8 June 2015
Recently I have been working with global supply chain people looking at total cost of ownership seeking ways to implement reduction strategies. If we cut out the management speak we're trying to help them become more competitive, blogs John Bowen.
Faced with achieving cost reduction the position can tend to get a bit predictable; the buyers push for a price cut and the supplier suggests a reduction in the specification as a way of achieving that, but such things tend to be knee-jerk reactions that don't really help either party in the long term. The buyer might put a little bit in the bank towards their bonus and the account manager will have protected their margin as best as they can, but there is no long-term thinking going on.
If you look at what makes up the price on a contract much of it is a direct result of what the client is asking for. That might seem blindingly obvious, but there is a lot beyond the service specification that will be a cost driver: performance measures, contract management, liability and similar matters all affect price. In effect, there is the service, the direct cost, and an overhead. Now overheads are something that most people understand as an area where you can look at reducing cost so if you look at what you ask of your suppliers in that light then you can start to take a strategic approach to reducing total costs.
The old saying that you get what you pay for gets reversed here because your supplier is going to be charging you for all of the things that you ask them for. Some will be explicit, but others are less so and clients really can make a difference by thinking through all of those add-ons in terms of not just what it does to the contract price, but in what it costs them. For example, how much do they put into measurement and contract management? I remember a client who had nearly 300 KPIs in their contract with us and we effectively had one full-time person pulling together the reporting in the format that the client asked for. The cost of that was in the contract price of course, but how much time was the client expending on using that information?
Finding ways to cut cost is a way of life these days, so we need to start getting a bit creative and if we don't need something then why ask for it? For a start take a look at what you ask for in terms of performance measures and contract management and ask yourself "If I stop this will it cause a problem?" If the answer is no stop doing it. If nothing else it might give a bit of time to make a difference somewhere else.
John Bowen is an FM consultant