De-costing Is Part of New Dynamics for Improved Productivity

June 3, 2014

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De-costing is a relatively new term in supply management and purchasing. Its activities require multidisciplinary teams and venerable, strategic supply partners, including machinery and machinery parts makers, willing to cooperate with them on activities designed to lower equipment consumption and thus improve productivity.

Transparency is increasingly important in the purchaser-distributor-manufacturer relationship, especially when it comes to plant equipment and replacement parts. Purchasing managers expect more visibility into parts manufacturers’ pricing models, and manufacturers and distributors are delving deeper into the end-customers’ operations to better understand cost drivers.

“De-costing” is a collaborative exercise purchasers and their supply partners — including distributors and, further up the supply chain, components manufacturers — can undertake in their quest to improve productivity. A relatively new term in the purchasing world, de-costing is defined as the reduction of actual expenditures from one period to the next. It is achieved by lowering consumption, such as the need to purchase new equipment, parts, and supplies. Other de-costing activities include decreasing costs associated with machine maintenance, repairs, downtime, and energy consumption.

Ultimately, de-costing is all about distributors, parts manufacturers, and purchasers partnering for better productivity, profitability, and competitiveness. De-costing involves tackling the total cost of ownership with renewed vigor and greater attention to detail.

Measuring Before Managing

Purchasing managers can play an important role on cross-functional teams responsible for de-costing initiatives. As with any type of continuous process improvement, de-costing must begin with clear baseline metrics from which to measure incremental progress toward goals. These metrics must waterfall from the highest organizational objectives to process-specific costing exercises on the plant floor.

Along with colleagues from operations and other departments, purchasing decision-makers must understand the company’s or site’s overarching performance and productivity-improvement targets and capital expenditure expectations.

Drilling down from there, purchasing directors and managers from other disciplines, such as design engineering and maintenance, need to review what machines, and what parts and components of those machines, are critical to plant productivity. That process should include documenting costs associated with keeping existing equipment running. This is the starting point for the multidisciplinary team’s engagement in decisions to reduce costs and improve productivity.

For example, at most manufacturing firms, electric motors are vital to the operation of numerous machines on the plant floor. Ball bearings and seals are among components essential to proper performance of the motor’s rotating parts. When these relatively small components do not function correctly, the entire machine can go down.

This downtime can have a huge order of magnitude. Typically, the more expensive the machine, the more challenging and expensive it is to repair. However, just as there is a compound impact when motor components fail and machines go down, there is a multifactorial “win” when that same machine remains fully operational. For instance, there is less purchasing of replacement parts, and there is a reduction in costs associated with rebuilding a machine or buying a new one. Most importantly, there is uninterrupted manufacturing of goods to be sold at a profit.

With so much money on the line, it is critical for purchasing managers, as part of the cross-functional team, to be armed with costing data related to key machinery uptime and downtime. Purchasing, not just operations and maintenance, also should stay informed on the expected lifespan of bearings and other components. The whole team should participate in tracking and analyzing actual performance of these parts against manufacturer or distributor guarantees.

As daunting as it might seem to dive into the minutiae, if the purchasing team cannot measure its impact on these baseline costs, it cannot provide evidence of how procurement strategies are directly supporting de-costing efforts.

What to Expect of Parts Manufacturers

The good news is that purchasing managers and their multidisciplinary colleagues do not have to do all of this data gathering and analysis on their own. Reliable parts producers and their distributors can help kick-start de-costing initiatives and, if desired, actively guide and manage de-costing activities until they can be shifted to internal teams for ongoing oversight.

In choosing strategic supply partners to assist with de-costing programs, it’s important to ask: Is the components manufacturer or distributor focused on making your business more productive? Or do they seem most interested in simply selling more parts and services?

For example, here is how to recognize when a parts manufacturer wants to truly invest in the big picture of the end-user’s overall productivity. Often by way of their distributors, they will come to the table with much more than their price-per-unit and bulk-discount quotes. They also will offer a manufacturer’s guarantee for product performance.

These producers will proffer guidance on how to properly maintain and optimize not only the part they offer but also the machine for which their part is a component. Parts manufacturers of this caliber will readily provide return on investment data. And beyond supplying the part or component, their resources will include on-site training for maintenance personnel as well as remote monitoring and analytics for plant equipment.

If a parts maker passes muster on these counts, the company is likely to be a solid partner to support de-costing activities.

Progressive providers of rotating equipment technology, parts, and components understand that purchasing managers often are measured by period-over-period cost reductions and decreases in overall spending. Yet purchasing systems do not necessarily integrate with manufacturing floor software or maintenance monitoring applications. Without this data at their fingertips, it is challenging for purchasing departments to quantify cost reductions associated with their parts procurement decisions and lower maintenance spending.

Parts manufacturers can turn the tide on that challenge by providing an abundance of information straight from the source. For example, as counter-intuitive as it may sound, de-costing activities often start with suggestions from the components maker about how to reduce spending on parts and how to quantify those savings. As the purchaser, you deserve to be able to measure the monetary value of expected versus confirmed savings — the total value beyond the initial cost of purchasing parts or services.

One way to accomplish this activity is through documented solutions programs, a type of software program for measuring the monetary value of confirmed savings. To help purchasers perform this analysis, a leading parts manufacturer might provide a software system for collecting and tracking information about the buyer’s parts purchases and how they are performing on the plant floor.

This type of IT system can provide a prediction for estimated savings to be achieved from the use of the parts manufacturer’s products and services. The components provider and the purchaser, with input from other departments, check in with each other periodically and add more data on actual performance into the system. The technology will identify when the customer achieves the predicted savings, including milestones and prospects for process modifications along the way to ensure goal attainment.

A de-costing initiative might go through three phases: an analysis cycle, implementation cycle, and a sustainability cycle. In the latter step, the process is simply turned over to customers to manage.

In the first step, the analysis cycle, the parts maker can help purchasers and their cross-functional teams to identify specific cost-reduction opportunities. This process doesn’t have to be complex. Simple changes can add up to millions of dollars in savings. For instance, one food maker worked with a components manufacturer to identify $15 million in de-costing activities. A metal producer found more than $50 million in de-costing activities.

De-costing activities for an electric motor might include:

  • Procurement of higher-quality components for critical motor parts, such as bearings and seals, for extended machine life
  • Changes to machinery maintenance schedules and techniques, especially for lubrication, to ensure equipment is running with minimal friction at optimal speeds
  • “Remanufacturing” used bearings
  • Implementing best practices for parts and component stock levels to reduce downtime.
During the implementation cycle, the parts manufacturer should provide a list of activities that need to happen to meet cost-saving objectives and offer to oversee or outsource some or all of those activities on behalf of its customer, as needed.

A de-costing activity should be something that can be implemented and measured within a specific, predetermined time frame. Parts manufacturers should offer guarantees to back up their de-costing projections.

For example, one leading provider of bearings and other components for rotating equipment was able to identify how a customer could evaluate its overall spending on a particular type of product, including costs for parts, maintenance, energy, and downtime. This parts manufacturer helped the end-customer eliminate five times its original level of spending within a 36-month period. Fifty percent of these savings were achieved in the first 12 months of the customer’s de-costing program.

Unearthing Opportunity Cost in Contracts

A de-costing focus in procurement also can unearth opportunity cost in traditional service contracts. Service and maintenance costs are a stress point for many manufacturing organizations because they can be so hard to predict. There is the issue of unplanned overtime if a critical machine goes down on second shift and requires overnight emergency maintenance.

There are also hidden costs associated with a stressful work environment for machinists, assembly operators and other employees whose productivity is impacted by broken or ill-performing machinery. Machine downtime interrupts employee focus and decreases morale because of missed productivity targets and lack of control over one’s output.

Through no fault of their own, third-party service providers, such as contract equipment-repair businesses, are not typically incentivized to make enhancements to help machinery perform significantly better. They are paid to get machinery up and running again at its normal level or to give equipment a regularly scheduled tune-up to keep it operating at the status quo. These contracts generally do not include any incentives to reduce parts procurement.

Even equipment OEMs aren’t necessarily best equipped for making incremental improvements to their own machinery to boost productivity and reduce downtime. On the other hand, a best-of-breed components manufacturer specializes in getting that extra ounce of power from every machine. Leading parts makers expend a lot of their own resources and years of study on how their components can make a machine run faster and with less friction, less energy, and less grease and oil, for example.

They also can propose maintenance plans designed to reduce overall parts consumption. If desired by the customer, they can execute or oversee these plans on an ongoing basis.

Because their knowledge goes deep instead of wide, these types of supply partners can be the best partners for continuous process improvement, such as de-costing activities. When purchasers, distributors, and manufacturers work together in this way, productivity and profitability are sure to prevail.

Top photo credit: General Bearing Corp.
Bill Moore is senior vice president of sales development and channel management for SKF Regional Sales and Service NAM, part of SKF USA Inc. He can be reached at (267) 436-6690 or william.c.moore@skf.com.
This article was originally published at My Purchasing Center and has been republished with permission. For more stories, visit MyPurchasingCenter.com.
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