Align Business Processes and Data Analysis to Improve Value Delivery
What a day — out of the blue, my motherboard decided to quit on me. Dead. Gone. Kaput. Before taking out the hard drives to send the computer back for service, I cleaned out some of the old files. I came across a file named, “Freight Costs by Rig,” something my team and I worked on previously.
I wondered how the older information compared with similar data I have been collecting for the past few months. To me, $5 million in freight is still $5 million in freight. Why did we spend so much with such little control?
I opened the old file – it was broken into key categories, including drilling, subsea, tubulars, consumables and equipment types. As I looked through the information, I reviewed some of the data points we used for the project:
Freight Type (Rail, Sea, Air, Urgent Air, Truck)
Load Type (Inventory, Equipment, Pipe, Third-party Equipment)
I noticed right away that when we shipped items by air, we were paying on average 12 percent of the cargo value. When we shipped ocean freight and Full Truckload Shipping (FTL), we were paying about 6 percent of our cargo value. Several things began to alarm me – most importantly, what was being captured toward each purchase and what was not. Key elements were missing. How were goods shipped to my third-party logistics (3PL), and what did it cost to get goods to my distribution center? This data was never captured.
Next, I began reviewing invoices from distribution partners. I saw many $25 delivery charges – essentially, this was due to distributors abusing my domestic shipping providers. After some more digging and segregating purchases by different suppliers, I was quickly reminded why I wanted my team to do this exercise: “True Value of My Goods.” For fast-turning items, I noticed small batch sizes and repetitive delivery charges. In some cases, the delivery charge exceeded the value of the product. But most of the time, the cost of delivery was approximately 35 percent of the cost of the product.
However, looking further, I noticed many vendors delivered items for free to specific destinations. The markup on their products was approximately 20 percent higher than that of distributors who charged for delivery. If we had continued with the companies that charged a premium on their products, we would have been better off than we were using the companies that charged for delivery. Just making this simple switch would have saved us $50,000 in freight on common items you can get at your local hardware store.
This led me to the following 5 questions:
Why are we buying it?
Why is it ordered so often?
Why are we using these suppliers?
Why are we not looking at costs and time?
Why are we using these shipment methods?
Considering these five questions, I began delving deeper into other files on my old hard drive, and I found some revealing answers. Some buyers said that certain vendors could deliver at a moment’s notice or that they liked working with certain vendors. Other buyers stated they preferred working with vendors in a specific geographic location or that they liked their superior customer service. Yet, there was no methodology for freight optimization.
My notes said time and quality were the most important factors at the time – cost was not a determining factor. The problem was that we applied this philosophy to all products. To compete in today’s market, organizations need to develop a list of priorities for their supply chain activities to assist operations in getting the inventory needed to run optimally. For example, many organizations force you to go with the vendor offering the lowest price. But, when we went with the low-cost provider, we were nailed with heavy shipping charges.
On the other hand, when we told vendors we needed a specific quality metric, they were often late. While the product was good, we felt we had to get it to our end destination as quickly as possible, so we trucked it at a heavy price. However, we should have taken a step back and examined how it linked to our supply chain. By taking some time to define our key products for operations and deciding whether cost, time, quality or flexibility was the highest priority, we would have created a competitive advantage for our customers.
For example, let's say we had taken our top-20 highest turning items and put them on consignment at our Houston warehouse. By transporting all our drill pipe via rail instead of trucking it, we would have saved almost $100,000 in freight costs. If we had consolidated our freight internally and passed it to our 3PL, we would have saved even more from optimizing packaging sizes because it maximizes our container space. On just one project, we could have eliminated 80 percent of the handling and crating fees. That alone would have saved us $225,000 for that one rig.
I wasn’t exactly happy when my motherboard decided to stop working, but it gave me an opportunity to examine and improve how we were handling certain procedures. It's easy to get into a pattern, doing things the same old way. In fact, it becomes almost a mantra: "That's the way we've always done it." Business processes become habitual, and in the heat of business, we automatically fall back on them just to get things out the door and on their way.
I learned it doesn't have to be that way. We were getting less than optimal results because we didn't think carefully about where we could make simple adjustments that would have resulted in some impressive savings. It just takes a little time to go over the numbers and reflect on what you can do differently.
Think about your own organization. Do some data analysis, and ask why you are doing things a certain way. Conduct a business process redesign with clear goals. You will find that you might not be getting exactly what you are paying for.