The Bottom Line

Less is More: A Case Study in Manufacturing Vendor Contract Management

Posted by Jim Kurtz on Dec 19, 2017 8:00:00 AM

 

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If your organization utilizes a strategic sourcing partner, that relationship should extend beyond ensuring the prices you pay vendors are consistent with what is being charged across the industry. A skilled sourcing expert can identify opportunities for process improvements that may have no influence on the invoice but will have a material impact on your bottom line.

Consider the recent engagement our firm had with an established, multi-plant manufacturer to optimize its procurement process. Based on its existing $150 million supplier budget and our knowledge of market dynamics in the vertical, we initially set a 10 percent target for cost savings. Once we analyzed existing procedures in detail, however, we quickly realized this goal was conservative.

Over time, the manufacturer’s network of 30 production sites had accumulated more than 7,000 contracts related to the vendors used to provide raw materials and other supplies and services to their operations. These vendors were invoicing at a plant level, usually daily or weekly, resulting in our client handling literally thousands of invoices and purchase orders on a monthly basis.

This scenario is not uncommon. As companies succeed and grow, inefficiencies inevitably seep into the system while management addresses more pressing, near-term imperatives. If your strategic sourcing company is not seeking out these “below-the-radar” opportunities, then your organization maybe missing out on savings that could eclipse those realized in the pricing negotiations conducted with a vendor.

Voice of the Customer and Supplier

In this case, with support and input from both facility heads and senior management, our firm solicited internal and external feedback to better understand site-level production and inventory requirements. This information allowed us to build a database documenting the material supply flow, thus forming a clear picture of what vendors were supplying materials to which operations across the enterprise. Additionally, we created a master document that set forth best-in-class logistics and pricing according to the needs of all locations.

Our goal was to trim the supplier list for our client from 7,000 to 1,500. While there is no magic number for roster size, supplier consolidation is paramount for any company wishing to optimize its value to stakeholders. Not only does it promote internal efficiencies, but it creates “market baskets” of vendors to encourage vendors to sharpen their pencils and offer the best possible price. While a list of 1,500 vendors is a substantial number, moving from 7,000 represents an 80% decrease in the overhead associated with managing these contracts and the vendors they represent.

Time and Focus is as Valuable as Money

With a smaller number of providers issuing consolidated monthly invoices, including plant-level detail, the client’s accounts payable department will eliminate thousands of the invoices they were processing previously. While overhead cost tends to be a fixed cost included in margins, metrics like the number of suppliers and number of invoices processed are drivers of long-term capacity. Moreover, the planned rollout of a Master Vendor Agreement will greatly reduce the ongoing legal burden.

Based on the changes made, with respect to how vendors were managed, we upgraded the estimate of our client’s hard dollar savings to 15-20 percent, or close to $30 million annually. The benefits received by our client across the project have exceeded their initial expectations. We’d be willing to wager most firms have similar opportunities lurking within their operations. Essentially, we accept such a wager in each of our business relationships, since we are paid solely based on the savings we generate for our partners.

 

 

Topics: Manufacturing, Strategic Sourcing, Vendors & Contracts