Is your company managing and reducing its overhead costs, whenever possible, so that you get the right products for the right cost and stay competitive in your industry?

Sometimes the spend in support of the company, in the areas of packaging, freight, utilities, etc., goes unnoticed and is literally ‘under the radar.’ This continues even though expenditures in these areas increase year-over-year.

This happens for different reasons but to be as competitive, it becomes a priority to control and reduce this overhead spend. A company with a revenue stream in the millions can save hundreds of thousands of dollars each year in this area by applying fundamental purchasing techniques.

Client’s Situation

A customer, located in the south, manufactures equipment for the oil and gas industry. The customer had grown to the point where their overhead expenses were increasing year-to-year and had reached $12MM annually.

This large spend prompted the client to learn more about these expenditures, as well as find a way to monitor and control these purchases. The analysis of the customer’s situation found a couple of different opportunities.

First, a fundamental procurement process was not being conducted. Second of all, these expenditures were not being properly identified and recorded in a purchasing module or production system. This made it very difficult for the company to properly identify and analyze these purchases.

Identifying spend, reducing costs, and streamlining the administrative issues arising in this environment would be difficult unless changes were made.

The Solution

The answer to our client’s situation involved a three-step approach.

• Establishing a professional purchasing position
• Installing a purchasing requisition process, and
• Use of the existing legacy purchasing module in the client’s production system.

The Plan

The remedy for the client was to gain control of these expenditures. In summary, at a high level, the following steps were taken.

• Securing support for the organizational changes
• Conducting orientation and training for personnel
• Implementing the purchasing requisition process
• Conducting a pilot test
• Release of the finished program to the client

In 2013, the company immediately saw a return on their investment. In just one solicitation, Purchasing reduced the indirect cost paid for a service and equipment by 18.6% or $83,000 per year. There were even larger savings obtained as the process migrated to the direct inventory purchases.

Another benefit was derived from reducing ‘lost time’ in production. Reorganizing this activity, and assigning it to the purchasing department, removed the administrative buying tasks from production employees. This efficiency saved the customer another $145,000 per year in unfavorable labor variance.

Finally, the new process made use of the purchasing module in the production system, enabling the monitoring and reporting of all MRO purchases. This step would lead to more opportunities to manage costs in the future.

Related Topics

Understanding Category Management. The category management process is the careful and deliberate segmentation of services and raw materials into different categories. For more on this topic, please follow this link. For more on this topic, please follow this link.

MRO Items: Organization, Control, & Spend. MRO Items: Organization, Control, & Spend. As your organization grows, it’s important to organize and control key functions. Because of the volume and complexity, and the time needed to process, MRO purchases are a good place to start. For more on this topic, please follow this link. For more on this topic, please follow this link.

Procurement Strategy. Executives today expect results. Successful companies satisfy customers with their products and services, making ‘targeted’ profits while doing so. Because of this, the procurement group is expected to play a much larger role and bring value to the entire business enterprise. If you’d like to learn more about procurement and supply chain management programs, please follow this link.

Organizational Structure and Performance. Top performing organizations require structure, culture and resources to produce high performance. Departments designed around four areas achieve much higher performance levels. For more on this topic, please follow this link.

Manufacturing and Supply Chain Services

We are Manufacturing and Supply Chain Services, MSCS, specializing in ‘enterprise wide’ production and operations management programs. Our company’s proprietary processes and services promote organization, control and cost reduction boosting your company’s bottom line. How can we help you?