1. Know your supplier payment terms. Terms are often negotiated and forgotten. These older terms facilitate quick payment of invoices and rob you of much needed cash flow. Companies need an easy to understand ranking of suppliers to create a game plan for approaching suppliers for better terms. I recommend that we start with a Comprehensive Spend Analysis (see next page). We will use data analytics to summarize the volumes of data into a simple, ranked list of suppliers and payment terms. We will approach the largest, easy targets first. As the suppliers agree to the changes, your cash flow will quickly start to improve.
2. Get rid of excess and obsolete inventory. The cost of storage in warehouse space, including Amazon Fulfillment, is quickly rising. It is imperative that we review obsolete and excess inventories for quick elimination. Some inventory can be sold at a discount, converted into something more usable, or even returned to the suppler for credit. Selling inventory online is a great option and can be the most profitable. Unfortunately, much inventory can only be donated or trashed. Donation is the better of these options for tax advantage and disposal costs. It is important not to be sentimental in this process, but be wise if you uncover a rare nugget. Unless you have free and infinite storage, you will begin to see the savings immediately.
3. Inventory investment needs to come down. As we reduce the amount of money invested in inventory, your cash flow is going to improve. The problem faced here is the effort and capability to review thousands of SKUs. A great tool that I recommend is the trusted 80-20 Rule. This will require some data analytics and a spreadsheet, but it will allow you to increase your focus on the important items. With a shorter list of A items, we will challenge supplier lead times, reorder points, and lot sizes. As time permits, we can review the B items too. With new information from our suppliers, we can quickly recalculate new, lower reorder points and celebrate the new, lower inventory levels.
4. Negotiate with partner suppliers, or find new partners. Using the Comprehensive Spend Analysis created in step one, we can also rank suppliers and categories of spending to target for price reduction. By reviewing the top 10 or 15 suppliers, we can normally find opportunities that haven’t been recently explored. Consolidation of volume through a supplier reduction initiative is often a good way to start negotiations. I like to think that our current supplier partners will work with us best. But sometimes, we must launch the Request For Quote (RFQ) process to find new suppliers that will better fill our needs. As we spend less for materials and services, our profitability will begin to improve immediately.
5. Measure supplier performance. Our strategic suppliers should be partners. In this type of partnership, we should trust, but verify. I believe that we should measure the obvious things like on time delivery, quality and price variance, but we should also measure Inventory, cost savings, and lead time. The old slogan “that which gets measured, gets done” is so true. With a quarterly Supplier Scorecard, we will reinforce the cash flow and profit improvements that we are striving for.
Short story about step ladders
Earlier this year, a national construction client allowed me to create a Comprehensive Spend Analysis for them. When I had completed the summary, I spent an additional 30 minutes reviewing the details. I found that they had bought 90 step ladders from 3 suppliers last year. The lowest price paid was $95, but the highest price paid was $210, at the same supplier. By knowing the details, we were able to negotiate their preferred brand and model for $93. This 30 minute review, and a little compliance pep talk with the buyers, saved them $4,000 per year, on step ladders. They were happy with that ROI.
John Geib is a Purchasing and Inventory Consultant in Athens Ga.
Learn more about what we do at www.GeibSCP.com
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Let’s say that you have finally negotiated a great contract price for hammers from The Green Hammer Company. Pat yourself on the back…this is going to save you a ton of money. Six month later, you don’t see any improvement in the amount you are spending on hammers.
After arguing with your accountant, your next instinct is to call The Green Hammer Company to complain about them not honoring your contract. While you are on the phone, they complain that you aren’t buying the amount of hammers that you promised. How could that be true…your business is growing, and you know that you are using more hammers?
You could have a Purchasing Compliance problem. And it could be costing you thousands of dollars. A Purchasing Compliance checkup will ensure that you are getting what you expect from your suppliers and your employees. This is a process that should take place monthly or quarterly. All you need is a little time and a little data analytics.
When you talk to your buyer, he tells you that he doesn’t like to use The Green Hammer Company because of many reasons (pick one):
· The Green Hammer Company is hard to communicate with
· The Green Hammer Company is often out of stock
· Sometimes, my calls to The Green Hammer Company go to voice mail
· Sometimes, The Green Hammers arrived damaged
· The Purple Hammer Company is so much friendlier
· The Purple Hammer Company will rush my order when I fail to plan ahead
· The Purple Hammer Company gives out these really cool calendars
It’s hard enough to find a supplier to partner with you in the completion of a truly successful project, and that actually delivers. Life is also hard if your own people don’t comply with the terms that you have negotiated. It is a real life lesson, but sometimes your employees take the path that is easy instead of the path that is most profitable for you.
Geib Supply Chain Partners can help with both of these.
