Brian Smith: Today We have an exciting case study to share with you that tackles a range of client issues from sourcing and procurement to product and customer rationalization to network optimization and pricing.
A respected Global Construction Materials client was facing a daunting challenge. Cost of goods sold, or COGS as it’s sometimes referred to, had steadily been rising at a pace of 1 to 2% per annum across an extended period of time. This trend was particularly concerning for them, Given that a majority of their products are sold in highly price sensitive and competitive marketplaces.
Jim Murdoch: 55% of direct material spend was not under contract. There was no clear organizational ownership for sourcing categories. 35 million dollars of spend Was in the dreaded "other" category, and it was actually the third largest category of spend. They didn’t really have a management operating system that could provide transparency of performance It was really essentially a buying organization as opposed to a strategic procurement organization.
Brian Smith: Determined to address this negative cost trend head on, our team Audere partners embarked on a mission to help the client transform their operations. We will tell you how they saved 47 million within six months and walked away with a return on investment of 23 to 1.
Welcome to Change and Sustain the podcast, where we take you on a journey of organizational transformation, exploring the power of people, processes, systems and technology.
Our story begins with A respected Global Construction Materials client who operated across the globe with major distribution networks in Europe and the U. S., as well as significant operations in Asia. Thousands of SKUs, stock keeping units, were offered to thousands of customers in a range of sizes, formulations, and types. Manufacturing was highly distributed and no single manufacturing operator was a significant part of the whole. Leading the charge was our skilled analyst Jim Murdoch, who played a pivotal role in this transformative journey. Jim, could you share with us the initial scope of the challenge and how our team approached it?
Jim Murdoch: We started off with an analysis phase looking at their current procurement processes, management operating systems, organizational roles and responsibilities and a number of other areas. And we did that by taking a look at the current state through detailed process mapping.
So really mapping out the end to end procurement process as it was in the current state. We spoke with a number of people in the procurement organization. Everybody from senior leaders in the organization, Down to what I would call kind of the day to day staff members
We really did some deep dives into their data around direct materials purchases and sliced and diced that in a number of ways to really understand what were the drivers of current performance and out of that. We were able to highlight some numerous gaps that were really contributing to that negative cost trend. 55% of direct material spend was not under contract. And there was no clear organizational ownership for sourcing categories. Over half of their direct material spend Were basically spot buys on the open market
35 million dollars of spend Was in the dreaded “other” category, and it was actually the third largest category of spend.
So, you know, they had categorized things such as films, packaging, gypsum, isocyanates, you know, various materials that they, they purchased. But unfortunately, other was, was the third largest category. And again, 35 million of spend in that category. So really just an uncontrolled category of spend that was, that was pretty significant.
We found from a staff perspective and you know, you’ve seen this in new, in numerous places particularly with purchasing and procurement functions that the staff really operated in a tactical reactive manner. It was really essentially a buying organization as opposed to a strategic procurement organization.
The staff there were essentially just executing purchase orders on the open market. Very tactically focused, not strategically focused.
They didn’t really have a management operating system that could provide transparency of performance a vehicle for facilitating continuous improvement and understanding, you know, what are some things we need to do to continually drive improvement.
And they really didn’t have the tools or training. Or process knowledge again to leverage global spend. And as a result, a lot of sourcing activities were regionalized. You know, as you pointed out, it’s a global company. They had regional procurement organizations, North America, Asia, Europe. And they tended to operate in silos, so therefore they weren’t able to leverage their global spend. It was suboptimal in many cases because of that.
They really had limited supplier performance management tools in place. They didn’t really have a good mechanism, a structured formal mechanism for Interacting with their suppliers to, to have the dialogue around getting improved pricing, getting improved terms, those, those types of things just didn’t really exist either. And so therefore help to contribute to this cost issue that that we were seeing.
Brian Smith: Wow, that analysis then produced an awful lot of clarification about what was going on with that COGS trend
Jim Murdoch: Yeah, no, it absolutely did. And I think it was very enlightening. For senior leadership to really understand what the drivers were of performance. So they came to us knowing that they a, had a cost issue the negative cost trend but they weren’t necessarily sure where to address it or, or what some of the root causes were.
We embarked on a 36 week implementation program that was really focused kind of five critical areas within the procurement supply planning and how that interface and interacted with the larger S and O P sales and operations planning process. , category management , tolling interestingly enough, there was an opportunity to look at ways to bring back in house purchase price variance reconciliation, or PPV reconciliation And plant level purchasing.
we started working on really improving the overall process.
We really went through a rigorous exercise of taking all of the spend and properly categorizing it. And in particular, taking that bucket of other, which again was their third largest bucket, and really assigning it out into some meaningful categories and then assigning ownership. Within the organization, which then allowed the client to really focus resources on some of the critical categories of spend. We started to train and skill individuals into becoming almost subject matter experts in, in those categories. And we started to drive greater levels of accountability for overall category management amongst the procurement organization.
Jim Murdoch: They really had limited capabilities in terms of kind of vendor management.
Started ranking vendors that supplied critical raw materials based on strategic importance. To really allocate some of the limited resources they had much more effectively. So we could focus on vendors that were critical. To the client’s supply. For example, maybe vendors where we were single sourced or vendors where we had very long lead times. We were able to assign people to really focus on those. Really applying kind of the 80 20 rule where, you know, kind of 80% of the spend was really focused in about 20% of the vendors. So we brought a higher level of focus to the to the critical ones.
From start to finish in procurement, and we started providing the staff training on supplier conditioning. So starting to lay the groundwork for having conversations with suppliers about getting improved terms, getting improved pricing, and beginning to use that as a foundation to start to build out supplier scorecards so that they had some, some data and some, some factual items. With which they could go to their suppliers and again, begin to start those conversations. It was a skill. They weren’t very well versed in just again, the nature of tactical versus strategic. So helping to put those processes in place and helping to train them on how to start having those conversations was was very, very important as well. Then we started to work with the client to begin some price negotiations with with key suppliers and starting to get more favorable returns. And then from there, we also start to look at supplier consolidation. And alternative supplier selection practices. So again, once we put the processes in place and start to lay the foundations for beginning to to manage suppliers.
Now we’re more focused on categories. We’ve got people who are accountable for remote focused on strategic suppliers. We could start to look at maybe some consolidation areas. So where there’s some areas where if we focused our spend a bit more into a smaller number of suppliers, we could commit to increased volumes and we could get favorable pricing, favorable terms.
In some places where we were single sourced, we were able to start finding alternative suppliers and we work with the procurement organization to work with the quality organization to do some Efforts to kind of re qualify or or qualify new suppliers that we could use as as alternatives. I touched on the tolling piece as well.
We looked at some alternatives to actually bring some, some some told products in house, which ended up having a benefit. And so all of this again, really started to help the organization. Move to being more strategic.
Brian Smith: I was going to ask you about that because a great many of the things that you’ve, you’ve talked about they seem when you lay them out the way you’ve laid them out, they seem very simple and obvious. But it’s the packaging of all of that stuff together to fundamentally transform an organization and, and provide some strategic direction too.
Jim Murdoch: No, absolutely. Absolutely. And I think what was critical in that Also was Getting the client to start thinking about that shift to strategic procurement and by leveraging best practices in terms of procurement processes, procurement thinking, putting in that management operating system , we were really able to guide the client towards that sustainable change. And it started with looking at the mission and objective of the procurement function.
Brian Smith: you used the phrase management operating systems. Can you, can you tell us a little bit more
Jim Murdoch: Yeah, absolutely. And that was a critical piece of what we did. We recognized the need to really put in place a comprehensive framework that we call the management operating system. And so for some of our listeners who may not be familiar with what a management operating system is, I’ll take a couple minutes and just kind of walk through that.
The management operating system really is the ecosystem. By which decisions get made actions get taken. So it’s made up of of meetings. It’s made up of documents. It’s made of metrics and scorecards. And really, you can think of it as following the plan. Do check act cycle. It’s a way for key processes to be better managed as a way to drive transparency and accountability throughout the organization.
So installing that was was a critical piece of of what we did.
Brian Smith: Understand. I do think there are lots of folks listening might think, well, you know, we in our organization have lots of meetings already. We have lots of metrics already. So don’t we already have a management operating system?
Jim Murdoch: I would say They may. It’s certainly possible. What they would want to take a step back and look at is, is are those elements? Is that management operating system really driving action and driving results and continuous improvement? You know, so, for example, in the one that we installed for the procurement organization, we put in place a weekly P.P. V. Review meeting purchase price variance review meeting, and the purpose of that was not just to go through a large spreadsheet and look at, Hey, we’ve got this data. We understand what our purchase price variances are, and we review it. That’s that’s a component of a management system. But the real win and the real benefit there was in driving action.
So where we had negative purchase price variances, Actions were signed on. How do we know what happened here? How do we get this back on track to a purchase price variance that we’ve agreed with with the client or what we’ve, you know, got into our bill of materials and other things. If there was a positive purchase price variance.
What was the positives that happened there? How do we replicate that? So in terms of a management operating system, yeah, you can have meetings and you can have reports and data, but the real benefit of it is taking that to the next level and, and taking that to a point where. You’re able to drive actions that that really, truly improve performance.
Brian Smith: Very good. And if I can endorse that approach, it’s it’s worked for me for 30 years, Jim.
Jim Murdoch: Absolutely. I mean, right. We see it. We see it in so many of our clients, how how powerful and how important that that management operating system can be again in terms of driving performance, but also in terms of providing a vehicle for energising its customers. Cross functional collaboration and breaking down silos.
So another example with this client in the procurement organization was we put in an integrated supply planning meeting. So I touched initially that supply planning was one of the areas we had focused on. And so we put in an integrated supply planning meeting that was linked into the overall SNOP process.
And so what that allowed Folks to do was really get an understanding of what does that? What does the production plan look like? What does the operating plan look like and how does that align with our our purchasing? Plans. Well, how does that? Factor into a supply of raw materials and so you start to have this cross functional Dialogue where you’ve got the two organizations saying hey, here’s here’s what we expect to produce.
Here’s what we expect to need Purchasing. Are you on top of that? Do we have the raw materials, you know, factoring and lead times and other things? And so what that allowed the organization to get away from was the surprise factor. Oh, my goodness. We don’t have the raw materials for this, so therefore we can’t run it.
We’ve upset the operating plan. And now what do we do? And then you get into that firefighting mode that again, you and I have seen in lots and lots of places. The management operating system helps get you out of that. And so this was just another example where we were able to use it. To bring together a couple of, you know, what in the past had been siloed organizations to really work together for an optimal solution.
Brian Smith: Very good. Well, Jim, we’ve talked about what the problem was for this client. And we’ve talked about the things, the activities, please. That we undertook to solve those problems. Let’s talk about the most important part now. What are the results of all of it.
Jim Murdoch: Absolutely. At the end of the day, that’s what it’s really about. It’s, it’s about driving results not doing the work for the sake of work, but doing the work to really drive performance and that’s, what’s always key , and they were quite remarkable. So within the. The 36 week program annualized savings had totaled out to 14. 6 million. We had a 3. 2% reduction in the cost of goods sold. There was 700, 000 of in house product savings due to the efforts around in sourcing some products that had previously been told. There was a 100, 000 reduction in unfavorable freight purchase price variance, and a 20% decrease in the reliance on single source supplies and suppliers.
And so, you put all those things together, and I think the most impressive… Thing for me, and I think for the client as well, was it ended up being a 23 to one return on investment for the client in terms of our efforts and what we were able to achieve and deliver with them together.
Brian Smith: That’s a lot of numbers. 23 to 1 is pretty impressive,
Jim Murdoch: Yeah. I mean, that is a, that is a very, very impressive number. You’d want to put that up against any kind of investment that you could make, you know, if I could, if I could get 23 to one on my own personal investments you know, I’d be over the moon.
Brian Smith: I buy it. Absolutely. Very good. Okay. That’s fantastic. So it’s clear that the strategic actions taken by a team had a profound effect on this, this client, right?
Jim Murdoch: Absolutely. And I think this case study really exemplifies the importance of taking a holistic approach. Taking the holistic approach to address complex challenges was really, really important here. And it started with looking at the mission and objective of the procurement function.
The need to move from tactical to strategic and ensure we could have come in and and tactically addressed an issue. You know, maybe we would have gone after some price negotiations with clients, or we would have looked at maybe the tolling aspect. But by taking that holistic approach and really.
Getting the client to start thinking about that shift to strategic procurement and by leveraging best practices in terms of procurement processes, procurement thinking, putting in that management operating system that we talked about, we were really able to guide the client towards that sustainable change.
And. Significant benefits that we just talked about.
Brian Smith: Well, those results speak for themselves. 14. 6 million 3. 2% reduction in cogs. 23 to one return on investment. Those outcomes are, I think, a testament to the dedication and collaboration between our team and the
Jim Murdoch: They definitely were. They definitely were. And I think it’s important to note that this goes beyond just the financial gains. Part of the, I think, point of the case study is to highlight how the transformation really facilitated a culture of continuous improvement. And strategic decision making and how in the end, it empowered the procurement staff to be much more proactive, much more value driven as opposed to, you know, for lack of a better word, just being order takers, right?
We really empowered them to to make decisions. Within, within guidelines and frameworks of being a more strategic organization.
Brian Smith: Very good. Well, I’m glad we’ve had an opportunity to talk about this particular case study since it serves as a reminder. The sustainable change requires not only addressing immediate challenges but also implementing systems and processes that enable ongoing sustainable improvement. It’s a testament to the power of people and process and system and technology.
Jim Murdoch: That’s right, Brian. And we hope that this case study has provided valuable insights and inspiration . Remember, change is possible and sustaining that change is within reach when the right strategies are implemented.
Brian Smith: Well, thank you, Jim, for sharing your expertise and shedding light on this remarkable journey of transformation. And thank you to our listeners for joining us on this episode of Change and Sustain. Hit the subscribe button to be alerted for more stories of organizational change and insights into driving sustainable success.
