Finding the Gold in Direct Costs

So much has been said and written about purchasing managers reducing their direct cost. Sometimes their entire bonus structure is written around that one concept. After all, a builder's direct cost is his biggest expense. So what's a PM to do. He could try another round of competitive bidding. How about looking over those plans one more time for some value engineering that was missed. Well I am suggesting a different approach. What if the focus was shifted from reducing the builder's direct cost to reducing the supplier's direct cost. Think about it. For every dollar in direct cost you can save the supplier, you save yourself anywhere from $1.33 to $2. Now that I have your attention, let's think this through. Where can you make an impact. You can't possibly work with every supplier. So take a few moments to measure the ones with which you can have the greatest impact.

First is in the area of communication. Sit down with the supplier face to face (preferably in his plant.) I visited a drywaller once at his office to review some takeoffs. You should have seen the looks on his staff's faces when I walked in and was introduced. I was the first builder in twenty two years to ever come to his office. But beyond building rapport, being on the supplier's turf allows you to see what you are working with. Are the systems antiquated? You don't want to suggest something that is clearly out of their league. But no matter their level of sophistication, it is possible to make an impact with just a little discussion. Invite their front line into the conversation. This includes the person who creates your order, the person who orders your materials, the person who schedules your work and the person responsible for quality. Now sit on the edge of your seat and listen carefully. Chances are, you will find your missing dollars rather quickly. Remember, the supplier probably has the advantage of working with several builders. Each builder has different strengths they can share with you. The supplier is also keenly aware of your weaknesses. Are your purchase orders too cryptic? Do errors take too long to get addressed? Do variances happen too often? Are your specifications unnecessarily costing you money? Are your superintendents not watching the bottom line? This meeting can be a wellspring of information.

Next it is your chance to speak. Ask questions. How does their ordering process work. Remember, this is where your skills are the sharpest. Helping them see the advantages of a Kanban system for some high rotation supplies, showing them how to capture more discounts, increasing their inventory turns are all examples of how you can help them help you. Remember, by helping them improve, they are not just improving your account, they are improving their entire business.
Before you leave, take the time to quantify your findings. While it may be a magnanimous gesture to improve their business and their margins, make sure it is clear that your goal is your cost reduction through their cost reduction. Get some numbers on paper. Them commit to following up on any proposed changes to see how they are going. In the end, you will have been one of the elite purchasing managers who truly understands and exhibits the concept of a trade partnership.