20 Reasons You’re Paying Too Much for Raw Materials – And How to Reduce Costs

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Raw material is often the single greatest expense for any manufacturing operation. It could range anywhere from 35 – 75% of total cost of goods sold depending on industry and the nature of the supply chain. Unfortunately, many manufacturing companies simply accept this as a “cost of doing business” and are reluctant to explore some of the many opportunities to reduce raw material costs. Some of these opportunities could be captured relatively easily and some require the execution of a longer-term Continuous Improvement strategy.

There are fundamentally three segments of your supply chain where there are opportunities to reduce raw material costs. Those segments are in sourcing, manufacturing, and post-manufacturing. The following are 20 reasons you’re paying too much for raw material:

Sourcing

  • Accepting higher prices instead of taking advantage or supplier market competition. Why not conduct a periodic sourcing analysis to determine the pricing and reliability of competing suppliers? This would give you the information you need to either negotiate prices or source new suppliers.
  • Paying higher prices by ordering smaller quantities from too many suppliers forgoing bulk discounts. The alternative would be to use a smaller number of suppliers to provide more of your materials, resulting in greater purchase volumes and lower prices.
  • Accepting higher prices due to not leveraging payment terms that would be favored by suppliers. Instead, offer to pay suppliers sooner in exchange for lower prices.
  • Accepting higher prices instead of utilizing points of leverage in supplier contracts to negotiate lower prices. The idea would be to assess your relationship with the supplier (including their past performance) to see if there is room for re-negotiating prices.
  • Accepting higher prices due to unwillingness to collaborate with your competitors to get bulk discounts.
  • Utilizing materials that are more expensive than what is needed for the product’s function.
  • Accepting higher prices due to unwillingness to commit to long-term purchasing contracts.
  • Purchasing materials at full rate instead of leveraging bargains. Conversely, monitor your supplier’s business cycles to identify when they would have excess inventory that they would be interested in selling at bargain prices. However, you will, in turn, need to maintain raw inventories and incur any shrinkage, obsolescence, and handling costs. This method is not typically recommended by could be effective in some cases.
  • Purchasing based on your manufacturing schedule instead of supplier’s production schedule. Suppliers are willing to offer discounts if you purchase on their schedule so they don’t need to maintain finished goods inventories. Again, you will, in turn, need to maintain raw inventories and incur any shrinkage, obsolescence, and handling costs. This method is not typically recommended by could be effective in some cases.

Manufacturing

  • High variation in filling or packing processes resulting in high fill targets and over-fill / over-pack. Instead, apply Six Sigma approaches of reducing variation so that overall target weights and over-fill can be reduced.
  • Scheduling using a “push” production model resulting in excess and obsolete inventories. The alternative would be to establish a “pull” production model using kanbans and safety stocks, resulting in controlled inventory levels and less excessive / obsolete materials
  • Scrap and material yield loss created by “leaks” in the system. The approach would be to identify and quantify the impact of leaks. Then implement process changes to close leaks and convert more wasted material into sale-able finished goods.
  • Too many low-consumption raw materials caused by high SKU complexity. Conversely, SKU’s could be rationalized so that smaller orders of raw materials could be reduced.
  • Over-application of material that customers do not find valuable due to over-designing products. Instead, work with customers to better understand the product’s function and remove materials or functions that are not useful to the customer.
  • Over-application of material that customers do not find valuable due to inefficient design. Again, work with customers to better understand the product’s function and explore design options that sufficiently address the need using less material.

Post-Manufacturing

  • Material lost in the supply chain process being scrapped or sent to the landfill instead of being recycled or reclaimed
  • High production costs for suppliers, which can be reduced by providing process improvement or project management services. An approach would be to provide Continuous Improvement services to help reduce the supplier’s operating costs in exchanged for reduced prices. This could be lucrative for suppliers since it helps them increase profit margins with other customers.
  • High supply chain costs for suppliers, which can be reduced by providing warehousing and distribution services. This allows your suppliers easier access to your local markets by utilizing your warehouse and distribution services. Then, you can negotiate lower prices and services fees per activity.
  • Accepting higher prices due to not leveraging buyers to take advantage of bulk discounts. Instead, work with your buyers to have them procure your raw materials. They can often get bulk discounts from your suppliers that you may not have access to. You can also offer your buyers lower prices since this will often result in significantly lower raw material costs on your end.
  • Too much shrinkage, or goods being lost, damaged, or stolen in the supply chain process.

The key to driving substantial improvement in raw materials is to use big data to quantify the opportunity for improvement in each of these areas and develop your plan of attack. The areas that have a combination of high impact, quick results, and low cost of implementation would receive higher priority. The items that do not provide a high short-term impact but contribute to an overall more efficient supply chain would require a more strategic approach to implementation. Most of these items have a place in your Continuous Improvement Strategy and if executed effectively, would set your supply chain up for significant cost reductions in raw material.

Copyright © Calvin L Williams blog at calvinlwilliams.com [2015]. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Calvin L Williams with appropriate and specific direction to the original content.

The Manufacturing Agility Index: Measuring the Efficiency of Change

Agility

How well does your organization handle change? Is it managed deliberately or do you use a shoot first, ask questions last approach to changes? What is the level of resistance that you face for easy process changes? What about the difficult ones?

Change is inevitable. The only choice we have is to proactively work to change for the better. And if you’re not actively getting better, then you only have one other way to go. Staying the same is just not a realistic expectation. This is the driving force behind the concept of Continuous Improvement.

In this post, I want to introduce the concept of the Agility Index, which is a measure of your organization or factory’s ability to process change. The lower the number, the more difficult change is; likewise the higher the number, the more agile the organization or process. The term Agile in business is much more popular in the world of software development and project management but the concept of Agile Manufacturing is increasing in popularity driven by the realization that markets are demanding greater variety and Agility can absolutely help drive down manufacturing costs. Agile Manufacturing is a relatively underdeveloped discipline that many believe is the next step in productivity to Lean Manufacturing. However, in my view, Lean and Agile are uniquely independent disciplines. Each is more applicable to some manufacturers than others. The goal of each is ultimately improved customer service and retention. Although Agile attempts to help manufacturers break into new markets sooner than competitors to gain advantage.

Agility can be described as the cost of change. Cost can be measured in time, energy, dollars, or even psychological displacement. And since change is inevitable, its in every manufacturer’s best interest to reduce the cost of change – or increase its Agility.

To measure a manufacturer’s agility, you first need to create a scale that measures magnitude of change. There are three factors that are used to quantify the magnitude of a change: Degree of Change, Scale of Change, and Complexity of Change.

Degree of Change: To get the full grasp of agility, you have to first see the business system as a process (or array of processes). All processes have three core elements – Inputs, Process, Outputs (with Suppliers and Customers being conditional factors as in the SIPOC model). Based on these three core elements, there are 4 degrees of change that I’ll go into detail about in a future blog post. The  greater the degree of change, the more difficult it is to implement. At the simplest level, a product changeover would represent a change from the current state to a future state process.  On the other end of the spectrum, a full implementation of a new product line or production plant would be a change in the fourth degree.

Scale of Change: Scale of change measures how many people or assets are affected either directly or indirectly. Some people will have an immediate need to change their behaviors and some will just need to be aware of the change that has taken place. For obvious reasons, the more people affected by the change, the more difficult the change is to implement.

Complexity of Change: This is a measure of how much of a learning curve is needed for the people affected by the change. A future state process that requires one new process step is much easier to implement than a future state process that requires 100 new steps for example. The greater the complexity of change, the more difficult it would be for an organization to implement and return to steady state.

Each of these factors are measured on a scale of 0 and 100% and multiplied across to measure the magnitude of change.

So here’s where all of this matters. One can fairly easily determine how much a change should cost. For example, if all of the waste was moved from a changeover process, it would require XX minutes. However, the actually process it taking YY minutes historically. The Agility score for that type (or magnitude) of change can be calculated as XX / YY. From there, you can actually calculate a savings potential for increasing Agility to 100% for that process.

Based on this information, you can use what is called the Agility Index to determine what the true cost of changes of greater magnitude such as implementing a new production plant would cost due to poor agility and how much could be saved by increasing Agility. Organizations with great agility will have a much lower “cost of change” than an organization with poor agility. Therefore, increasing Agility in the manufacturing environment would be substantially lucrative in many cases.

Good luck with your efforts to increase your organization’s Agility. Feel free to reach out to us if you would like a 50+ point analysis of your manufacturing Agility with recommendations for what could be done to drive improvement.

© Calvin L Williams blog at calvinlwilliams.com [2015]. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Calvin L Williams with appropriate and specific direction to the original content.

Why American Companies Struggle with Lean Implementation

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Its no secret that American companies have had their share of fits and stalls with the implementation of Lean Manufacturing. Why is it that some companies are able to generate so much steam and momentum with their Lean efforts while some can’t even create the slightest inertia? As a Manufacturing Efficiency expert, I’ve had the privilege to lead several Lean implementations myself and support clients who were in desperate need of a Lean initiative. Here are some of my key observations for why American companies struggle to implement Lean:

1) Lack of true Lean expertise – Many companies simply staff lean roles in the factories and leave them to sink or swim. They either select people who already work at the facilities who have generally done a good job or they bring in someone from the outside who seems to have a grasp on the concept on Continuous Improvement. Granted just about anyone can learn the basics of Lean, it takes an experienced hand to navigate the politics and shape an palatable strategy for a true and sustainable implementation. These people not only need to have a strong grasp (and good experience) with executing lean tactics, they also need to have a strong competency for change management and political savvy.

2) Lack of leadership buy-in and support – At the lowest level, the factory manager needs to have a strong grasp of Lean and be fully bought in to leading an implementation. It needs to be a prerequisite for the job of managing the factory. At the highest level, Lean competency would be a strong consideration for any job or promotion within the supply chain division of the company (especially manufacturing). The VP of Operations would be a former implementor of the Lean initiatives. The Directors would be Black Belts (or at least Green Belts) with experience leading significant OEE improvements. The factory manager’s job performance would be heavily dependant on hitting milestones against Lean performance metrics. At that point, you’ve got a winning recipe for success.

3) Lean is counter-intuitive for American culture – Lean was developed and honed within the Japanese culture. Japan has a very strong culture for discipline, order, and process optimization. In contrast, America has a strong culture of instant gratification and individualism. Imagine the sumo wrestler or the samurai in Japan. Their characteristics are discipline, focus, endurance, loyalty, and control. This is reflective of the Japanese (and Lean) culture. Then imagine the cowboy or rock star in America. Their characteristics are rapid gratification, individualism, and heroism. These are reflective of American values as well. Lean is a discipline of manufacturing that is founded on the systematic elimination of waste. It is tailored to Japanese culture. In America, when something goes wrong (ie machine breaks down or materials don’t arrive), it is natural to point the finger at the person standing there holding the bag. We assume that someone messed up and we quickly move to take disciplinary action. Rarely do we take a step back and ask what conditions exist for this type of issue to occur and how can the system be designed to eliminate the possibility of this type of error. Fixing the system takes time, trial, and error. Its just easier to discipline or replace someone when there seems to be a problem. Also, since many corporate managers only stay in a critical leadership role for a short amount of time (often less than 4 years), their promotion is dependant on immediate and dramatic results. A thorough and sustainable Lean implementation takes at least 5 years – and that’s with skilled implementers and competent / dedicated leaders at the helm.

Most companies think of Lean as a manufacturing process improvement initiative. They see the tactics such as 5S, Kaizen Events, Root Cause Analysis, and Andon Systems. What they don’t see is that Lean also requires an organizational adjustment. This includes changing the rules of the game and what is required to get ahead in the company. The desire to get ahead is the driving engine for the American economy. No single American company will change that. Therefore, as in sumo wrestling, American companies need to leverage the desire to get ahead – to drive manufacturing efficiency. Lean has a fantastic set of principles and tools for driving manufacturing efficiency. For starters, manufacturers should align their employee performance management systems with Lean implementation requirements. The people capturing the greatest gains in savings, efficiencies, and productivity improvements need to be regarded as the rock stars. Even those unsuccessfully attempting to drive positive change should be recognized and appreciated for their efforts. For a company that is serious about a Lean implementation, there should be a direct connection between promotions and compensation to impact on factory efficiency improvement for all factory employees.

© Calvin L Williams blog at calvinlwilliams.com [2015]. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Calvin L Williams with appropriate and specific direction to the original content.