Spend Matters welcomes this guest post from Nitin Khandelwal, of GEP.
Much of the human race is obsessed with cars. We may have other dreams to achieve, but most of us do have dream cars. And, we probably understand more about the engine, the technology and the functioning of our cars better than we understand the functioning of the human body. Maybe if we did, humans would be a lot more fit and healthy. But that’s how important our cars are to us!
Despite our love of cars, it may be interesting to find out that, in the sourcing arena, buying or leasing and maintaining forklifts is easier than buying or leasing and maintaining cars. The points below provide some explanation:
|Market consolidation/ fragmentation||Consolidation of major suppliers globally||“N” number of suppliers, brands and models to choose from|
|Customized/ standardized||Though organizations prefer to move to a standard set of MHEs, they can still be customized depending on the industry and requirements||Only high-end customization possible from the OEMs|
|Onsite maintenance||Onsite maintenance to counter any unforeseen breakdowns||Nothing of such sort available|
|Electric vs. IC||Industry moving to electric forklifts, which have significantly low total costs of ownership and limited ongoing maintenance costs||Majority fleet still use gas and other types of fuel, which accentuate the overall costs (exceptions — Tesla)|
|Productivity test/trial||Forklift OEMs allow for productivity trials inside the plant and warehouse to ensure that the drivers are satisfied and it meets the operational requirements||Test drives do happen but typically are only allowed for a few hours at max|
|Guaranteed supplier savings||Supplier can guarantee consistent savings on energy and annual operational costs||Only upfront tax credits on energy efficient cars|
|Scope for cost breakdowns and negotiation leverage||Procurement can request a cost breakdown of the truck, the chargers and the batteries separately and accordingly negotiate individual items and entail transparency||Offers are received on the overall lease rate of a car|
|Online reporting to maximize efficiency and lower costs||The fleet management systems report the performance of the trucks/drivers on a real-time basis, thereby maximizing efficiency and lower costs||Fleet users are expected to be efficient themselves without any real-time data|
As highlighted in the above table, forklift sourcing isn’t as complex as it seems (especially when we compare it with fleet) but there are a variety of factors, mentioned below, that should be considered to ensure that you contract the right supplier:
- Service locations: To ensure minimal breakdowns, it is imperative to understand the proximity of the supplier’s service locations to the client’s. It is also crucial to gain the trust of the local stakeholders, especially if procurement is proposing a change of suppliers.
- Energy certifications: Ensure that the prospective suppliers have energy certifications (ISO 50001) in place to meet environmental regulations and the proposed energy savings.
- Fleet management systems (FMS): Excellent FMS systems can ensure transparency in reporting and maximize efficiency and driver productivity.
- Lithium ion batteries: Lithium ion batteries (along with fast charging systems) should be considered for trucks, which are supposed to work for more than 2,000 hours annually.
- Lease vs. buy vs. hourly rate: A thorough business analysis should be considered as whether to pursue a lease or a buy model, or a mixed approach across all sites. Organizations should leverage their negotiations to ensure that the short-term hire rates are not too different from the lease rates.
- Over-customized trucks: Local stakeholders have allowed for over-customization of their trucks in the past, but procurement should step in and host a healthy discussion within the business to ensure that customization should only happen when it is of the utmost need and suits business requirements.
- Catalogs: The supplier should be able to provide catalogs with full specifications to ensure that local stakeholders have complete clarity of what is being ordered with price transparency. Also, cataloguing will ensure that standardized equipment is being used across different locations.
- Log flow studies: Organizations should hire prospective suppliers or any third-party service providers to conduct detailed log flow studies to ensure that their current operations or processes require any improvements, and assess if they have the right volume of trucks to conduct their daily operations.
- Mix of new and refurbished fleet: Refurbished trucks are as good as the new ones but cost a lot less, so it makes good business sense to have a mixed fleet of new and refurbished trucks. For any truck being used for 750 hours or less annually, a refurbished one will do the job at a much lower cost
The following best practices will significantly support negotiation discussions/meetings with prospective suppliers:
- Sign-on bonus: Most suppliers agree to a sign-on bonus, especially when the number of trucks is any more than 250 trucks on a regional/global level. The amount of bonus can depend on the total commodity spend and can range from 0.5% to 1% of the total spend.
- Volume consolidation: In an ideal world, an organization should have one supplier for its forklift needs — if not globally, at least regionally. Having standard trucks across locations may make it ideal to consolidate spend and thus leverage additional benefits out of the entire engagement.
- TCO: Lease rates constitute only 8%–10% of the total cost of operating a forklift, and the other major components are operator rates, energy costs, maintenance costs and driver training charges. Selecting a supplier only based on the lease rates isn’t the ideal approach; a decision should be based on the TCO.
- Volume-based rebates: Common practice is to negotiate volume-based rebates, especially when the spend trend over the past few years has been inconsistent. This means that either the organization has been leasing short-term hires or there have been far more breakdowns and maintenance issues that haven’t been covered by preventive maintenance and warranty.
- Discount on the list price for spare parts: Before awarding the contract, procurement should benchmark the spare part rates with other suppliers, and thereby agree on a discount percent of the list price for such spare parts.
- Discount on the current fleet: When the incumbent supplier is awarded the contract, it typically will agree to a discount on the current fleet in the range of 30%–50%. This can be a significant savings for the duration of turnaround time (approximately eight weeks) when the old fleet is replaced by the new fleet, or while waiting for the end of the contract.
Forklift as a commodity, if sourced properly, can yield 10%–12% in savings without much resistance from the local/internal stakeholders and lower switching costs. However, stakeholder engagement should be consistent throughout the project execution phase and the SLAs should be given the same weight as cost savings.