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Archives for May 2010

Does Your Company Have a Margin Improvement Program?

By Herb Shields | 05/21/2010 | 1:14 PM

Prime Advantage, a Chicago-based buying consortium for mid-sized industrial manufacturers, recently announced the findings of its fifth Prime Advantage Group Outlook (GO) Survey, and reviewed the top economic concerns of midsized industrial manufacturers for 2010.  According to the survey, “The top three external concerns facing small and mid-sized manufacturers include customer demand at 38 percent (and up from 24 percent in the last GO Survey), price pressure (32 percent) and inflation (16 percent).”  I was interested to see that sourcing concerns were highly rated and that these issues were mentioned:

 

  • The ability to generate cost savings
  • Managing the cost of raw materials and components

Since the fourth quarter of 2009, most of the work that I have done with clients has been focused in those two areas.  I believe that the mid-sized manufacturers who survived the recession are determined to improve margins so that they are better positioned during the economic recovery and for the next recession, whenever it occurs. What does margin improvement entail?  There are two basic options – raise prices or reduce costs.  Raising prices has never been easy, with global competition in most markets, it can be a risky approach.  Reducing total cost which includes manufacturing, purchased materials, and transportation has several benefits.  Done correctly, you take cost out of your system permanently by developing collaborative programs with both suppliers and customers.

 

Here are some suggested actions that I learned while managing Purchasing and sourcing during my corporate career:

 

  • Create “costed” bills-of-material for each of the SKU’s.  A costed bill is easy to create, have your finance people look up the purchased costs for each item on the bill as well as the labor cost associated with the product.
  • Identify the highest cost purchased items for each product.
  • Develop the cost history for the last 3 years.  If you do not have the data, ask your suppliers to furnish it.
  • Compare that history to market information by using Bureau of Labor Statistics price indices or published commodity information
  • Get actual product samples of each high cost component.  Many times seeing the differences for the same type of item used in one end product versus another can be quite revealing.

 

In large companies, Purchasing will do this as part of their regular activity.  In smaller organizations, once you have completed the information gathering, decide which suppliers and/or items to tackle first.  Start with commodities that you think have good savings potential. Schedule meetings with those suppliers and plan to introduce your 2010 margin improvement program. 

 

Your plan for each meeting will be different based on the commodity, the number of suppliers that you use for a given item or commodity, and how much competition exists in the marketplace. The discussion should focus on what can be done to take cost out of the item(s) in question.  In most cases, this is the start of a process, so record the expected actions, responsible individuals, dates, etc. If you identify purchased commodities or items that have not been market tested for a year or longer, then doing an RFP and validating your current pricing is a good first step before you engage your current supplier in the effort.

 

 

Suppliers will try and respond positively when the customer – you – takes a collaborative approach.  In fact, many suppliers are taking the lead in working with their customers to take cost out of the process.  The large marketers, manufacturers, and suppliers in the consumer products industry have been working together for years.  Mid-sized companies need to adopt these practices to improve their margins and prosper in the years ahead. 

Does Manufacturing Matter?

By Herb Shields | 05/03/2010 | 8:19 AM

 

Last month I participated in a lively discussion on this topic at a local APICS sponsored breakfast.  Since many of the attendees have careers that are at least in part related to manufacturing, there was admittedly some built in bias towards the answer, “Yes it does.”

It matters to all of us as consumers because in spite of the conventional wisdom that says little is still made in the USA, in consumer products in particular, that is not true.  Most readers of DC Velocity work with or for companies such as Proctor & Gamble, Kraft Foods, Pepsico, and/or their suppliers with significant manufacturing capacity in the US.  One concern expressed by many of my colleagues during our discussion had to do with reminding those not in the CPG industry that manufacturing remains an essential part of the domestic economy.

Can the government save manufacturing?  The group did not think it could or should.  We would like to see more assistance for small manufacturers that would lower the cost of doing business and provide incentives for new markets such as renewable energy.  Yesterday’s Wall Street Journal had an article on the approval of the first off shore wind farm off the coast of Massachusetts.  Two nuclear power plants were approved for construction earlier this year.  Yet both the wind turbines and nuclear plants are far from sure things.  Meanwhile China and other countries are moving ahead more rapidly.

Who is most to blame for losses over the years in manufacturing – management or unions?  We came to no agreement on this one, other than to conclude that both sides did not always take the long term view.

Last week, we saw some very positive news for US- based manufacturing.  The Tempe, Ariz.-based Institute for Supply Management's (ISM) manufacturing index rose to 59.6 in March from the February reading of 56.5.

The strong number was driven by significant growth in new orders and production, as well as larger inventories, which grew for the first time in 46 months.

The breakeven point for the index is 50, with a reading above that indicating growth in the sector. March's higher score means the manufacturing sector grew at a faster pace than the month before.

The monthly report surveys purchasing managers, and because it's a survey, some analysts say the index is highly subjective and overrated. But others view the report as a valuable indicator of broad trends and the overall health of the economy.  As a former Purchasing Manager who participated in the monthly surveys, I trust the numbers.

Overall, 17 of the 18 manufacturing industries surveyed showed growth. Plastics and rubber products is the only industry that reported contraction.

It will be interesting to see if manufacturers can continue to make progress for the balance of 2010.

The opinions expressed herein are those solely of the participants, and do not necessarily represent the views of Agile Business Media, LLC., its properties or its employees.

About Herb Shields

Herb Shields

Herb Shields has run Chicago-based HCS Consulting since 2000, helping clients across multiple industries and in higher education improve their supply chain strategy and execution. Shields has more than 30 years as an operations executive for capital equipment, automotive, electrical machinery and consumer products companies. As vice president of materials management at consumer goods company Helene Curtis, Shields led the supply chain organization that helped Helene Curtis win "Vendor of the Year" awards from Wal-Mart Stores and Target Corp. Shields has a B.S. degree in Electrical Engineering from Clarkson University and did graduate work in business at Bowling Green State University.



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