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3 Ways to Attack The #1 Cost Driver

By Richard Turner | Feb 9, 2017 10:59:28 AM

When it comes to controlling costs in business we seldom use the obvious tactics, especially if the solution relies on cross-departmental efforts. It is always easier to control your own department’s costs from within than to gain consensus from other departments. As a result, we default to what we know best, standard department cost reductions. But does this really make the biggest impact for the company? 

One example is Direct Material Cost, the cost of raw materials and components used to create a product. It is the most significant cost in manufacturing and can represent 50% of revenue for manufacturing companies. Yet it is often ignored as an area of cost reduction, or worse each department will attempt to reduce this cost independent of the other groups resulting in marginal cost benefits and unsustainable solutions.

(Direct material cost is the cost of the raw materials and components used to create a product.)

1-Enable the New Part Request Process with Data Governance

NewParts.pngThe new part creation process can potentially be a company’s largest cost driver, and therefore its biggest potential for cost savings.  When it is challenging for engineers to find existing parts, they will take the easier route and create new ones. Many times, these requests are not scrutinized and you end up with the wild west, where everyone is creating new parts.  Some believe they can solve this problem through a better system.  In fact, the biggest improvement companies make in this area is to invest in a PLM or ERP system, both of which can be a significant investment in resources and costs.  When deploying PLM there must be work to improve the current product data quality issues to make searching easier or the new PLM system will fail to manage new part creation. In fact, a PLM could make it easier to create more new parts. Creating new parts, rather than using existing ones, has a direct impact on Direct Material Costs.  Every new part number requires a lot of activities to take place over the parts lifecycle: procurement, supply chain, logistics, testing, quality, inventory, etc., adding to the overall cost of each part

If a new part is truly needed, there should be a governance process in place that approves the creation of the new part.  It is imperative that the new parts are created in a way that makes it easy for them to be re-used. A good way to do this is to assign similar parts to categories and enter attribute data, including values to help insure data governance standards are adhered to.  These new part requests need to be reviewed by both engineering and procurement to insure the new governance process is followed.  Mitigate the wild west of unnecessary new part requests with data governance.

2-Part Rationalization Prior to ERP Migration

When integrating newly acquired businesses, take the opportunity to rationalize Direct Material Cost at the same time.  Quite often, if the companies are similar businesses coming together, both may be buying the same items from different suppliers at different volumes and pricing.  Start by looking at the most commonly shared spend item, then look to rationalize pricing, suppliers, inventory and purchasing of items.  It will be critical to normalize and then rationalize the data of a new acquisition prior to migrating the new item data to the corporate ERP system.  It would be a lost opportunity if this was not done, as you may be proliferating your ERP system with duplicate inventory, which has significant cost implications.

(Normalize – the process of taking different naming conventions for the same items created by different groups and standardizing them such that there is just one way to describe the same thing.)

Oil and Gas Industry Client - Tip on how to map duplicate parts during ERP/PLM conversions: An oilfield services company processed duplicate parts by mapping the parts up front, before they got loaded into the ERP or PLM system, as a step in their ERP conversion process.  This can be done by just adding a secondary legacy number to the main part.  By adding the secondary numbers, it automatically links the parts together, mitigating the need to do an engineering change request.

3-Consolidate Purchase Part Spend

If a company has not been disciplined in addressing data quality for their purchased parts, or if businesses and programs work independent of each other, there may be a good chance for rationalizing spend.  Items you are buying from suppliers don’t have to be exact duplicates to be a cost reduction target.  It starts with classifying all of your purchase part spend and enriching parts with attribute data that makes it easier to cluster and group similar items.  Quite often, the difference in price between similar purchased parts has to do with suppliers and volume.  If a company can consolidate this spend with less suppliers and offer higher volumes, pricing should drop significantly and savings will be magnified by the recurring orders.

Start by going after the low hanging fruit first, the most common items purchased across the enterprise.  Build support and executive sponsorship between engineering and procurement, pilot the process, then scale.  Each commodity group may require different steps to realize cost savings Make sure it’s not a onetime fix. Implement a governance process to help sustain cost saving efficiencies for the long term.

Here is a short video illustrating the process for Motors https://www.youtube.com/watch?v=Pm6tlc4qVgg&feature=youtu.be

Summary

There are three simple steps you can follow to reduce Direct Material Cost.  First, significant direct material savings can be attained if you take a cross-business, cross-functional approach to savings that is sponsored at a high level in the organization.  Second, a key success factor is to make it easy to reuse preferred parts and establish a governance process to approve new part requests when a new part is needed.  Remember, to make it easy to find parts you will need cleansed, classified and normalized data.  Lastly, if you’re migrating parts to your ERP system, make sure you identify and process the duplicates as part of the conversion process.  Focus on the purchased parts first as that is where the low hanging fruit resides.  By consolidating similar part spend with preferred vendors, a company will get way ahead in controlling direct material spend.

About Convergence Data

Companies with chaotic or incomplete data trust Convergence Data to scrub that information into an organized, efficient structure. The company specializes in: 

  • Minimizing part duplication
  • Cultivating part standardization and re-use
  • Reducing part count
  • Streamlining inventories
  • Improving leverage with vendors
  • PLM/ERP migrations

Convergence Data enables customers to manage data in a variety of industries, 
including Aerospace and Defense, Appliances, Automotive, Electronics, Industrial Manufacturing, and Oilfield Services. 

For companies deploying PLM or ERP solutions, the cleansing, classification, and data enrichment services from Convergence Data can be a significant benefit. 

To learn more about Convergence Data and receive a Data Value Analysis (DVA) go to: www.convergencedata.com.

Topics: Part cost, Manufacturer Parts, Classification, Duplicate Parts, Governance

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