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For spend managers at these organizations hoping to push their enterprise into the 21st century, what value could be achieved by concentrating spend where it’s needed most?
Enterprise spend management stresses the value of smart budgeting with a tight focus on maximizing ROI, optimizing processes, and expanding businesses in meaningful and sustainable ways. One may think the chemical processing and refining industry wouldn’t need to worry too much about how it spends, given how its products permeate as much as 96 percent of the supply chains for all manufactured goods, according to a recent study.
However, the success of the chemical industry as a whole is built on a foundation comprised of companies of all shapes and sizes looking to invest practically in their own prosperity. For spend managers at these organizations hoping to push their enterprise into the 21st century, what value could be achieved by concentrating spend where it’s needed most?
Direct spend management strategies tend to take top billing over indirect spend management. Direct spend management centers around equipment purchases, software integration and other physical assets a company can purchase. Indirect spend management, like coordinating spend on a sound on-site maintenance program, may not be as viscerally appealing as state-of-the-art assets, but can be just as valuable to a chemical processing plant, if not more so.
Reliability-centered maintenance strategies utilize vast stores of data to analyze how plant equipment functions. In doing so, supervisors can track productivity and deficiencies which may evolve into failures over time. Maintenance personnel then address these issues before they exacerbate. From a spend management perspective, this practice undeniably adds value. Proactive maintenance hits on several crucial concepts the chemical processing industry has been moving toward reinforcing: environmental accountability, strengthening employee safety, securing asset availability and uptime, and overall process optimization.
“Asset owners can use maintenance spend to gauge the financial viability of a replacement.”
Furthermore, an updated maintenance plan could guide organizations toward making more intelligent direct spend management decisions. If one asset continues to underperform despite several rounds of proactive maintenance, its owners can use maintenance spend as a metric to gauge the financial viability of a replacement.
Driving out commoditization with R&D investment
Growing commoditization of chemical goods increasingly prevents businesses in the industry from investing in innovation.
In his book Winning at New Products: Creating Value Through Innovation, author Robert G. Cooper explains that although the average time-to-market across all manufacturing sectors has trended downward since the turn of the century by more than 42 percent, new product sales decreased over that same period of time by 15 percent. Many investors cannot justify the “risks” of R&D, like steep upfront costs and long lead time, when highly specialized chemicals already in market favor perform so well.
Desire for a quick buck has officially overridden the urge to innovate, but from a spend management perspective, this narrow mindset offers little in the way of long-term financial sustainability. The chemical industry shouldn’t be afraid to expand its horizons by investing healthfully into a diverse product portfolio, but must do so with tact. For instance, chemical companies should only room in the budget for prospective products that fulfill an explicit objective valuable to their enterprise. In addition, technological investments should serve more than a single purpose, lest they go to waste on the off chance a new product fails to capture the market’s attention.
In manufacturing, indirect spend reductions can have a deeper, more profound impact than other industries. What must manufacturers do to optimize indirect spend management strategies?
Traditionally, indirect procurement spend for all sectors consists of things nobody really talks about at boardroom meetings: the furniture in the break room, the cleaning supplies under the communal sink, the paper clips in the supply closet, etc. In recent years, businesses have brought indirect spend out of the darkness as a pocket of costs susceptible to steep reduction without compromising productivity – as many as half of Fortune 1000 businesses agree with that sentiment, according to a Harris Interactive survey.
Start tracking indirect spend
Taking advantage of indirect spend may require some culture changes. Like direct procurement spend – those things contributing to the product and a manufacturer’s bottom line – all financial decisions regarding indirect spend should receive at least a modicum of attention. Otherwise, manufacturers run the risk of wasting revenue considerably without notice.
Furthermore, if these organizations do wish to reduce indirect spend to increase revenue, they’ll need visibility into the matter. Supply Chain Brain reported “non-core spending” comprises anywhere from 15 percent to 40 percent of the average business’s revenue. That’s a considerable gap to leave unchecked, low end or high end. Manufacturers should regularly compile basic data on things like from whom they procure indirect purchases, the quantity, the overall cost, and who on site made the purchasing decision. Manufacturers don’t have to treat this information like operational or throughput data and send it through analytics or employ visualization to observe trends, but even casual awareness could bring areas of improvement to light.
Use data to develop an indirect procurement plan
Although indirect procurement would naturally fall under indirect spend management, cost associated with obtaining these goods should be segmented from Bill of Materials, similar to what a business would normally do with direct spend. For manufacturers, directing sourcing strategies should include building a working relationship between them and their suppliers, one that may include the transference of demand data, perhaps through an intermediary.
By building a comparable procurement architecture for indirect spend, manufacturers decrease their chances of overspending on shipping costs through bulk order negotiations or even simply by picking suppliers located closer to their facilities. As manufacturers cultivate a system for indirect procurement monitoring, they’ll establish preferred vendors for each classification of items, preventing procurement managers from simply buying whatever from whomever, regardless of impact on cost.
“Machines operating as commissioned shouldn’t require frequent component replacements.”
Don’t forget about preventative maintenance and spare parts inventory
Indirect spend also includes spare parts, tools and equipment related to a manufacturer’s production assets, transportation fleet and peripheral electronics. Manufacturers with full spare parts inventories may see themselves as forward thinkers, but a preventative maintenance plan focused around reliability may not only offer greater support to important manufacturing assets and processes but an opportunity to cut wasteful indirect spending habits.
There’s nothing wrong with having a few spares on hand, but manufacturers must examine the reasons why they feel the need to keep an emergency supply in the first place. Machines operating as commissioned shouldn’t require frequent component replacements. Moreover, each spare replacement takes time out of production to complete, eating away at productivity. While preventative maintenance may cost more upfront than doing nothing at all, this is likely a drop in the bucket compared to the recurring costs of spare parts and downtime. Preventative maintenance can isolate and analyze repeat breakdowns, uncover the root cause, and possibly eliminate spares from a manufacturer’s indirect spend budget altogether.
Don’t let the name fool you – indirect spend management has an immediate impact on the ways in which any business operates, especially if the business in question works to optimize procurement and rein in costs.
Where can the food and beverage industry reduce procurement costs for better strategic sourcing?
Strategic sourcing isn’t achieved overnight – it’s a discipline honed over the lifetime of a given business. High procurement costs may seem like a necessary evil to continue producing products and services customers have grown to love. True strategic sourcing practices root out pockets of spending, apply dynamic methods to reduce waste in the short term, secure more working capital for business owners going forward, and leave room for new ways to build off previous gains.
The food and beverage industry has a number of unique hurdles that Cheif Procurement Officers (CPOs) and other procurement staff within an organization will need to navigate to keep upfront costs low, as well as bolster a long-lasting and fruitful relationship with its suppliers. As such, strategic sourcing practices must account for these challenges to rise beyond them.
Fresh foods warrant fresh perspectives on procurement contracts
Consumers today want freshness in the foods they eat and produce providers have answered the call, according to a 2015 Produce for Better Health Foundation report. Fresh fruit stock in stores has grown by 4 percent in the last five years, and the youngest generation’s increased interest in vegetables could easily lead to significant demand in the near future. Inversely, during that same period, canned produce inventories dropped by 13 percent.
“30% of an American shopper’s budget is spent on fresh food alone.”
While highly sought after, freshness presents problems for sourcing. How are businesses expected to supply customers with the fruits and vegetables they crave when they’re out of season? For other organizations that process fresh ingredients as raw materials, this problem is just as unavoidable. Procurement may just be a matter of finding an available supplier half a world away, but increased logistics costs tend to trickle down to consumers eventually, so much so that more than half of the global population say rising food costs impact their buying decisions when shopping for fresh foods, according to a 2012 Nielsen Shopper Trends survey. After all, 30 percent of an American shopper’s budget is spent on fresh food alone.
Just as customers shop wiser, food and beverage companies need to procure wiser by overseeing supply costs with greater seasonal awareness. If a certain fresh product or ingredient has historically led to untenable logistical cost increases at certain points in the year because of market demand, companies must move away from flat-rate spend models and negotiate with suppliers for more elastic procurement contracts.
Food and beverage can’t ‘chill out’ over cold storage logistics
The “cold chain” industry – or refrigerated logistics – has become the focus of attention in many industries, particularly food and beverage since the passage of the Food Safety Modernization Act of 2011 and the rise of trends pushing for stronger commercial energy efficiency practices. For businesses struggling to find cost reduction opportunities, cold storage proves an ample target.
“The U.S. food and beverage industry wastes $750 billion worth of products annually.”
From a straightforward cost retention perspective, the Food and Agriculture Organization of the United Nations reported in 2013 the U.S. food and beverage industry wastes $750 billion worth of products annually, a figure which the International Trade Administration attributes to a “lack of proper facilities, improper food safety handling procedures, and insufficient training for those personnel working in the cold chain.”
With that in mind, temperature-regulated transportation and warehousing affords food and beverage businesses with incredible value potential, but at a cost. For those managing their own cold chain, investing in low-cost energy-efficient equipment like docking bay seals or scheduling regular staff training sessions around the most energy-intensive assets may shrink utility spend. For businesses outsourcing logistics to a third party, contract negotiations should touch upon the company expectations for how its 3PL plans to mitigate cost increases on their end to save money for everyone involved.
When businesses source strategically, they not only reduce costs for the immediate future, but they build a precedent for cost reduction into their procurement operations that delivers benefits time and time again.
Can smarter asset management and maintenance strategies address mining issues of today, as well as those on the horizon?
When they supply manufacturing and other process industries with the minerals they need to service their customers, the U.S. mining industry also performs an incredible service to the stability of the nation. The mining industry processes hundreds of billions in minerals each year, and once delivered to other sectors, the materials added more than triple their worth to the economy, according to the National Mining Association. Mining is the fuel for the engine of production.
An industry so valuable to the economic integrity of the U.S. requires reliability-centered maintenance initiatives to protect and preserve mining assets over their entire life cycles. By investing in regular, data-driven repairs, mining assets have the potential to last longer, and their owners avoid cost increases related to inefficient operation, downtime and replacement, among others. But mining is an industry like no other, one with its own set of unique challenges.
Long hours of operation take their toll on mining assets
So long as there are minerals left to mine, a mining company’s extraction process will continue to be lucrative. But while mine workers and equipment operators in the U.S. average just over 44 hours weekly, according to the U.S. Bureau of Labor Statistics, the assets they utilize on the job may virtually never really stop running. According to literature published by the state of Illinois detailing a day in the life of a coal miner, many mines operate 24 hours per day. So, while workers might come and go according to their shift schedules, on-site assets function around the clock.
“Operation without end increases an asset’s susceptibility to inefficiency and breakdowns.”
These conditions present two problems for mining assets and the legacy maintenance strategies used to protect them: First, running machines constantly for long hours obviously puts an incredible amount of physical strain on the equipment in question. Operation without end increases an asset’s susceptibility to inefficiency and breakdowns. Furthermore, when assets run on a 24-hour operations schedule, any downtime – planned or unplanned – detracts from site efficiency.
That said, planned downtime as part of a reliability-centered maintenance strategy can take advantage of data communicated between machine and managers to reduce time to repair. If mining telemetry effectively predicts machine deficiencies capable of spiraling into full-blown failures, maintenance crews can plan downtime to address these smaller concerns rather than waiting for a big, expensive breakdown. The ability to schedule maintenance in advance delivers benefits all its own. If a mine has any off hours, even a handful a day, maintenance can devote that time to their work orders accordingly.
As mining demand rises, so does the significance of uptime
If the previous points didn’t stress the importance of asset reliability and continuous production, hikes in mining demand will. Industrial and technological trends have added pressure to the mining industry, compounding the need for maintenance programs designed specifically to enhance uptime.
By the NMA’s assessment, the average computer chip contains upwards of 60 different minerals and elements, all requiring mining operations. Moreover, the latest technological advancements may involve expanded mining operations to extract new metals – in 2011, Technology Review discussed how the U.S. is the largest consumer of cobalt while, at the time, mining none of mineral itself. That has since changed.
“As businesses move back stateside, procurement will need to follow suit.”
Additionally, reshoring may also increase mining demand in the U.S. According to the Reshoring Initiative’s 2014 data report, America went from losing 140,000 manufacturing jobs per year to overseas companies to gaining 10,000 per year in the last decade. As businesses move back stateside, procurement will need to follow suit, lest they undermine the cost efficacy of relocating to the U.S. by sourcing abroad.
Reliability-centered maintenance for mining assets keeps equipment availability high and mines in operation. As heightened demand pushes productivity to the limit, every machine extracting or transporting minerals will require support from a maintenance plan working alongside asset management best practices to secure availability.
The prosperity of future mining operations depends on the industry’s ability to respond to forecasted demand, so why not use the same principle to enhance asset functionality? With reliability-centered maintenance, mine workers and machine operators turn asset data into actions, thereby reducing maintenance costs, eliminating large-scale failure events, improving safety and throwing their full weight behind value-added operations.