The Office Space Effect
Many remember (and chuckle, and seethe) at the scenes in the movie “Office Space” when the consultants are grilling the employees of the company to determine what they do to see if they are needed. Many in today’s workforce can relate to this. When companies need to save money or are trying to find efficiencies, where is the first place they look to cut?
The men and women that do the actual work in the company.
I am not advocating that executives cut their pay (though, that may help image-wise). I am a firm believer in free market capitalism and the freedom of people to amass as much wealth as they see fit. If the executives’ pay is the thing hurting the company though…
But cut the people that are making the company operate every day? Especially if those people are effective at their job? That makes no sense to me. (Note: I said if the people were effective at doing their job. If they’re not: fire them.)
Rarely do companies look at their sourcing activities, as well as other internal processes within the company, to cut the budget.
Developing more effective sourcing techniques and improving processes, and reducing total cost ownership will do more for a company, both up front and long term, than slashing headcount.
NOTE: I use the following terms here interchangeably.
- RFP/RFQ/Solicitation for Bids
Developing More Effective Sourcing Techniques and Improving Processes
This is anecdotal and I don’t have any hard data to back it up, but I am finding that many medium and even larger companies don’t have a central procurement/sourcing department, or a department within their organization that leads and monitors that function. Purchase orders are done as lists on excel spreadsheets, or over the phone. Many times supervisors or crew leaders simply go to the vendor with a credit card. This is an ineffective way of sourcing the company’s needs.
How do these companies know they’re getting the best price? Because the vendor tells them? Unfortunately, “Our supplier tells us we are getting the best price.” is the answer I hear time and time again, both in other companies and in the company I work for.
Developing effective sourcing techniques can help reduce costs almost immediately. Just a simple RFP can produce lower purchase prices. (We’ll talk more about purchase pricing below under reducing total cost ownership.)
The company I work for did this with their MRO. They discovered on some items which suppliers were telling us we were getting the best price we were being charged a 400% mark-up. When we asked the supplier why, the supplier’s response was, “You never asked.” It was no wonder these suppliers “loved us” so much – we took them at their word when they said we were getting the best price, and were able to overcharge us exponentially.
Control of bidding, purchase orders, and contracts – everything that goes into sourcing – with a central sourcing department, or at least one department within the organization that is given responsibility and accountability for this function, helps, too. They can work to set company policies, processes, and procedures around sourcing and, with upper management support, enforce it.
This is where your Lean and Six Sigma ninjas come in, too. Perhaps there are already procurement processes within the company, but there is clearly room for improvement. Mapping the processes and their sub-steps, and leaning them out by removing steps and/or red tape will save in work hours alone – and time is money. It doesn’t take spending millions on a consultant like McKinsey and Company, or Accenture to do this. Companies can do this themselves.
Developing better negotiating tactics and techniques can help, too. The Institute for Supply Management (ISM) includes many techniques for negotiations in their CPSM Study Guide. And there are lower cost consultants and webinars out there that can help your company hone their negotiating skills. (Yes, I do have a bias against the bigger supply chain consultants. There might be some bitterness there. (There’s definitely bitterness.))
Finally, control of the procurement process, and by extension payment of suppliers, helps save. While there are some instances where parts or services are needed in less than 24 hours – I emphasize some – 95% of the time this is due to poor planning on the part of the Project Manager, the sourcing department, and the warehouses. (Note my use of and not or. It’s a team effort, and if one fails, they all fail.)
The company should limit who can input requests for orders, who can approve and issue these requests and orders, and then keep a close eye on invoices to ensure they match quoted pricing.
Working closely with the company’s warehouses can help set minimums and maximums (min/max) on materials so that what is needed most is in stock when it’s needed, while working estimates and forecasts on past spend and usage and upcoming project earlier can ensure that if additional materials or services are needed they are sourced well in advance. Having pre-negotiated agreements across the company with a handful of suppliers can ensure that support is provided when needed, and new one-off contracts aren’t being constantly issued.
Reducing Total Cost Ownership
So your company has a handle on its sourcing of materials and services. Controls are in place, and the processes have been made lean, mean, sourcing machines. Money is being saved.
But not enough.
The next thing a company should look at is the total cost ownership of the materials and services they are sourcing.
Here’s an example:
Lean Corp wants to go out for bid for buying and installing widgets. (Very original, I know.) They send out a RFP to five vendors. The bids come back, and Lean Corp short lists two of the vendors: Cheapo Co, and Quality Co.
Cheapo Co can provide the widgets for $10, and charge $10/hour for installation.
Quality Co can also provide the widgets for $10 (widgets are probably a commodity, like steel), and charge $20/hour for installation.
At face value, Cheapo Co is the low bidder.
But there’s a catch.
Cheapo Co takes 3 hours to install each widget! That’s $30 of installation per widget!
Quality Co, on the other hand, only takes an hour to install each widget; $20 of installation per widget. And the equipment is up and running faster, meaning less downtime, meaning Lean Corp can produce more, sooner.
Lean Corp brings both vendors in for negotiations.
Cheapo Co won’t budge on their pricing, and offer very little extra for their services. C’mon, they’re clearly the low bid! They know it! They’ve been working with Lean Corp for over a decade and the working relationship is great. And Cheapo Co’s owner is golfing buddies with two of the VPs of Lean Corp. Why would Lean Corp want to award to anyone else?
Quality Co, on the other hand, offers extended warranties on the widgets they install, and they offer up to 10 business days of training per year at no charge, a value of $15,000.
That training has downstream effects in Lean Corp: the training which Quality Co provides increases the knowledge of Lean Corp mechanics and reduces rework they have to do, and reduces downtime of the equipment by dozens of hours per year – remember time is money. The additional cost reduction is compounded by the value added services Quality Co provides.
This is an extremely simplified example, but it gets the point across well.
Total Cost Ownership is a pricing model that takes into account everything before, during, and after the sourcing of a material or service. This includes (but is not limited to) materials that go into producing the thing being bought, labor hours that go into producing the material/service, overhead, freight, mark-up, how long it takes to provide the material or service, number of deliveries per week/month, estimated downtime, and inventory holding costs, to name a few.
Reducing the total cost ownership of the materials and services sourced, while working to increase the value added services the supplier provides, should be the goal of the organization trying to cut its costs, especially when trying to not cut overhead.
This can be done through negotiations with suppliers, or through internal efficiencies within the company itself.
Companies looking to reduce costs should develop more effective sourcing techniques and processes, and reduce their total cost ownership of materials and services before slashing headcount. This will not only create short-term wins, but a long-term, sustainable model of keeping costs low. It is up to senior and middle management of companies to enforce this so that it takes hold in the company’s culture.
Don’t misunderstand me: I am not advocating for never cutting headcount. If positions are completely outdated and unneeded, then they need to go. No need having the ten Accounts Payable clerks that were kept because that’s how many they had in the time before computers and now everything is automated so six of those clerks are being paid to check social media. And if individuals are truly underperforming, even after corrective actions, then they need to go.
Improving sourcing is where companies should start to cut their costs.
I can’t count the number of times in my career when I had stakeholders or team members come to me and say,”I need X done, and I need it done this way.”
A few “why” questions, and a little investigation reveals that, no, it actually doesn’t need to be done that way, it’s simply the way the individual thinks it should be done. What do they actually need? What is the overall end state that must be accomplished?
Once we have that figured out, we can then start researching solutions.
What is a need?
In this instance, the need is what the end state is. Materials, such a maintenance, repair, and operations (MRO) procurement; a service, such as company-wide maintenance; or software for something like managing your supply chain. Identifying this to its simplest source can help you and your organization find the best solution.
What is a solution?
Here, a solution is the process or way that the need to achieved. There are times when a project manager or upper management says, “We must do this from A to B to C.”
A Solution Vs. A Need
But many times this is not the case. In my experience (this is anecdotal), more often than not the stakeholder/requestor/project manager has conceptualized a need, and has built a solution to fit it.
“We need program Y because our manager and department need it for work.” This is another sentence I hear very often. And, just as often, it’s not true. The IT department or one of the maintenance departments gets a visit from an account manager from a software company, manufacturer or distributer, and are sold on their offering.
The specific software or certain product is rarely what that department or business unit actually needs.
A need looks like the following:
- We need a work glove that is ANSI cut resistance five, is fire resistant, and made of a material that won’t melt to the worker’s skin in sizes small to triple-XL.
- We need a program that manages and integrates our procurement, contracting, warehouse operations, that talks to our current ERP system.
Those are model needs.
From these needs, scopes of work written and requests for proposal/quote can be created. Or, if working with an incumbent vendor on a blanket contract/master purchase order, your team can work with them to find the most cost effective solution from their offerings to meet your actual need.
The Role of Supply Chain/Procurement/Material Management
Here I call it “Supply Chain”, but your business unit or department may have a different title.
Regardless, it’ll be the job of you and your department or business unit to work with your stakeholders to identify their actual needs and not allow the latest shiny thing to derail good company and/or project budgetary goals.
This can be hard, as there are individuals within organizations who have de facto authority over others where they shouldn’t, and you will have to work with your manger, director, and perhaps even your VP and other stakeholders to overcome these people.
It’ll also be your job to make sure that all suppliers and contractors go through your department. I can’t count the number of times I have been getting a vendor to meet our needs at or near our desired pricing, when they get the ear of a supervisor or manager in the department I’m working with, and all of a sudden all of my had work is derailed. Time that could have been used completing the agreement is used getting everyone back on the same page, or renegotiating things that we thought were already locked in.
Working with your stakeholders, maintaining good relationships, and using the “5 Why’s” method (which is actually as many “why’s” as needed to get to the bare bones need) will help you and your organization identify these actual needs of your internal customers.