Direct Costs are not immune…

In recent weeks our series of articles on Recalibrating Costs for the “next normal” has focussed on Indirect costs i.e. those that aren’t directly related to sales. The Direct costs of goods sold should similarly not be immune from cost-cutting efforts. 

There is often a reluctance to pursue hard-hitting reductions in Direct costs due to their interactions with other systems and processes for example high speed packaging lines or skilled operator teams on assembly lines.  

There are three key ways in which cost reductions can be brought about in Direct costs and they all need the support of the local management teams who will invariably be being measured on parameters other than the prices paid for direct costs and materials:

1. Establish fear in an incumbent supplier about loss of all or part of their business (assuming that there is one entrenched supplier)
2. Introduce new product / materials from new suppliers which will help the local production / management teams meet their objectives e.g. Waste reduction or throughput as well as cost of goods procurement.
3. Consolidation of demand into fewer existing suppliers without introducing unnecessary risk (assuming there are multiple suppliers)

Of course, these approaches all assume “business as usual” trading conditions. That is supply chains are operating at a profitable capacity and all operatives are reluctant to disrupt the eco-system. 

In most production organisations where we have worked the culture is about keeping plant, machines and assembly lines as efficient as possible. Invariably this means operating as close to capacity as possible which makes pulling the cost reduction levers very difficult if not impossible. The Procurement role in this state is about keeping the machines running.  This culture whilst critical when demand is there adds unhelpful inertia to change when it is not.  

With the “next normal” rapidly approaching in many manufacturing environments it is now the time to mobilise interest in taking a careful look at the Direct costs of materials, products and services with a specific eye on reducing the costs.  The actors across the full value-chain are in a state of disruption and looking for opportunities to secure their survival beyond the end of this crisis whether internal or external thereby eliminating the barriers to the three approaches listed above.

A perfect example of seizing the opportunity to tear away the sacred cows in Direct costs in the telecoms industry was at Cable and Wireless in the early noughties.  Procurement had historically struggled to make headway in expenditure on direct materials / products.  When the disruptive winds of technology blew unfavourably for C&W it was, in large part, the arrival of a highly motivated Procurement executive, which helped to buy time to restructure.  The buying gloves came off and the sacred cows were slaughtered in the most brutal manner.  It helped that ‘reverse auctions’ arrived on the scene and were applied with zeal wherever possible.  The burning platform was used to great effect to address a very conservative culture traditionally focussed on sweating the assets.   There were long term reputational issues for C&W as a result of the gloves-off approach and it was recognised that the people on the front line in the crisis were not the people required for the re-build but at least there was an organisation to re-build.

It is a recurring message at the moment but now is the time to act.  This window of opportunity to fundamentally address Direct input costs is rapidly diminishing.  Seize it today.

If you’d like to discuss how we would save you money in Direct costs and indeed across your entire cost base please contact Jonny Michael e: j.michael@jmclconsulting.com or m: 07831 390161.