etc.) had a sizable impact and were a key element of the matrix targeting. Also, by highlighting the impact of certain supplier relationships, the matrix approach played a key role in identifying potential initiatives, such as renegotiating some existing agreements and seeking new vendor partnerships.
Results
- Executing these initiatives increased company profit by 14 percent.
- The cost savings from several near-term opportunities helped pay for implementing larger, medium-term initiatives. Many of these more direct cost reductions came with reduced vendor counts, increased quality of received goods and services, and cuts in both inventory and receiving transactions, thereby reducing waste and inefficiency.
- Working capital reductions provided additional first-year cash flow.
- One of the initiatives also led directly to the creation and launch of an important new product line.
- The company’s supply chain, previously a suboptimal flow of procurement transactions, became a highly focused weapon in its competitive arsenal.
