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How Partners Cut Costs:
Manufacturers and Distributors share real-world tips that work.
This panel session highlights specific tactics business partners are using to eliminate redundant costs and improve efficiency.
by Thomas P. Gale
Like motherhood and apple pie, cost reduction and increased efficiency in distribution channels are concepts everyone agrees on. Beyond the concepts, they have a different meaning when the rubber hits the road in day-to-day transactions.
Two distributors and two manufacturers of power transmission/motion control products shared what’s worked for them in a presentation at the Power Transmission Distributors Association annual meeting a few months ago, moderated by Paul Taylor of Martin Sprocket & Gear Inc. Here’s a few great ideas yielding some strong payback.
Pull vs. push
Flexible Steel Lacing Company, Downers Grove, IL, took an approach ten years ago to focus on improving its delivery performance as a strategic goal. A manufacturer of conveyor belt fasteners, Flexco has a make-to-stock production environment, with few specials. Its goal for next year: 95 percent of orders shipped complete in three days.
The payback has gone beyond their expectations, according to Rick White, executive vice president of Flexco. By working the goal of reducing delivery lead times, the company revised its distribution policies and focused on changing its internal processes to benefit the distribution channel and reduce the inventory in the channel. It established pricing, return and minimum-order policies that specifically provided incentives for keeping distributor inventory levels low.
Internally, Flexco focused on reducing its manufacturing cycle times. The company went to a manufacturing workcell environment that focuses on key product lines. Along with that it adopted lean manufacturing principles to reduce waste, decrease machine set-up time, and streamline its production processes. It also improved internal communications to lessen its need to rely on traditional MRP product demand forecasts. Flexco found the cycle time reductions it was gaining made it less dependent on its MRP demand forecasts, and gave it an ability to rely more on the real-time pull information coming from the distribution channel, versus its MRP system.
The company also adopted operating performance measures that were directly related to how quickly it was shipping orders complete and on-time. The net effect of these three initiatives: Flexco has seen:
- labor productivity increase 10.5% over 2002
- total inventory decrease 35% since the mid-nineties
- delivery performance increase 17% since the mid-nineties
Key benefits to distributors include improved stock turns and lower processing costs, including paperwork, labor and errors. “The more reliable a supplier is helps to reduce uncertainty for a distributor, which should lead to less stock sitting on shelves,” White said. “If we ship faster and more accurately, so the distributor receives complete stock orders in one shipment, that’s going to have big impact on their internal costs for dealing with inventory and errors.
“We feel our focus has given us a competitive advantage,” White said, “particularly in the face of increased international competition. No matter what your lead times are, if you can improve them , it’s a win-win by lowering channel inventory and improving operating efficiencies internally for both the manufacturer and its distributors.”
Freight cost recovery
It’s possible for distributors to build a program to recover freight costs or even make it a profit center, according to Ken Miko, BDI Corporation, Mississauga, Ontario. But it requires an attitude that freight is a service and it’s OK to make a profit. It also takes an aggressive management program to control freight cost and change your internal culture “to not give it away.”
Three keys to an aggressive freight recovery program:
Attitude: Bill customers freight unless contractually obligated to absorb (this is a for-profit service that you can manage more effectively than customers). If you can get as close to 100 percent recovery by billing, those dollars go to the bottom line (i.e. $1 billed in excess of total external freight costs impacts bottom line directly).
Evaluate: your customer base as to who you can/can’t bill for freight. Analyze your customer database individually and set the freight flag on for all – you can change if necessary.
Accomplish: by using your legacy system or complimented system (Options: add a % of total invoice value as freight charge, or accumulate freight in the system and post to the invoice with a mark-up, or factoring a combination of truck/UPS charges). The more automated the system, the better. That reduces errors and makes it easier to “institutionalize.”
A successful freight recovery program has a few important building blocks. The first objective is to reduce LTL freight rate paid. Externally it’s important to benchmark standard freight rates. BDI analyzed each of its carriers through an independent service, Czarlite freight rates, that it uses to negotiate discounts and volume rebates.
Contracts are an important part of managing the external parts of this program. BDI uses a third-party bill payer to audit and pay its freight bills, which ensures that freight partners are in compliance with the negotiated contracts. Miko stresses it’s critical to communicate the programs set up with your suppliers and selective carriers – monthly at first – then on a quarterly or semi-annual basis. It becomes pretty obvious if you are using 15-20 carriers that consolidating to four or five can yield some effective cost savings. But your list of common carriers has to be on the purchase order so your suppliers are on board as well.
BDI uses three formulas to measure program success:
1. Net freight measures the sum of total freight in and out minus freight billed.
2. Net freight as a % of sales (net freight divided by total sales) is a key monitor of how well you are working the recovery plan.
3. Percentage of freight recovered equals freight billed divided by the sum of your total freight in and out.
Internally, buy-in to this program throughout the company is key. It has to go beyond management through the whole organization to receiving. It requires educating salespeople and customers about how you are working to reduce your internal costs through this program. It can be included in documented cost savings once you have the analysis tools in place.
The biggest factor to success, according to Miko: “You need to establish an aggressive role with an aggressive means to make money on this service. After that, you have to monitor the process closely, and track the information you are generating. Like any process, it takes effort to get in place, but it’s worth the pain to turn an expense into a bottom line that affects you in a positive way.”
E-business tools
The Timken Company, Columbus, OH, has built electronic tools to reduce costs and errors in day-to-day transactions with it distributors. And while standards remain an issue, there are a lot of options through EDI, system-to-system, and Web tools that are driving a lot of costs out of the system, according to Bob Daniel of Timken. One example is the company’s joint venture CoLinx, formed with INA Holding Schaeffler KG, Rockwell Automation, and The SKF Group to provide shared e-commerce and logistics services throughout North America. Services offered by CoLinx include warehousing, packaging, labeling, kitting, export packaging, light assembly, freight bill payment and audit, web stores, system-to-system connections with distributors, transportation management, cross-docking, shipment consolidation, and returned goods processing.
Timken has seen some real returns from e-business tools, Daniel said. The company now receives about 45 percent of transactions via EDI and about 10 percent through the Web. The remaining 45 percent is by phone and fax mainly. As a benchmark, Daniel says, let’s assume the average order entry cost per line is one dollar. Based on that assumption, the average order entry cost per line for EDI is 25 cents; it’s 43 cents for Web transactions.
Web transactions are increasing, Daniel notes, and as the volume increases, the cost to process drops dramatically. The company is also seeing 20 percent fewer “ordered in error” events as well as a strong decrease in data entry errors through its online tools.
Web-enabled distributor
With all employees using PCs, Bearing Belt Chain Co., Inc., Las Vegas, NV, does everything it can over the Web, says President Steve Philpott. He detailed three areas where he is seeing significant cost savings through the use of online tools: order upload, online stock checks, and electronic price file updates.
This three-branch distributor uses CoLinx, which Philpott says has been instrumental in helping him save money in his transactions with suppliers. He is pushing a lot of suppliers to accept online orders. The company exports purchase orders from spreadsheets and uploads them over the Internet without rekeying. Philpott estimates that it saves $2000 a month conservatively by eliminating rekeying and removing typographical errors. He further estimates monthly savings on the vendor end of $200 a month for not having to re-key faxed or mailed orders, and a further $500 per month due to reduced typo errors.
This is something any small distributor can do that yields big results, Philpott says. The investment is minimal, especially with manufacturers who support this type of online order. The cost of manual order entry has to be driven out of the channel as the tools exist, Philpott notes.
For online stock checks, employees will have three or four browsers open to supplier Web sites. Customers on the phone or at the counter get immediate information on where the item is if it isn’t in BBC’s computer system. Even with the cost of T1 data lines, BBC’s long-distance phone costs have dropped an estimated $200 per month as salespeople can pull that information from the Web versus a phone call. Result: Sales volume per inside salesperson has risen 9 percent – more sales with the same amount of people.
Philpott said manufacturers are calling him asking what the matter is, as his people aren’t calling anymore. The calls only happen when it is information that isn’t available through the Web. Philpott estimates $300 per month savings on the vendor end because of fewer inventory stock checks by phone, and more productive use of talent than answering basic availability questions. “Hopefully, they are more proactive and trained on new product releases coming out, so when I do call them with questions about a new product, they can be very educated and spend time with me to make sure I’m picking the right product,” Philpott says.
As far as price updates, Philpott says he is selecting vendors based in part on whether they provide electronic price file updates. His company used to have a full-time person paid about $3,000 per month just to maintain pricing. “Now, everything is accurate and there are no keying errors,” Philpott says, noting another $400 monthly savings because pricing mistakes are gone. “We’ve loaded all our manufacturers into our system so my employees are able to go in and get timely information on the products. That’s added at least 2 percent per year because of that. Days of using printed price sheets are basically gone. Our customers don’t want to pay for a pricesheet, so we need to eliminate that cost.” Philpott estimates vendor savings from less printed material and $250 per month in reduced phone calls for pricing information. He added that this automation also increases sales of total product line as there is increased visibility.
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