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Explain the supply chain attributes and measures that can be implemented to maximize cost reductions across OnTarget?

Case 8

A Mandate for Costs Reduction Dueto the Competitive Environment

In 2007, global economies are creating new competitive challenges for every organization and OnTarget is no different.

THE ORGANIZATION

During the past several years OnTarget has moved from a dominant competitor in its industry environ-ment to one of intense competition. Top management saw this competitive environment emerging and understood that it would be necessary to reduce costs in order to remain competitive. Global Procurement, along with every other group within OnTarget, was charged with developing strategies for corporate-wide cost reductions. The Global Procurement group has identified two general areas that it would like to attack.

First, inventories are too high throughout the company. These inventories include both maintenance parts and indirect materials.

Second, some materials costs have been increasing at the rate of 4 to 5 percent per year. This is higher than the Producer Price Index. These price increases cannot be tolerated because competition is forcing OnTarget to have flat or even declining prices to customers. Thus, these price increases cut directly into OnTarget profits, hampering its competitiveness. The company believes that the expenses can be reduced because a benchmarking project revealed that these increases were above the industrial average.

The company is a large organization with three different operating units. Accordingly, each unit is responsible for millions of dollars' worth of expenditures. Each unit is rather large and sells somewhat different products. Hence, the units do not "talk" among them-selves as much as desirable. This is partially due to geographic differences but also because the operations have a tradition of independence. A centralized Global Procurement Department

provides services to each unit. Some individuals within the centralized department are assigned to separate operational functional units with the company. For instance, one unit has a large expenditure of a major packaging material. A global procurement professional is responsible for managing this major expenditure even though the individual does not directly report to that unit.

COST REDUCTION: A FIRST STEP

The Global Procurement group's first step was to conduct an organization-wide spend analysis. Through this analysis, the amount spent with every supplier was identified. One important observation was that one large supplier, Extel, provided product and services to each of the company's three main units. Furthermore, in terms of spend, Extel was one of the top five suppliers for the entire corporation. Some of the goods were purchased from a number of long-term agreements, whereas certain capital goods and services were purchased as a result of competitive bidding. Within the long-term agreements, clauses were included allowing the supplier to increase prices. In hindsight, this is most unfortunate for OnTarget. The supplier had a good reputation in the industry and does business with virtually all firms in OnTarget's industry. OnTarget is dependent on some of Extel's proprietary technology and specialized products. Other items purchased from Extel are available from other sources. Extel's service and quality were generally considered good to excellent by OnTarget, and excellent by Extel itself. Extel has expressed an interest in increasing its business with OnTarget and offering more services and different arrangements.

COST REDUCTION: A SECOND STEP

Because Extel represents such a large corporate spend, the Global Procurement group decided to further investigate the buyer-supplier arrangement. Several interesting pat-terns emerged. First, different units were buying the same products from Extel without any coordination among themselves. Furthermore, different sales representatives were selling the same item to different units at different prices. It was not uncommon for two or three sales representatives to be working on agreements with two or three company buyers at any one time. Second, in one unit, the company was making an extremely large purchase from this supplier. Unfortunately, the buyer-supplier relation-ship was bumpy in this unit as many accusations of price increases, poor deliveries, and changing demands were frequently traded between the buyer and supplier. A third finding was that in two units major services were being purchased from this supplier. Although the services were slightly different, the purchase of these services was not being coordinated.

COST REDUCTION: A THIRD STEP

The company has a target to reduce expenses. Because of the competitive environment, the company must reduce costs in order to remain competitive. The items purchased from this particular supplier have been identified as a potential area for cost reduction.