Whether we want to or not, businesses are faced with continued pressures to survive today. While there are many reports of signs that the economies of the world are improving, on the ground businesses are still struggling to stay in business and cut costs while meeting the ever increasing demands of their customers. Unfortunately, this leads to some hard and often dramatic decisions such as reduced service, less opening hours, reduced staffing, or even closure. It is easy to be depressed in these challenging times. However, what amazes me is that there are things companies can do that will help. Simple things that (hopefully, when I list them below) will result in some of you saying “DOH!!”
In this short article, I want to suggest some possible approaches to help businesses reduce costs using some simple purchasing and supply chain techniques.
- Buying & Networking
Most small businesses today are involved in some form of networking. They may be formal members of networking groups or they may simply avail of networking opportunities organised by Chambers of Commerce or other bodies. What happens at these events? in general, you meet with other businesses in similar positions to you. You discuss your difficulties and hear that you are not alone. In fact, one of the most common feedback statements I have heard from Networking Functions relates to the fact that “it’s great to learn that others have the same problems as you”.
So we meet and we learn that other companies, some of whom are in similar business to us, have the same problems as us, but we do nothing at these events to proactively improve things.
So what can you do?
How about this? Next time you are at a networking event, why not discuss sourcing and purchasing of materials with the other businesses attending the event? Why not use the Networking event to establish a Purchasing Consortium, i.e. increase your purchasing power?
A Purchasing Consortium is a group of businesses who come together for the sole purpose of maximising the buying power of the group. They focus on common products (even focusing on ‘B’ and ‘C’ class products will result in savings) and spread the saving across all of the group members (rather than one company tying up large amounts of cash in bulk bought inventory).
I suggest that instead of arranging networking events for companies to meet ‘and do business together’, companies should be brought together to explore possible joint purchasing opportunities. By consolidating orders, purchasing and delivery costs will reduce. Members of the consortium will not have to tie up large amounts of cash in order to avail of the price breaks associated with higher volume orders, which frees up the cash for more operational requirements.
- Transport Networking
What about Transport? Many companies who are competitors transport their products to the same customers. How about networking transport. Companies need to recognise that they do not compete on the back of a truck.
While numerous companies already avail of consolidated transport of their products through 3PL operations, there are equally a large number who have their own fleet of vans/trucks that they need to fully utilise. Your transport fleet is only returning on your investment if it is adding value to your operation. Sending out a vehicle that is half full is not giving you that return.
Instead of running half empty vehicles, are there companies in your area that you can deliver for while running your own deliveries? Can your vehicles run a back load service for businesses in your area which would help with the previous point by negotiating for a factory gate price (eliminating the delivery cost)?
Large companies frequently seek the assistance of those delivering products to them in order to move products to other locations. It speeds up deliveries and reduces costs. Why can’t you and your fellow/neighbour businesses do the same?
- Buying Local
There is a myth that buying from local suppliers is too expensive and that products can be sourced cheaper from foreign markets. While it may be true that the unit cost of a product can be cheaper if sourced from one of the growing markets in Asia, I have continually come across companies who forget one of the most basic principles of purchasing; Total Cost of Ownership.
I had a client at one time who boasted how she was able to source a container for her product at a “ridiculously cheap” price from a supplier in China. When I heard that, alarm bells started ringing in my head. I asked her, how many did she have to buy to get the price that was so good. “A million”, she said. So I went for the jugular;
How many do you use per week? “1,000”
1,000?? That means that you have bought 1,000 week’s stock? “Yes”
Where are you going to store 1,000 week’s of stock? “Ahm…They’ll be coming on a container, won’t they?”
Yes, but the shipping company will want that container unloaded immediately and returned or they will charge you a daily/weekly rent. “Oh!…”
And so it went. In effect, this client had forgotten the basic concept of Total Cost of Ownership (TCO). Put simply, the TCO is the addition of ALL the costs that should be applied to the unit purchase price from the time of ordering to the time you take delivery of the product, i.e. the TCO is:
The cost of ordering + the purchase price + ALL Customs/Revenue Charges + Transport costs + unloading costs + Storage costs + insurance/security/lighting/heating/etc Costs + Obsolescence costs + + + +
The facts are simple (yet easily forgotten in the cloud of a cheap unit price); the longer the supply chain coupled with the higher the quantity required to order, the more expensive the TCO will be.
While the unit price can be a very tempting draw to purchase, let’s look at another simple fact; a longer supply chain means a longer lead time. This fact must be covered when ordering and holding stock. For example, if your lead time is 6 weeks, then you will always need to hold at least 6 weeks stock of materials to ensure your ability to supply the demand for your products.
If, however, you source your materials more locally, your lead time will be reduced, which means you will not have to hold as much inventory. Reduced inventory = less capital tied up in materials = greater operational potential.
I know that after reading this, many will say “No Way!!” we can’t share vehicles with other businesses, especially those who are our competitors. Some will say that “Our products are so specialised that we could never enter a Purchasing Consortium”. The truth is that while there may be SOME products/materials that companies cannot partner up on either for purchasing or transport, I’ll bet that, with some honest consideration, there are equally a large number of products that could be jointly sourced and transported.
The payoff is in the fact that pulling together with other companies in your area has the potential to give your business numerous benefits including:
- increasing your buying power,
- reducing costs,
- increasing efficiency of transport utilisation,
- increasing employment,
- freeing up capital
- etc., etc.
Isn’t that what Networking is really all about???