Wednesday, February 11, 2015

Cost Cutting through Root Cause Analysis

WICMA - Magazine Feb 2015

I want things cheaper so when I bought this pair of jeans from a retail outlet I was gushing at the discount I got compared to a branded one which I had bought earlier. It is a different thing that the fitting was not right and the material felt rough. But I sidetracked those concerns considering the savings. However, after few rounds of wash, the stitching started getting frayed and the material stretched unevenly. In the end I was pretty upset that my great bargain deal was such a flop. Well, it was bound to be for obvious reasons!
Everyone wants everything cheaper these days but the best of the quality. How much cheaper? Honestly, most people don’t know the answer to this question so anything lesser than the price currently being quoted is great. Why don’t people know how much cheaper? Because they don’t have the capability to figure out the method to calculate or are too lazy to do the legwork.
This is a constant demand in our packaging business too. Customers want cheaper cartons while insisting that we stick to their quality requirement. Most purchasers consider this to be the easiest way of saving costs. There are quite a few reasons; one of them being priority of payment. Packing material suppliers are the last ones to be considered while scheduling payment. There is too much competition in this segment and the work is not rocket science hence, every supplier can be replaced easily (well most of the time).
But the chief reason is lack of hard work and analysis. If one really wants to save costs, they need to fundamentally change the product and processes not the 1 or 2% of the packaging cost. There are ample scope for improvements and waste reduction if the basic product itself is analyzed and redesigned. But this requires serious involvement and hard work. It requires time and resolve to conduct root cause analysis. There is need for data collection, analysis, testing and rechecking. Most people are hence content with reducing the packing material cost which is least hard work and creates the illusion of saving and becoming cost competitive! It is when more international biggies come into the market will these companies realize what is competitive edge?
Businesses do not understand that there are other ways of properly reducing packaging costs. One good idea is to put some serious brains into design and drawing specifications. The designer quite often simply copies an existing template and changes dimensions. If you ask why they need BS of 20 and not 15, rarely will you get a clear answer. Often the specifications are more than what is truly required which jacks up the price. Everyone wants to play safe by adding unnecessary buffer and to cover for shortcomings.
Another way is to focus on advance planning. Now the larger buyers want “just-in-time” since they do not know what they want and when. If a corrugator is given proper forecast of requirement then they can build up inventory to meet the delivery dates instead of stocking up for anything anytime. Inventory turns will be more and the carrying cost will be less.
Let us take an example of Company A and B.
Company A has random requirements and n-number of carton sizes designed and developed by people over a period of time. They are not following any forecast method to identify which type of cartons will be required when. When the item is ready or nearing completion, the carton suppliers are asked to deliver the cartons. At the time of seeking payment, Company A delays at random without any reason. Often they feel humiliated if the suppliers follow up for payment or show a laid back approach towards releasing payment. The adage – customer is king is often taken too literally by many buyers. But they forget that the kingdom prospers due to its many subjects and not just the king.
Company B has created a standardized set of cartons to pack all their items in atleast one of them. (This is what today’s E-commerce companies are practicing). They have a clear system of tracking which items are being ordered, manufactured and are at what stage of completion. There is a visibility of status in the process. This company also has a data stating how much time is needed to make one item and ship. Based on this, whenever an item goes into production, all the relevant suppliers are intimated of the same. This gives every supplier time to plan their production and delivery schedules. Company B also believes in sharing historical data, future plans and planning schedules on a regular basis with their suppliers. Taking a step forward, they also communicate the material receipt and payment processing dates creating good levels of transparency and timely information delivery.
It is obvious that the supplier of Company B is not going to stock too much inventory and buy as required. They will also supply as per the time schedule and have a fair idea of the payment cycle. Continuous procurement will also help the supplier to plan production at their end. Payment and order cycle reliability automatically will impact cost of production and price of the item. Company B will surely demand good quality at lower rates and get it too.
The reliability of timely payment trumps all the other options. If a supplier is assured of timely payment and the commitment is honored regularly, the offered rates will be automatically cheaper. However, no one sticks to the payment cycle, everyone delays and hence, somewhere there is a compromise in quality or buffering in costs.
How is China so competitive in the manufacturing sector? Cost cutting as a means to remain competitive is a shallow approach. There are larger economic factors at play which pushes up the price. Fuel costs, taxes, cost of operating a business, lack of infrastructure, the labor market all contribute to the increasing costs. If these are contained, automatically our products can become cheaper in the global arena. We need some serious root cause analysis and structured approach to cutting costs as an organization and not squeeze the ever dispensable packaging material supplier.
Though it can also be argued that these suppliers lack organized approach towards pricing, quality and need to work in a framework of specified price band like many paper mills supplying Kraft paper. Is there a scope for improvement amongst us corrugators?  

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