Trouble signs & cost drivers

by Dr. Robert A. Kemp

The concept that MRO is about 20 percent of the total organizational spend and 80 percent of the total transactions suggests that many MRO operations have opportunity to reduce total cost and generate value for their organizations.

In this column, I will identify five signs of trouble in the cost management process. Each problem identified stems from the use or misuse of cost drivers in planning and controlling our operations. The list of cost drivers at right can be associated with these problems.

Our first and foremost problem in cost management for any process is our first trouble sign — the lack of knowledge about the purchasing and payment process. Our solution is to absolutely understand the spend analysis. What do we buy? When do we buy it? Who buys it? Whom do we buy it from? How many items are purchased per buy? How do we use the product or service? Is it a standard item? Is there inventory? If so, where is it? What are the stocking levels? What do we pay for it? How do we pay for it?

Our second trouble sign is decentralized purchasing processes. In previous columns, I discussed organizing MRO activities around major commodities. Once you identify the commodities, you need a finite spend analysis for each commodity group. This data will identify where we can centralize the buy to build leverage, reduce cost, and increase service and value.

Failure to know and understand our cost drivers is a major contributor to poor cost management and control. This often stems from the lack of sufficient training and the wrong people in the job. Equally important, though, is the fact that this failure derives from our budget and accounting system that divides cost and cost control to different non-coordinating process. For instance, MRO managers aren’t responsible for transportation costs. Similarly, travel and entertainment is allocated across the budgets of many cost centers. By creating sound commodity teams, we take a big step toward bringing these and other cost drivers under better control.

The list of cost drivers provides examples that have ramifications across most organizational processes. Each industry, commodity team and major product team must identify its own list of drivers for research, training, modeling and control.

Poor relationships with our suppliers are our fourth problem. I’m always amazed by the way so many organizations treat their suppliers. We expect them to perform 125 percent, but in many cases, treat them with near total indifference. We don’t trust them. We don’t share information with them. We don’t involve them in our research or plans. Perhaps worst of all, we don’t provide incentives for them to want to share information (i.e., product or market knowledge) with us.

 Our final problem is that many of us have given little or no thought to creating leverage in the supply base. In decentralized organizations, buyers and managers may resist the idea of coordinating buys to build leverage because they don’t want change. Consolidation of the buy can take place across buyers, plants, divisions, even globally. The capabilities are limited only by our ability and willingness to cooperate and share with others. When your spend analysis shows that you have multiple buyers in the same plant or division buying the same thing and, often times, at significantly different prices, it’s time to drastically centralize the buy.

All organizations have cost drivers that can be identified, studied and modeled in detail. If you still have uncontrolled low-dollar buys from multiple sources for the same thing, solving these five problems and using your cost drivers will help bring costs under control.

Robert Kemp is a consultant, speaker and the former president of the Institute for Supply Management. He can be reached at kempr@mchsi.com.

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