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Profit Leaks? Unnecessary Costs?

With most businesses I have worked with, I have found the most significant profit leaks and unnecessary costs within the indirect spend (i.e. telecom, energy, temp labor, payroll processing services, leases, packaging, printing, freight, MRO...etc.) What have been your experiences regarding specific spend categories offering the greatest value improvement potential?

Answers

Topic Expert
Regis Quirin
Title: Director of Finance
Company: Gibney Anthony & Flaherty LLP
LinkedIn Profile
(Director of Finance, Gibney Anthony & Flaherty LLP) |

I have been able to obtain real savings from vendors, just by reading the contract. I have discovered, on more than one occasion, service commitments that were not being honored. This situation usually caused negotiations to re-open.

Richard Rafdahl
Title: President - Purchasing Consultant.
Company: Cost Reduction Specialists Inc.
(President - Purchasing Consultant., Cost Reduction Specialists Inc.) |

Excellent suggestion. I, too, have found many contracts to be open to debate or lacking key details. On the other hand, when I work with a client and they can not find a contract(s) or are not sure when it expires - there is typically savings opportunity in that area since it has not been reviewed recently and has had little oversight.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

On a side note, I have found numerous errors (typographical) in which the error has actually been to our advantage.

Example, a leasing contract said a certain charge would be based on "seven percent (9%)". Obviously there is an error here, and Courts have traditionally ruled in favor of the signer (non-maker) of a contract in these areas.

Richard Rafdahl
Title: President - Purchasing Consultant.
Company: Cost Reduction Specialists Inc.
(President - Purchasing Consultant., Cost Reduction Specialists Inc.) |

Wayne, great example. Typical leases can be complex agreements with alot of language some of which, I believe, is to overwhelm the lessee and/or slant the terms in the lessor's favor. It requires patience and focus to read through these agreements and ensure that what has been agreed to is included and accurate without any unexpected or unfair terms added. Both parties can be susceptible to missing key details.

Michael VanderGoot
Title: Director of Audit
Company: BC Compliance Group, LLC
(Director of Audit, BC Compliance Group, LLC) |

Reviewing all contracts and leases for compliance annually can be a preventative measure for "leaks." When there is staff turnover, on the company side and/or vendor side, contract terms can change ever so slightly relating to the services being provided and the costs of each.

Many leases contain additional rent provisions. Depending on the landlord these bills maybe prepared by someone with many years of experience so they fully understand the subtle differences between leases. On the flip side a landlord who uses a less experienced person to prepare those statements may not recognize those subtle differences, such as capital expenses being excluded or amortized can cost tenant greatly.

Along the same line many companies (tenants) do not have experienced staff to fully understand those same differences.

Richard Rafdahl
Title: President - Purchasing Consultant.
Company: Cost Reduction Specialists Inc.
(President - Purchasing Consultant., Cost Reduction Specialists Inc.) |

Thanks Michael,
I appreciate the information and good advice regarding areas of leases that could be most troublesome.

Robert Meybohm
Title: Owner
Company: Meybohm & Bodell, LLC
LinkedIn Profile
(Owner, Meybohm & Bodell, LLC) |

I hope I am not too much of a contrarian here, and I also guess it depends on the business model that one is looking at. For the last 15 years, I have been working in a mfg environment where COGS is where the action is at as far as big dollar spend is concerned. If you looked at a financial statement for a MFG company, the COGS line is huge, so there are going to be very large opportunities within that number to improve profits. Now, I am not saying that you will be able to actualize these opportunities, as many of the actions required involved a series of very involved steps. For example, if you are looking to improve the gross margin, the way to go about that would be to see if you can reduce direct material costs. Usually direct material costs make up the bulk of COGS in a mfg environment, with labor cost coming in second, and applied overheads coming in third. How do you reduce material costs? Vendor negotiations; investigations into alternative suppliers; discussions with R&D group as to design specs for products. If you are doing offshore OEM work, then you can take a look at your logistics footprint; how efficient is your inbound freight program on a per unit basis; are you paying the correct of amount of duties (of your merchandise properly classified), do you have a duty drawback program in place, and so on.

The bank for the buck in paying attention to COGS is huge. If you take a company with $100 million in sales with a 40% gross profit margin (meaning $60 million in COGS), and I will throw out an assumption of 70% material cost, which is then going to put total material costs at about $42 million, a .5% reduction in those costs yields a savings of $210,000. Perhaps worth spending some time looking at. In many cases, with diligence and effort, substantially greater improvements can be achieved which will yield even greater savings.

Topic Expert
Richard Rafdahl
Title: President
Company: Cost Reduction Specialists Inc.
(President, Cost Reduction Specialists Inc.) |

Hello Robert,

Thanks for your response.

I completely agree that the majority of the spend is within the COGS for most non-service businesses. What I have found, with most of my clients, is that their procurement team usually has a good handle on their "cost of goods" and core areas of spend. These costs are critical to the success of the business and as such management and purchasing are usually very focused on the competitiveness of these costs - since they are frequently reviewed or at least should be.

On the other hand, the indirect expenses are frequently undermanaged or just given a courtesy review because most organizations simply don't have the time or internal resources to invest in the necessary due diligence for all expenses. In addition, sometimes the internal staff does not have the experience to legitimately review and challenge every expense and supplier. In essence, potential alternative products, service and suppliers are not considered since there is not enough time or expertise for a thorough value and market analsis. Some of these indirect expenses are on auto-pilot which set the stage for substantive unnecessary costs and profit leaks over the years.

Mark Matheny
Title: VP - FInancial Planning and Analysis
Company: Novolex (formerly Hilex Poly)
(VP - FInancial Planning and Analysis, Novolex (formerly Hilex Poly)) |

Another area is getting what you pay for. It is sometimes eye opening the things the vendor agreed to supply that is taking up in house resources that can be put to more productive use. I always find It interesting the information our customers expect us to supply that we can't get from our vendors.

Topic Expert
Richard Rafdahl
Title: President
Company: Cost Reduction Specialists Inc.
(President, Cost Reduction Specialists Inc.) |

Thanks Mark,

One of the most difficult challenges is the get Sales, Purchasing and the Client all on the same page. Ongoing communication is so important. I have found it very helpful to schedule periodic meetings with key Sales and Purchasing staff regarding customer issues or requirements as a great way to manage the expectations, avoid surprises, solve problems, and most importantly, respond to the customer in a professional and effective way - with all internal parties on board.

Mark Sutherland
Title: CFO
Company: Profit By Design CFO & Controller Servic..
(CFO, Profit By Design CFO & Controller Services) |

I have found a lot of money for my clients within their commercial insurance(Liability, Auto, Work Comp, etc). I employ competitive bidding, I carefully review(for errors) quotes, renewals, audits, etc., and have found numerous, high-dollar errors. Work comp can be especially prone to errors; incorrect classifications, incorrect OT calcs, simple math errors, redundant counting of wages, etc.

Topic Expert
Richard Rafdahl
Title: President
Company: Cost Reduction Specialists Inc.
(President, Cost Reduction Specialists Inc.) |

Thanks Mark,
You bring up another piece of collateral damage when people don't have enough time - errors in contracts, calculations and processes.

Topic Expert
Christie Jahn
Title: CFO
Company: Prime Investments & Development
(CFO, Prime Investments & Development) |

Our strategy is to shop all vendors annually. It keeps your current vendor on their toes and gives other vendors the ability to prove their value. After a year long process I just changed our benefit agent because I didn't feel like I was getting the service we desired. I am all for loyalty but you have to earn it and maintain it. So many times I find they paint an awesome picture, submit a low bid and then after accepting their proposal the court ship is over (so to speak).

On a more positive note we just saved a ton of money on shipping because once our vendor learned we were shopping they performed an account analysis and realized our business had increased significantly and we were eligible for some great new perks. So it allowed us to see what else was out there but really put the pressure on our existing company to step it up.

Topic Expert
Richard Rafdahl
Title: President
Company: Cost Reduction Specialists Inc.
(President, Cost Reduction Specialists Inc.) |

Thanks Christie. Your strategy and approach is spot on. Current suppliers are much more open to renegotiate and accommodate if they feel their program is in jeopardy and their competition is being considered. Unfortunately many businesses do not have the internal resources and time to do this annually or as needed.

Allan North
Title: Consultant
Company: Adding Value Management services
(Consultant, Adding Value Management services) |

Hi,
Does anyone have an excel model that show areas of profit leakage?

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