Continuous Improvement: The Key to Sustained Savings (Part 2)

See Part 1 of this post here.

3. How to incorporate Continuous Improvement within the Sourcing process
In order to adopt Continuous Improvement for a specific category, the following additional steps need to be carried out during the respective stages of strategic sourcing:

I. Data Collection
In addition to collecting spend information, the sourcing team must execute surveys and interviews of personnel who are most involved with the specific product or service and interact with the supplier. Questions must be asked to elicit processes that could improve service levels, productivity, shorten the process cycle and reduce wastage. Pain points and challenges are also important data points.

II. RFP Creation
The RFP information document should clearly state that a major objective of the solicitation is to establish a 'Continuous Improvement' program that would provide sustained savings, especially in the out-years of a long-term contract. It should also be mentioned that a supplier's ability to provide ideas towards such sustained savings and backing them up with guarantees would be a critical part of the evaluation.

The RFP response document should include a section that requires suppliers to detail areas where they can provide savings ideas, estimated savings percentages and savings tracking methodologies for those criteria. Most importantly, the supplier should be asked to guarantee a percentage of spend that they can guarantee they will be able to save by carrying out specific 'continuous improvement' processes. By guaranteeing these savings, the supplier will be required to write a check to the client should they be incapable of meeting their savings quota as per the guarantee.

In order to point the suppliers in the right direction, it might be useful to enter specific areas that were identified by company personnel in the data collection process.

III. Negotiations
During the negotiations process, one must not only look to achieve the highest possible guaranteed annual continuous improvement percentage from the supplier, but also nail down the details of what is addressable within the continuous improvement program. A list of qualifying programs and processes for the CI program must be established along with the savings calculation methodology and the governance process.

It is important to ensure that only programs that represent real savings are included in the program while peripheral benefits that don't impact the bottom line aren't counted towards to guaranteed quota. For example, a MRO supplier should be credited for providing higher productivity pumps and motors resulting in savings but should not receive credits for repairing a defective motor within its warranty period, since the supplier was responsible for repairs within the warranty period as part of the purchase terms.

A contentious issue around CI negotiations is the supplier's ability to count savings from programs that were not implemented. It is in our best interest to only accept programs that were implemented. However, there are many instances where perfectly feasible programs suggested by the supplier do not realize in savings due to their lack of adoption by the buying personnel or other shortcomings within the client organization. A common compromise is to have a CI approval process prior to the implementation where certain processes are approved based on their feasibility and the onus is put on the internal personnel to work with the supplier and realize the savings instead of conveniently blaming the supplier for ideas that were feasible but weren't implemented internally. An example commonly seen is savings from substitution are not realized if the buyers and end users don't purchase a feasible substitute for non-business reasons. The responsibility to make this program successful resides with both parties.

IV. Implementation
All addressable programs and the proposed annual guaranteed should be incorporated in the supplier contract. The key to a successful CI program is establishing a CI team involving client and supplier personnel, all of whom should be well-versed in the terms and conditions negotiated. Periodic reviews should be held - monthly at first, and quarterly after the first year to ensure that the program is on track. A program proposal template should be established and the savings that counts towards the quota should be calculated as per the terms set forth on the contract. Any programs that are not listed in the contract but are later deemed to have real savings potential should be included as contract amendments.

4. Best Practices for a Continuous Improvement program

  1. Stakeholder buy-in is essential prior to establishing this program. Without the end-user's support and willingness to adopt changes to services and products, there is very little chance of success.
  2. Incent buyers and end-users on successful adoption of CI. It is paramount to get away from the "don't fix what isn't broken" mentality and proactively look for ways to improve.
  3. The best way to kick off this program is to adopt 'best practices' around process and productivity at specific facilities and apply them, as appropriate, to other facilities. By scoring initial wins through proven success stories, this program will encounter lower resistance as time progresses.
  4. Ensure that the supplier representatives are operational personnel and not sales personnel. CI success hinges a lot on the understanding of the product or service and the ability to impact improvements without compromising on quality. The absence of product/service expertise will hinder the proposal of successful programs.
  5. CI programs are best incubated through long-term supplier relationships. Some CI initiatives might require supplier investment. It is best to pursue these programs for suppliers who have at least a 3-year contract in order to ensure that they have a long-term view toward sustained savings which is our ultimate objective.

Auri Ghatak is a manager in the Strategy and Operations practice of the Hackett Group.

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Voices (4)

  1. ZenSpender:

    I’ve got to agree w/ bitter on this one. You’re basically telling the supplier to contractually guarantee x% savings per year. If that’s the case, just tell them that (some firms do just that – be it good or bad) and don’t insult their intelligence with the guise of feigned collaboration and CI. If this is about hitting procurement savings targets b/c of Finance requirement for only one year of savings, then just annualize the cost reductions that equate to the NPV of the savings from the winning bid…. and fix the root cause of the problem by aligning savings horizon to contract duration – not stupidity of 1 year horizon. Technically, it should be NPV of savings in perpetuity, so ‘meet in the middle’ w/ Finance on this one. At least worth a shot.

  2. bitter and twisted:

    I dont understand point II. How can you honestly guarantee you’ll have a good idea in a couple of years time? It would encourage suppliers to inflate the starting cost and ration the improvements to the contractual minimum.

  3. Kevin Lemmens:

    A very interesting blogpost.

    Good to see that bullet 4 (operational personnel) has been made explicit, because this may sometimes been ‘forgotten’ while it is essential. At the same time it is also essential that operational personnel of the purchasing organization is involved (not just in the data collection phase mentioned above, but also (or: especially) in the ‘negotiation’ (open discussion) phase).

    I’m looking forward to the coming parts of this series!

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