7 Common Profit Leaks and Cost Savings Opportunities

Tuesday, December 12, 2017 , business management, by Rich Rafdahl

The following are a number of common cost improvement opportunities that I have witnessed when working with my various clients.   This list, by no means, covers all the potential situations where unnecessary costs may exist and savings are possible but it is a good starting point.   My hope is that what I have shared here will stir your interest by providing some basic ideas and sound business practices that will help your organization become more competitive, profitable and financially sound.

Good Luck!

  1. Supplier Minimums that are Not Accommodative:  Being forced to abide by an unfavorable supplier minimum which forces the buyer to purchase too much inventory can negatively impact cash-flow, carrying costs, space requirements and total cost of ownership.  Possible options could be to negotiate smaller or no minimums, issue a blanket order that will allow your supplier the confidence that the product will be pulled and paid for eventually.  Another option is to ask your supplier to carry back up inventory on their floor, which you will draw from as needed.  A min/max agreement with the supplier could help reduce the inventory investment on the buyer’s floor and improve cash flow while allowing the supplier some latitude on when  and how much to produce.
  2. Unfavorable Payment Terms:  Many companies simply accept the payment terms issued by their suppliers.  It is a significant financial enhancement to secure more favorable payment terms from a standard net 10 to net 30 or even 2/10 net 30.  In some cases you may prefer net 60 or longer or some other variation and the suppliers simply need to be asked or pushed to accommodate.  These are basic requests that often get overlooked which significantly impact cash flow and overall annual savings.   As the saying goes – If you don’t ask you don’t even have a chance to improve your position.
  3. Infrequent Supplier/Category Reviews:  Identify those spend categories and suppliers that have not been reviewed in 3 or more years.  If some spend categories have not been reviewed in some time, there is highly probability that your company is not receiving the most competitive pricing and optimum service possible.  Key spend categories should be reviewed and put out to bid every 2 or 3 years.
  4. Supplier and Pricing Agreements do not exist: Identify those spend categories that have no standing supplier agreement in place.  Again, if there are various spend categories and supplier programs that are not managed with an existing agreement, there is a high probability that favorable terms have not established, prices change logic and methodology have not been agreed upon resulting in price changes being issued without any rules, controls or stipulations attached . Also, important business terms, services and performance standards could be assumed and at risk – if there is no formal agreement.
  5. Too Many Suppliers for a Specific Category Spend.  In a decentralized business model or where each department or location has some autonomy, there is the propensity to engage too many suppliers thus reducing the potential leverage that exists if only 1 or 2 suppliers were servicing the business.  When too many suppliers exist, a business will likely not realize the lower pricing and higher level of attention and service that most suppliers offer to larger buying clients.   In addition, having fewer suppliers will assist in promoting internal efficiencies and supplier partnerships that are much more cost effective.
  6. Current Supplier is No Longer the Optimum Supplier:  If your company’s business has grown over the years, the current supplier may no longer be the most ideal to service your business.  For example, when the company spend is modest a small local distributor may be the best option, but if that spend has increased significantly over the years your company may be better served by a larger full-service distributor or even going direct to the manufacturer itself.
  7. “Well Liked” Suppliers who have been Given a Pass on Any Competitive Bid Process.   Are you using some of the same suppliers that you did 10 plus years ago because you like the sales representative or because you are a personal friend of the owner or sales manager?  Maybe they take you out to golf several times and really service your company well.   I have witnessed, numerous times, that the friendly relationships that can develop between supplier and buyer, at whatever level, does not always translate into a favorable pricing model.    There have been many occasions when my clients’ jaw drop once I showed them how much of a premium they were paying to the current “friendly” supplier – a supplier who they felt had their best interests in hand.

 

Now, this is not always the case and many sales representatives are great and do try to keep their customers competitive but you should never assume that is always going to be the case.  I would suggest you put these programs out to bid every several years to ensure your program is competitive and your representative is keeping you competitive – regardless how much you like them and trust them.  It is simply good business.

 

If you have any questions, please contact Richard Rafdahl – rafdahlr@crspecialists.net

Did You Know!

The Boston Consultant Group concludes that a 5% reduction in procurement costs is the bottom line equivalent to increasing sales by 30%.

CRS offers its services on a contingency basis, with our fee tied to the savings secured and approved by the client.

CRS focuses on reducing the Total Cost of Procurement (TCOP) while maximizing value with key suppliers. This includes negotiating improvements in quality, services, performance requirements, terms, incentives & price change methodology.

CRS will manage all information with utmost respect and confidentiality.

CRS can develop and facilitate Reverse Auctions and complex RFQs, RFPs, RFXs and RFIs.

CEO of a film manufacturer said “What appealed to me initially was that CRS’s offered expertise in procurement and supply chain on a performance basis - contingent on results, with no risk. Within 6 months CRS provided savings in excess of $1 million".

CRS has assisted various manufacturers and distributor organizations in the food, packaging, spirits, electronics, computer, cosmetic, furniture, metals, services & construction industries to reduce their costs & increase savings.

“Cost Reduction Specialists were very easy to work with and helped us achieve savings in many areas including telecom costs, credit card processing fees, office supplies, distribution supplies and other indirect costs”- Controller Furniture Business

“CRS negotiated significantly lower prices for our temporary labor, labels and corrugated cartons programs resulting in savings that exceeded $400,000”. VP of Finance – Food Processing Organization

Subscribe to Our Blog

Name
Email Address*