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Driving Long-term Savings Within Your Supply Chain

Do you know how much your supply chain costs impact your bottom-line profit? Do you know how much improving the productivity in your supply chain can increase your net profit?

In the globalised age, where competition is harder and harder, looking at internal efficiencies becomes a powerful driver for increasing net profit. A reduction of supply chain costs by 5% can impact your profit and loss (P&L) and could  potentially double net profits.

It’s not uncommon for efficiency improvements to yield annual savings of between 2 million and 10 million Euros, depending on the size of the company.

Based upon these numbers, the advantages of improved supply chain efficiency have caused many to implement long-term strategies to reduce costs. If you are thinking in adopting such a strategy, there are a several questions to consider:

  • How much does your supply chain cost you today?
  • How much should it be costing you?
  • What’s your roadmap to strategic cost reduction look like?
  • How can you use technology as a tool to achieve your financial goals?

How Much Does Your Supply Chain Cost You?

 

Before you do anything, you need to run an analysis on your supply chain costs. Depending how your systems are set-up, this can be as easy as clicking a button or as complex as forming a team to perform a thorough cost analysis. If you have a complex system, you may want to consider a suitable IT solution to ease the burden of analysis in the future. Understanding the numbers proves critical in later phases of this process.

According to The Hacket Group:

“While 94% of organizations say digital transformation will fundamentally change supply chains, only 44% have a strategy for getting there.”

In their report “Analytics: Laying the Foundation for Supply Chain Digital Transformation” the group has set the four stages of maturity to analytics capabilities.

Supply Chain Analytics Maturity Model

Most companies still operate in stage 1 and stage 2, with small pockets building towards stage 3, but the trend indicates that most companies will operate on steps 3 and 4 over the next three to five years. You need to take action now in order to simply keep up with the market and your competition.

How Much Should Your Supply Chain Be Costing You?

Once you understand your supply chain costs, you need to benchmark your organisation against best-in-class supply chains in the market. The list below from Benchmarking Success shows average and best-in-class enterprises over different industries:

metrics across industry

This benchmark can give you a sense where you stand. However, long-term cost savings need much more than a competitive benchmark goal. To achieve these savings, you need to be strategic and follow a systematic and ambitious approach.

What’s Your Roadmap to Strategic Cost Reduction Look Like?

When executing strategic, long-term cost savings plans, focusing resources to stimulate growth and differentiation matters much more than cost cutting. Strategic ambition and an underlying culture of innovation and customer-focus differentiates successful programs from those that focus solely on technology.

In PwC’s “More for less: five steps to strategic cost reduction,” the organisation notes that a strategic process to move the business forward ─ optimising rather than just cutting expenses ─  ensures your business can sustain competitive relevance and maximise its potential. This process should look like the following.

1. Start with the strategy.

A clear view of your global strategy ensures consistent understanding across your organisation. It also enables you to see how viable your projected cost returns will be five years from now, especially in the face of new technology. Plus, understanding how costs occur across business units leads to more clarity into strategy and cost projections.

2. Align costs to strategy.

Differentiate the strategically-critical costs from the non-essential costs. Targeting where resources earn the best return, rather than just cutting costs, leads to strong results. To get started on t this process, you should differentiate the capabilities needed to fuel profitable growth (‘good costs’ targeted for investment) from low-performing business and inefficient operations (‘bad costs’ targeted for overhaul or elimination).

3. Aim high.

Be bold, be brave and be creative. Look beyond what’s always been done.  Ask why. Find more alternatives. Look beyond marginal efficiency savings, and use the 10X concept to achieve a game-changing boost in capabilities. Examples include the opportunities opening in robotic underwriting or automated materials handling.

4. Set direction, and show leadership.

Deliver cost optimisation as a strategic, business transformation programme. Ensure central governance, secure senior management agreement and buy-in. Engage the workforce at all levels, and develop ways to encourage personal ownership and organisational collaboration.

5. Create a culture of cost optimisation.

Ensure you embed a culture of ownership and incentivise continuous improvement. Regularly review strategic cost reduction priorities. Update them in the same way as your business assesses the relevance of its strategy and the opportunities ahead.

How Can You Use Technology as a Tool to Achieve Your Financial Goals?

By following these guidelines, you can achieve significant savings. For example, you could implement an enterprise-wide automated guided vehicle (AGV) deployment plan. AGV systems have established themselves over the years as reliable drivers of improved efficiency and can help you achieve your 10X goals. Deploying several systems throughout an enterprise can save you up to €35 million (based upon previous customer experience).

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Ultimately, carefully examining your supply chain costs and working toward improved operational efficiency can transform your business. It has the potential to maximise profits and usher your company into Industrie 4.0.

Managing Risk with the FEED Process

By: Doug Houghton, JBT Chalfont

Doug is a Sales Manager with JBT. He works primarily with food and beverage customers based in the United States. 

Have you ever heard the term “three guys in a pool?” It refers to the age-old process in which multiple bidders all receive a request for proposal (RFP) and are “tossed into the pool” in the competitive bidding process. Here, vendors attempt to drown each other. They beat each other down on price, dive deep into engineering details, and generate fixed price proposals that account for every nut and washer in the proposed system. The bidders produce a 100-page proposal that no one really wants to read. Then, the end-user typically eliminates one vendor, and the process starts all over again. Finally, a sole survivor climbs to the side of the pool, seemingly victorious, only to be thrown back into the pool by a procurement group. The crushing reality is that most of the bidders spend vast amounts of resources, human capital, and time only to get nothing for their effort.

Water polo

Meanwhile, the competitive bidding process also affects those who initiate it. End-users learn about several different vendors, and most often, they have a favorite after only a few discussions. But instead of moving forward with their favorite vendor, they must sit at the edge of the pool and watch as their favorite vendor tries to drown the competitors. They can’t get the ball rolling on their project and ultimately lose out on some of the benefits of the equipment they desperately want. Then, even if their favorite emerges from the pool victorious, they watch as their procurement team pushes the vendor back into the water, where they may potentially drown again.

Throughout this process, the buyer assumes that they will get the best system solution for the best price. The three guys in the pool all get the same RFP, the same data, and the same opportunity to visit the site. As a result, the buyer ideally receives proposals that truly compare “apples to apples.” In reality, this is never the case. All too often, the RFP isn’t clear and is open to interpretation. The data may not be accurate and thus open to misinterpretation.

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Let me give you an example – recently I was working with a client on large automated guided vehicle (AGV) system at one of his company’s production facilities. All the bidders were given the same data set. However, the data was interpreted one way by my team and a totally different way by a competitor. This misinterpretation caused a difference in AGV count by almost 10 vehicles! When the client asked us to explain our results, we showed the client how we had analyzed the data and line rates. Fortunately, we had spent a fair amount of time with the client reviewing their data during the bidding process, and in the end, the client agreed with our interpretation of the information. If they had chosen the competitor, then the system would not have been able to maintain throughput. They would have ended up spending more money in the long-term to make the system work.

By throwing three guys into the pool, you want to an even comparison. But, as evidenced by my recent experience, this often doesn’t happen because of the constraints placed on the suppliers in the pool. We’re all making an informed decision, but it might not be the same one. In all likelihood, what you really want out of the competitive bid process is the right solution at a fair price. That’s where the FEED process comes in.

What is FEED?

The RFP is designed to reduce risk for the buyer. We have noticed, though, that the vendor can be impacted negatively, too. The FEED process helps to eliminate risk for both the buyer and the vendor.

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Front-end engineering design (FEED) is a project-development process focused on producing enough information to enable decision-makers on both sides of an agreement to buy-in on a project. This means that both parties can assess risks and make resource decisions without over-extending commitments in the process. FEED uses a stage-gate process, whereby a project must pass through formal gates at well-defined milestones before receiving funding to proceed to the next stage.

FEED 1

In FEED 1, each party (vendor and client) only expends the energy and resources needed to reach the point of making a decision to proceed. They do their “due diligence.” Everyone knows that FEED 1 will not produce a fully-designed and fully-engineered solution – this would result in an over-extension of resources. FEED 1 should only commit enough resources to bring the client to a decision-point, where they choose one vendor over others. It provides decision-makers with a level of comfort in a vendor while ensuring the vendor’s concept and pricing is in line with the return on investment (ROI) and project goals. The buyer is able to make a decision regarding a vendor’s concept and budget pricing. At this point, the buyer chooses a partner.

The deliverables for a FEED 1 proposal include:

  • Preliminary
    • Schedule
    • Layout
    • Vehicle count
    • Throughput calculation
    • Scope of work
    • Software interface definition
  • Detailed
    • Description of process flow
  • Budget price estimate of +/- 10%

The intent of FEED 1 is not to develop a fully-designed system and detailed pricing, rather to provide enough information to allow the buyer to make a decision.

FEED 1 reaches its end-gate when a customer commits to expend more resources, which is represented by a down-payment. This down-payment serves as the gate needed to progress into FEED 2.

FEED 2

FEED 2 commences with a purchase order (PO) issued by the client in order to fund more work. This financial commitment is only large enough (typically 10% of the FEED 1 estimate) to complete the work of FEED 2, which helps avoid the over-commitment of resources by either party. FEED 2 strives to eliminate risks to both parties as technical staffs from each party deeply and thoroughly analyze the project. Each party can now commit more resources because vendor selection and funding has occurred.

 Once the vendor receives a PO, the client holds a kick-off meeting at the project site. Representatives on both sides (vendor and buyer) who attend this meeting include:

  • Management
  • Project Management
  • IT/software
  • Operations
  • Sales
  • Procurement

Business people working on a laptop

The meeting begins with a salesman reading the detailed description of the process flow (from the FEED 1 estimate). During this reading, any questionable items are recorded in corresponding areas within an action-list book. Upon completion of the reading, the groups break into focus groups and take the action-list book with them. The groups then work through the list, making decisions on items requiring further investigation, eliminating easily-answered questions, and/or clarifying misunderstandings. Both parties keep the action-list book, and it becomes part of the overall project.

In the end, the vendor and the buyer work together to design the correct system, with the right functionality, correct interfaces, and ROI requirements. The result is reduced risk for both vendor and buyer.

The entire FEED 2 process occurs within a time limit, typically 60 days. Legal and financial terms and conditions are negotiated to agreement throughout the FEED 2 process. The final gate test for resolution of FEED 2 is a contract and purchase order for the full project amount minus the FEED 2 down-payment.

Deliverables of the FEED 2 process include:

  • Definitive
    • Schedule
    • Layout
    • Vehicle count
    • Throughput calculation
    • Scope of work
    • Software interface definition
  • Detailed
    • Description of process flow
    • Functional specification
    • Terms of sales

At the end of the FEED 2 process, a client will issue a final PO for the entire price of the proposed system and commissioning of their system begins.

The End Result

Working through this process with a client in the food and beverage industry, they realized during the reading of the general description that even their internal team did not fully understand their process. We were able to work together to identify a cost effective solution for them. Had we not utilized the FEED process with them, this issue could have ruined the entire project. We were also able to design an AGV for them that offered more functionality to their operation. Again, this saved them money and improved their ROI. In the end, the final FEED 2 price was less than the FEED 1 budget price. We reduced risk and provided a system that was exactly what the client needed.