SupplyChainCostManagement

Supply Chain Cost ManagementPraiseforSupplyChainCostManagementIhaveusedtheAnklesariaCostRoadmaprepeatedlyoverthelasttenyearswiththreeorganizations,togreateffecteachtime.Wehavebeenabletotakemillionsofdollarsoutofsupplychaincoststhroughknowingjusthowmuchthereisthatcanbeavoided,eitherbyidentifyingandjointlyremovingthosecoststhatarenotvalidforus,orthroughhelpingsupplierstakedowntheirowncostbase.TheAIM&DRIVEprocessisagreatwaytogetastructuredstart,runningtheprocessinparallelwithmultiplesuppliers.NeilA.Deverill,ExecutiveV.P.Procurement,AngloAmericanplc.(formerlywithPhilipsandElectrolux)IhavebeenpersonallyinvolvedwithAnklesariasAIM&DRIVEprocessoverthepastseveralyearswithtwolargeemployers.Theprocessreallyworks.!Ihaveyettofindanyothermethodologythatprovidesacomparablereturn-on-investment.SteveKesinger,VicePresident,Procurement,NordstromTheAIM&DRIVEprocessisthefacilitatorofchange.Itgivesfocusanddirectiontothecostmanagementeffort.Seniormanagementmusthaveanunderstandingoftheprocess.Theyhavetovalidatethetargetsandtheyhavetomakeacommitmenttoparticipate.Withtheaboveinplace,AIM&DRIVEisapowerfultoolthatturnsgoalsandtargetsintorealchange,realbottomlineimpact.Thisishardwork,butwatchingateamanalyze,identify,learn,andstructureoptionsforactionisreallyneatstuff.WelookedatseveraltoolstoincorporateintoourcostmanagementeffortandchoseAIM&DRIVE.Theapproachgaveusthedefinitions,theworkpa-pers,andthemethodologytobuildtheentirecostmanagementprogramforourmarketingcommunity.Wedidntwanttobringinabunchofconsultants,teachthemourbusiness,givethemourdataandprocesses,havethemtelluswhatweknowalready,andthenleave.AIM&DRIVEallowsustobuildaninternalknowl-edgebase,pointstheprocessownerstothecostdriverandpromotesreal,permanentchange.BobQuinn,DirectorofBusinessOperations,IBMCorp.IcannotbelievethatmyteamsandIhavebeenusingAIM&DRIVEtechniquessincetheveryearly1990s!Thisissurelytestimonytothevalue,durability,andrelevanceofAIM&DRIVEasavaluablewaytocollaborativelymanagecostthroughthesupplychain.Managingcostisalwaysasensitiveissuewithsuppliers.However,theAIM&DRIVEprocesshascontinuallyprovenitsvaluebygettingpasttheemo-tionsandgettingtorealcostmanagementsolutionsthatbenefitbothparties.JohnProverbs,SeniorDirector,SupplyChain,KLA-Tencor(formerlywithIBMandHewlett-Packard)Ifyoureinterestedinsustainablesupplychainadvantagealongwithbreak-throughcostreduction,readJimmyAnklesariasbook.AIM&DRIVEisaprovenandrobustprocesstosystematicallytakecostoutofyoursupplychainversussimplytransferringcostselsewhere.Jimmysextensiveexperiencewithmanypremiersup-.16526$FM08-08-0709:50:39PSPAGEiplychainpractitionersprovidesinvaluableadvicetoanyoneseriousaboutsupplycollaborationandgenuinecostremoval.JoeSandor,Hoagland-MetzlerEndowedProfessorofPracticeinSupplyManagement,TheEliBroadGraduateSchoolofBusinessAIM&DRIVEisoneofthemainprocesseswehaveimplementedatNokiaSourcingandProcurementinthescopeofMaterialCostLeadership.Thesystematicapproachofthismethodologyandtheanalysisofthekeycostdriverscombinedwithoursoftskills,reflectedintoourPassionandTrustvalues,haveproducedaclearadvan-tageforNokiaatthesystemlevel.WehavenowfullydeployedAIM&DRIVEatNokiaforallcomponentsolutions.AIM&DRIVEisalsoplayingamajorroleinouroverallcooperationandcollaborationwithoursuppliersnetworkinaveryposi-tivepartnershipspiritwhichisthefoundationofourstrategy.Jean-FrancoisBaril,SeniorVicePresident,SourcingandProcurement,NokiaCorporationAnklesariasAIM&DRIVEprocesshelpedtoopentheeyesofprocurementprofes-sionalsandgeneratedvalue-addedandbreakthroughideasatDeutscheTelekom,whichweneededtoimprovethebottomline.HansHeith,ChiefProcurementOfficer,DeutscheTelekomIhaveledtheexecutionoftheAIM&DRIVEprocessintwomajorcorporations(TexasInstrumentsandMotorola)foroverthirteenyears.ThisprocesshasyieldedgreatercostreductioninthesupplychainthananyothermethodIhaveseenused.ItisalsooneofthebestprocessesIknowoftostrengthenpositiverelationshipswithsuppliersandhasfacilitatedplacingmycompanyasthemostfavoredcustomerstatuswithoursuppliers.ErnieCook,formerChiefProcurementOfficer,CommunicationsComputingGroup,MotorolaTheteamstrainedintheAIM&DRIVEprocessdeliveredimpressiveresults.Itmadenodifferenceifthesupplierwasdomesticorforeignorwhatthecommoditywas.Iftherewasacostremovalopportunityitwasuncoveredandimplemented.Theproc-esshelpedinovercominginternalbarrierstoimplementationofchangeatboththecustomerandsupplier.PhilKeller,formerManagerProcurementProcess,DuPontIhavebeenengagedwithJimmyAnklesariasAIM&DRIVEprocessoverthepastfifteenyearswiththreetopemployers,soontobefour.Theprocessesareoutstand-ing!Thereisnootherprocessthatyieldssignificantresultseverytimeregardlessofthecategory.Everybuyer,engineer,andstrategicsourcingpersonmusthavethesetools,processes,andmethodologiesintheirintellectualtoolbox.TomPiersa,VicePresident,Procurement&SupplyChainManagement,AlliedWasteIndustries(formerlywithEastmanKodak,YorkInternational,andMaytag)IreallybelieveinJimmyAnklesariasAIM&DRIVEprocessandhavepersonallyseentheresultsatIBMandMotorola.Therearefewprocessesthatdeliveragreaterreturnoninvestment.TheresaMetty,Chairperson,InstituteofSupplyManagement.16526$FM08-08-0709:50:39PSPAGEiiSUPPLYCHAINCOSTMANAGEMENT.16526$FM08-08-0709:50:39PSPAGEiiiThis page intentionally left blank PAGEivSUPPLYCHAINCOSTMANAGEMENTTheAIM&DRIVE ProcessforAchievingExtraordinaryResultsJimmyAnklesariaAmericanManagementAssociationNewYork?Atlanta?Brussels?Chicago?MexicoCity?SanFranciscoShanghai?Tokyo?Toronto?Washington,D.C.16526$FM08-08-0709:50:40PSPAGEvSpecialdiscountsonbulkquantitiesofAMACOMbooksareavailabletocorporations,professionalassociations,andotherorganizations.Fordetails,contactSpecialSalesDepartment,AMACOM,adivisionofAmericanManagementAssociation,1601Broadway,NewYork,NY10019.Tel:212-903-8316.Fax:212-903-8083.E-mail:specialslsamanet.orgWebsite:.amacombooks.org/go/specialsalesToviewallAMACOMtitlesgoto:.amacombooks.orgThispublicationisdesignedtoprovideaccurateandauthoritativeinformationinregardtothesubjectmattercovered.Itissoldwiththeunderstandingthatthepublisherisnotengagedinrenderinglegal,accounting,orotherprofessionalservice.Iflegaladviceorotherexpertassistanceisrequired,theservicesofacompetentprofessionalpersonshouldbesought.AIM&DRIVE isaregisteredtrademark,andisusedwithpermission.FormulaBasedCosting istrademarkedbyJimmyAnklesariaandisusedwithpermission.LibraryofCongressCataloging-in-PublicationDataAnklesaria,Jimmy.Supplychaincostmanagement:theAIM&DRIVEprocessforachievingextraordinaryresults/JimmyAnklesaria.p.cm.Includesbibliographicalreferencesandindex.ISBN-13:9780-814474754ISBN-10:08144747561.IndustrialprocurementCosteffectiveness.2.IndustrialprocurementCostcontrol.3.BusinesslogisticsManagement.I.Title.HD39.5.A552008658.7 2dc222007013645 2008JimmyAnklesaria.Allrightsreserved.PrintedintheUnitedStatesofAmerica.Thispublicationmaynotbereproduced,storedinaretrievalsystem,ortransmittedinwholeorinpart,inanyformorbyanymeans,electronic,mechanical,photocopying,recording,orotherwise,withoutthepriorwrittenpermissionofAMACOM,adivisionofAmericanManagementAssociation,1601Broadway,NewYork,NY10019.Printingnumber10987654321.16526$FM08-08-0709:50:40PSPAGEviThisbookisdedicatedtomywife,Jennifer,myson,Zubin,daughters,JasmineandAviLynn,andTomymentorandfriend,GeneRichter(19372003).16526$FM08-08-0709:50:40PSPAGEviiThis page intentionally left blank PAGEviiiThis page intentionally left blank PAGExContentsForewordbyTheresaMettyxiPrefacebyDaveNelsonxvAcknowledgmentsxix1.Introduction12.TheAIM&DRIVEProcessofCostManagement73.AgreeingontheNeedtoManageCosts294.IdentifyingCriticalCostsintheSupplyChain555.MeasuringSecondaryandTertiaryCosts796.DefiningtheKeyCostDriversandDevelopingStrategicOptions1017.Reducing,Eliminating,orChangingActivitiesThatCauseCosts1238.ImplementinganActionPlan1619.VerifyingthePlanwithCostMonitors18510.EternallyImprovingandLeveragingtheProcess205Index225.16526$CNTS08-08-0709:50:43PSPAGEixForewordDuringmytimeatIBMandMotorola(19952005),therewasonegoalthatdroveusconstantly:asubstantialreductionincosts.Thelow-hangingfruithadbeengathered,andwewerestillfarfromourtargets.Weneededsomethingthatwouldtakeustothenextlevelwhereourcategoryteamscouldgeneratebreakthroughideasthatwoulddeliverasustainablecompetitiveadvantageforthecompany.TheanswerwasAIM&DRIVE.Wesuccessfullydeployeditatbothcompanies,andwereabletotakehundredsofmillionsofdollarsoutofsupplychaincosts.ThatalonewouldbereasonenoughformetotakethetimetowritethisForeword.ButthemagicoftheAIM&DRIVEprocessisthatwhilewewerereducingcosts,wewerealsoimprovingkeysupplierandinternalcustomerrelationships.IrememberoneparticularinstancewherewewerelookingatwaystoreducethecostofourMarketingbrochuresandliterature.WeengagedourkeysupplierandourinternalcustomersinanAIM&DRIVEsession.TheinitialskepticismquicklyfadedastheygrewtounderstandtheAIM&DRIVEapproachtotakingcostoutwithoutuglybattlesandheateddebates.Together,wewereabletodramati-callystreamlinetheprocessandsavetensofmillionsofdollars.Notonlywasthesupplierthrilledwiththemoreefficientprocess,ourinternalcustomersweredelightedthatthesesavingswerefromgenu-ineprocessimprovementsthatdidnotcompromisetheeffectivenessofthecreativeprocess.16526$FRWD08-08-0709:50:45PSPAGExixiiForewordInthisbook,JimmyAnklesariahasprovidedawonderfuljourneythroughtheAIM&DRIVEprocessthatisengagingandeasytoread.WhetheryouareaC-levelofficer,seniormanager,mid-levelmanager,orfunctionalspecialist,youreprobablyunderpressuretoreducecosts.Thisbookwillgiveyouaprovenmethodologytoleveragethecollectiveintelligenceoftheextendedenterprise(yourcustomersandtheircustomers,yoursuppliersandtheirsuppliers),andgener-atesubstantialresults.Theexamplesandstoriesineachchapterarefuntoread,andtheybringalltheconceptsandstepstolife.Isuspectyouwillrelatetomostofthem.Thefirsttwochapterslaythegroundworkfortheprocess.Theyoutlinesomeoftheproblemswithcost-managementeffortstoday,demonstratewhycollaborationisessential,andlayoutachecklistforsuccessfullydeployingtheprocess.Therestofthebookprovidesadetailedwalk-throughoftheAIM&DRIVEprocess.Youwilllearnhowtoselecttherightteamtodevelopstrategiesandagreeongoals;identifycriticalcosts;developanddefineacomprehensivelistofcostdrivers;developstrategiesthatreduce,change,oreliminateactivities;andmuchmore.Whileallofthissoundsextremelycomplex,thebeautyofAIM&DRIVEisitslackofcomplexity.Itisnotburdenedwithcomplicatedandtime-consumingnumericalandstatisticalalgorithms.Itfacilitatesthecreationofbreakthroughideasquicklyandeffectively,andcanbeusedbyeveryoneacrosstheenterprise.Asyougothroughtheeightstepsoftheprocessinthisbook,thatfactwillbecomeabundantlyclear.Ivepersonallyseentheprocessdelivergreatresults.Ittakesusfarbeyondthetraditionalworldofcostaccounting,costmodeling,andpricenegotiation.Itismuchmorepowerful.anditworks.Watchingmyteamsfirst-handwastrulyexciting.Oneteamafteran-othercametounderstandthetruebenefitsoftheAIM&DRIVEproc-ess.Toseethemworkingcloselywithourkeysuppliersandinternal.16526$FRWD08-08-0709:50:45PSPAGExiiForewordxiiicustomerstoachievehugesustainablecostreductions,allthewhileimprovingrelationships,wastrulyamazing.Youreinforarealtreat!TheresaMettyBoardChair(20052007),InstituteofSupplyManagement;FormerChiefProcurementOfficer,Motorola;FormerVP-Procurement,IBM.16526$FRWD08-08-0709:50:46PSPAGExiiiThis 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PAGExivPrefaceHowmanytimeshaveyouwantedtotakeyourcompanyscostsdownby5percent,10percent,even50percent?Costmanagementisthekeytoprofitability,andcostmanagementisthekeytosuccessfulsup-plynetworks.Takethemoneyyousave,anduseittobuildanewplant,ordevelopanewproduct,ormakeyourstockholdersrich!Thepointis,evenifyoudontknowhowmuchyourcompanyisspendinginpurchasedmaterialsandlaborandlogisticsandbelieveitornot,mostcompanies,evensomeBestPracticeleaders,dontyouwillfindsignificantsavings,justexactlythewaywedidatHonda,TRW,Delphi,andJohnDeere,bymanagingonyouroperationstruecosts.Therealpowerofcostmanagementistoknowfromthecreationofanewpart,product,orservicewhatthetruepurchasedcostsarenotthecostsdevelopedafter-the-factsimplyfrompricessetbythemarketplaceorbidsfromavarietyofsuppliers.Thesecostsmostlikelywillnotrepresentorevencomeclosetotheoptimumproductcostdevelopedbyusingthecostmanagementconceptsinthisbook.Thiscostmanagementconceptisthemostpowerfulsupplyman-agementconcepttoday.TheAIM&DRIVEprocesstakesyoufarbe-yondthebenefitsofnegotiatedsavingsandfacilitatesbreakthroughcostsolutions.Genuinecostmanagementisdifferentfromcostcut-ting.Anyonecandothat.However,thebest-in-classcompaniesen-gagetheirsupplybaseintoughnegotiations,setaggressivestretchtargets,anduseadefinedprocessofmanagingsupplychaincosts.16526$PREF08-08-0709:50:49PSPAGExvxviPrefaceThiskindofcostmanagementisthekeyreasonthatToyota,Honda,andNissanaresocompetitivecomparedtotodaysAmericanautomo-tiveBigThree.AlthoughmostpeoplewanttoattributeToyota,Honda,andNissans(JB3)successtoleanmanufacturingtech-niquesintheirownmanufacturingassemblyoperations,thatisreallyonlysomewhattruebecause75to80percentofthecostofacarispurchasedcost,comparedto20percentin-housecost.TheJB3softensay,HowgoesPurchasingishowgoesthecompany.With75to80percentofthevehiclecostcontrolledbyPurchasing,itseasytounderstandwhyusingthecostmanagementtechniquesinthisbookgivesacompanysuchalargeadvantageovertheircompeti-tion.Purchasedcostsalmostalwaysrepresentagreateropportunityareathanmanagementfirstthinks.Infact,onlyafterdoingagoodspendanalysiswithastrongfollow-upofcostmanagementimple-mentationcanyouknowforsurehowcompetitiveyourcompanyreallyis.Youmayhavesomerealsurprises!Forexample,someautomotiveanalystsbelievethatonaverageToyota,Honda,andNissanpurchasetheirpartsforanequivalentcarat$1,600lessthantheirAmericancounterparts.Myexperiencehead-ingupPurchasingforHondaofAmericaManufacturingfortenyearsconfirmsthatthis$1,600-per-caradvantageistrue.AndthenworkingformanyyearsinSeniorManagementfortwomajorautosuppliers,whereIcouldseethefullpicturefromasuppliersside,doublecon-firmsthisfact.Yourcompanycanattainthesamekindofcompetitivepurchasedcostadvantageaswell.Whowouldnotenjoysuchacostadvantageovertheircompetitors?Followingtheconceptsofcostmanagement,JimmyAnklesariade-scribeswhatwillhelpanycompanygainandsustainasignificantcostadvantagesimilartothatofToyota,Honda,andNissan.CompaniessuchasJohnDeereandothershavealreadyputsuchpracticesinplace.Theseconceptstheyarenotjusttheoryarebeingusedeverydaybyenlightenedcompaniestohelpthemcompete.Myguess.16526$PREF08-08-0709:50:50PSPAGExviPrefacexviiisthatyourcompanywantstoexperiencethisstrategiccompetitive-nessaswell.DaveNelsonFormerheadofSupplyManagementatHonda,Delphi,TRW,andJohnDeere;CoauthorofPoweredbyHonda,ThePurchasingMachine,andTheIncrediblePayback;ChairEmeritus,InstituteforSupplyManagement;MemberoftheShingoPrizeAcademyandBoardofTrusteesShingoPrize;RecipientoftheJ.ShipmanAward,InstituteofSupplyManagement,2006.16526$PREF08-08-0709:50:50PSPAGExviiThis 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PAGExviiiAcknowledgmentsInSeptember1983,whenIfirstcametotheUnitedStatesfromIndia,hadanyonetoldmethatIwouldbewritingbooksandgoingaroundtheworldteachingcoursesinSupplyChainManagement,Iwouldhavefallenoffmychairlaughing.IwasaCharteredAccountant,theBritishequivalentofaCertifiedPublicAccountant,withalawdegreewhohadcometotheUnitedStatestodoanMBAattheUniversityofSanDiego.Ihopedtolearnmoreaboutinternationalbusiness,fi-nance,andmarketingandthengobacktorejointhefamilybusiness.AllthatchangedwhenImetProfessorDavidBurtinamarketingclassin1984.Dr.BurthadjustreleasedabookcalledProactiveProcure-mentandhedescribedtome,theeternalbeancounter,howseniormanagementjustdidnotgetitwhenitcametothevalueaddedbytheProcurementorganization.Hispassionforthesubjectandgenu-inebeliefintheopportunityaheadwasevident.Itstruckmethatapersonwithabackgroundinbusiness,aprofessionalinthefieldofmanagementandcostaccounting,withalawdegreetoboot,couldbringadifferentperspectivetotheprofessionofprocurementandsupplychainmanagement.Ibegantolearnmoreabouttheprocure-mentprofessionandsharedmyideaswithDr.BurtandWarrenNor-quist,thenVicePresidentofProcurementatPolaroid,abouthowcostaccountingandfinancialconceptscouldhelpbuyersnegotiatebetter.Theyinvitedmetojointhemincoauthoringabook,ZeroBasePric-.16526$ACK08-08-0709:50:53PSPAGExixxxAcknowledgmentsing :AchievingWorldClassCompetitivenessthroughReducedAll-in-Cost,publishedbyProbusPublishingin1990.Evenbeforethebookwasreleased,ItraveledaroundtheworldteachingtheconcepttocompanieslikeLockheed,Harris,HermanMiller,ShellOil,Tektronix,AppleComputers,andothers.Feedbackfromthosewhoattendedtheclasseswasverypositiveandthepartici-pantsinmyseminarsfeltthattheycouldnownegotiatewithmoreknowledgeofcoststhantheyhadbeforetakingthecourse.Bytheearly1990stheconcepthadbeenembracedbyHewlettPackard,Kodak,Deere,DuPont,Electrolux,andmanyothercompanies.MoreandmorebuyerswereusingZeroBasePricingtonegotiatebetterpricesforgoodsandservicesandbeingrecognizedfortheircontribu-tiontothebottomlineoftheirrespectivecompanies.Yet,somethingwasmissing.Afterdoingagreatjobunderstandingthecoststructureofasupplierandusingpriceandcostanalysistonegotiateafairandreasonableprice,buyersseemedtobehittingabrickwall.Inthefallof1991,IwashavingbreakfastwiththeheadofHewlettPackardGlobalProcurement,GeneRichter,andheencour-agedmetothinkabouthowProcurementandEngineeringcouldcol-laboratewithsupplierstofindwaystotakecostsoutofthesupplychain.ThisstruckanervewithmesinceIhadwrittenabouttheim-portanceofthePurchasing-EngineeringinterfaceinanarticlewithDr.BurtthatwaspublishedintheJournalofPurchasingandMaterialsManagementalmostfiveyearsearlier.Tohavesomeonefromindustrybackmeupwasmostencouraging.ThatswhenIdecidedtocomeupwithaprocessandwriteanotherbook.Itriedtokeepitassimpleaspossiblesothatitwouldbeembracedbyalllinksinthesupplychain.TherewereafewiterationsbeforetheAIM&DRIVEprocesstookshapeandIpiloteditatHP,JohnDeere,andKodak.There-sponsefrombuyers,engineers,otherstakeholdersofthecustomercompanies,andeventhesuppliers,wasmostflattering.Yes,atruesupplychaineffortwastakingplaceandcollaborationwasreplacing.16526$ACK08-08-0709:50:53PSPAGExxAcknowledgmentsxxiconfrontationwithfantasticresults.ItwasinFebruary1993thatIstartedwritingabooktodocumenttheeightstepsofAIM&DRIVE.Well,herewearein2007.Whateverhappenedtocycletimeman-agement?AIM&DRIVEgatheredmomentumasmoreandmorecom-paniesjoinedtheinitialfewandusedtheprocesstodrivecostsoutoftheirsupplychain.Iwassobusyflyingaroundtheworld,raisingafamily,andteachingeagergraduatestudentsattheUniversityofSanDiego,thattherewasnotimetoputpentopaper.Timerolledby,theprocesswasusedbycompaniesintheUnitedStates,Europe,Asia,LatinAmerica,Australia,andSouthAfrica.Iwasremindedbymywife,Jennifer,thatthebookwasstillnotout.So,in1997Imadeanotherattemptatwritingbutgaveup.Noonewaswillingtogivememorethantwenty-fourhoursinadayandthatwaswhatIneededinordertodoalltheotherthingsinmylife.Ittookasadseriesofeventstogetmegoingagain.In2003,Ilosttwoveryinfluentialpeopleinmylife.FirsttogoinMaywasmyPapaKali.Hehadraisedmetousecommonsensetosolvecomplexprob-lemsandtoexplainthingsinlanguagethatwaseasytounderstand.Hedidnotgettoseethebookpublished.Then,inJulythatyear,mymentorandfriend,GeneRichter,oneofthetruelegendsintheuni-verseofSuppl