UPPER MANAGEMENT SUPPORTSUPPORT

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Supplier Identification

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organizations that attempts a project like this needs to have the steering committee develop the mission statement. The mission statement needs to be communicated throughout the organization and everyone needs to understand the objective of the organization as the project moves ahead.

Upper management support is the critical starting point for a supply base reduction project. This project will take a significant amount of time and money to be done correctly. More than just lip service will be required to make it happen. The savings from a project like this are tremendous but the up-front costs can be significant and must be committed to so that the project can be completed.

The upper management group must all be for the project and support it wholeheartedly if it will be successful. There must also be some teeth in their commitment, and serious consequences for those who would try to hinder the process at any level. By “teeth” I mean disciplining people who do not help with the project or try to go counter to what the project is trying to accomplish.

When a project of this size is embarked on, some suppliers are going to lose business. This has to be known and understood by everyone involved.

A strong commitment and support will be necessary as the business that was lost is attempted to be recovered. I will share a couple of examples of attempts to get lost business back.

In the first example, a company was in the running for one of the com- modities that was being investigated. They were invited in to do a presen- tation, and one area where the company had trouble previously was the notification of material and process changes so that the customer could notify their customers of possible problems. Since this involved a chemi- cal that was registered with the EPA it was required that the performance of the product be guaranteed and any changes that were made needed to be reported. When asked directly if they would notify the company of any material or process changes the answer was, “certify all of our plants and you will be fine.” As a result, the supplier later found out that they had lost a large portion of business, and they even hired an ex-employee of the customer to try to get inside the customer’s organization and get the busi- ness back.

In the second example, the supplier evaluation meeting was attended by just a couple of the supplier’s sales representatives, who said they really did not want the business anyway. As a result the customer immediately moved the business to a new supplier. The supplier’s CEO was not happy about the decision. He knew they could have received the business for all of North America as well as Europe and Asia for this customer. The CEOs of the two companies met on the golf course and the supplier tried

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to recover the lost business through friendship at the top level. As the two CEOs were playing golf, the CEO of the customer company told the CEO of the removed supplier that his company should have the business for this product line. This was an example where a customer had previously gone through a type of supply base reduction and never followed through, so the supplier did not believe that this customer would actually remove any busi- ness. If the customer CEO is not fully supporting the process, he under- mines the entire process that is taking place, not even realizing that the process has just been destroyed by a casual comment to a friend. Other meeting places where this type of behavior may go on would be technical shows, conferences, and exhibits.

One way for you to convince upper management to support the reduc- tion effort is to present a concrete example of savings to be realized. If an example is not available, the product group selected to work on first should be one that can show a high rate of return rapidly. Upper manage- ment talks money and as they see results they will be even more supportive of the process.

In most businesses today, raw material costs exceed labor and manu- facturing costs by several times. Table 5.1 shows a small reduction in raw material costs.

The assumptions made in the table are: The raw material costs are 50 percent of sales and the overhead costs are 30 percent of sales. Labor costs are assumed to be 15 percent of sales. These percentages are a close reflec- tion of typical ranges that occur in businesses today.

As can be seen from Table 5.1 a five percent reduction in the cost of raw materials yields a 50 percent improvement in profit performance. This type of impact is what upper management is looking for and it is a way to save lots of money. These types of changes should fall straight through to the bottom line of the organization.

Table 5.1 Small reduction in raw material costs.

Case 1 Case 2

Sales dollars $1,000,000 $1,000,000 Raw materials $500,000 $475,000 Labor costs $150,000 $150,000 Overhead costs $300,000 $300,000 Total costs $950,000 $925,000 Profit $50,000 $75,000

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Upper management must be convinced of the benefits and value of doing the project before it is started. Many times a simple table like the one shown above with figures from your own company can put some real numbers in front of them and show the potential savings for your business.

This tends to bring the savings home.

Be sure not to let the project lag so that upper management has to ask what is happening with it. The project needs a success story and to get that requires that the project keep moving and getting some results. In the beginning when large amounts of time and money are being invested, upper management needs to know that progress is being made and that positive results are being seen.