The Myths Around Cost Management & Supply Chain Solutions
Beware Cost Management Consultant In The Building
In this Growth Engine daily I’d like to talk about the myths around cost management and supply chain improvements.
I get a little bit frustrated when I see cost management consultants coming into the business, and in the most to do a good job, but one I see that frustrates me when I sit on boards and these consultants come in is the generalistic approach they take.
What I want to highlight to you today is my experiences and to sort of get you to focus where cost management consultants are better and can add a lot of value.
So just to be clear, straight out of the gate, I’m not anti cost cutting or anti cost management consultants at all.
Businesses should always keep a tight rein on, certainly, overhead and direct cost and things like that.
Understanding Where To Focus on Cost Cutting
I’d like to highlight two areas that I think that you could sort of learn to split a line between when you as the entrepreneur starts to either cost cut in your business, or you are bringing in a cost management consultant yourself, as an external.
Recently, is it the displeasure that I had of having to have a chat with one?
A company that I sit on the board with? We brought one in just to sort of do an audit that they had canvassed us from with a free consultation.
So we’re sitting there, and take out the spiel, take out everything else, my job there is really to observe and to see what the process is going to take to advise the board.
It just seemed to be that they were going to go carte blanche at the supply chain and they were going to go out and they were going to look at the service and evaluate … good point … evaluate what we’re currently getting, and then they were going to go out and find alternative suppliers to go out to try and lower the cost. So I’m 45 to 50 minutes into this meeting and my blood’s boiling here.
I’m waiting for the gear shift.
Why the gear shift? This is where the split comes into two.
Value Vs Damage
What I want to do is talk about where cost management consultants have value and where I think that they could damage your business.
I know that’s a bold statement and I apologise if there are any cost management consultants in the community. It’s an honest take.
I’m happy for you to open a debate with me.
I’m sure not all cost management consultants are cut from the same cloth, would be the statement, but here goes.
Where we’re looking at commodity purchases … So let’s define commodity purchases, things that you can go anywhere and purchase that gets delivered to the same standard in the same timeframe, but where you can leverage your costs.
So a commodity is just that.
It’s something that you can go to the market and go from there. There’s still, and I’m sure the commodity suppliers, should I say, they will certainly be saying,
“Yeah, but our service is better than this company,” or, “That service is better than that company,” and to a degree, that will be there.
But the example I’m going to give to you is if you’re buying a computer box and that’s made by Dell or HP, and that computer box is the same spec from one supplier to another, it’s the same delivery and it’s the same warranty, and one of those boxes is £499 and the other is £400, that’s a commodity purchase.
As long as it’s like for like, then why would you pay more?
I accept that, and cost management consultants are pretty good at highlighting that.
Niche & Service Suppliers
However, when you get into more, and I’ll put these two together, which is niche services, or what I would call service based delivery that has a lot of hidden areas that these cost management consultants just don’t see.
For those who know me a little bit more, I spent 20+ years in automotive finance and leasing, and run basically a top 50 leasing company in the UK, I cover this in context as when we spoke to this cost management consultant, we were speaking about company vehicles.
They chipped in, and they were unaware that both this client and myself have got an automotive background, and we didn’t necessarily say, which also tells me that they came to a meeting unprepared, but that’s a totally different article that we’ll do in the community.
Then they said, “Well, for your company car leases, we’ll go out and we’ll render it out and we’ll get you the cheapest vehicle out there.”
Where You Can Pay More and Still Save Money.
In the mid-90s, ’95, ’96, ’97, getting to the late nineties, we built a vehicle leasing company that we built from scratch to just over £3 million on a proviso that I could charge £15 a month more and still save you money.
How that works is, I don’t want to get too technical, but there is something called spread rental and terminal pause in leasing. A spread rental would have been typically 3 x 35 payments, so you’d pay 38 payments over 36 months usage.
When you add those up, divide it out, it comes to a total amount repayable.
However the 3 x 33 terminal pause option, which is 36 payments for 36 months rental, actually, it’s about £10-15 per month more based on manufacturer deal.
But ultimately, when you look at the TAR, the Total Amount Repayable, it’s actually cheaper.
So when I see a cost management consultant speaking about vehicle leasing, saying,
“I can get you cheaper leases,” then if it’s like for like and everything on a commodity purchase, then that’s different.
There’s More To Consider Than The Headline Price
But I see regularly they miss all the other aspects that are critical and where costs can be incurred, like
- Service Charges
- De-Hire Charges
- Inclusive damage Charges
- Administration Charges
- VE103 Certificate Charges
I find that in the most, not all they’re just so uneducated. I’m sure there are hundreds of speciality niches that I don’t know about, this is just my specialist subject I’ve used as an example.
Now this cost management consultant we met maybe just a bad apple, however, I have had the experience of dealing with multiple cost management consultants, probably a dozen or so over my career, and I see the same mistake time after time after time.
They are treating specific niche services and contractual, recurring payments like a commodity purchase.
What’s Your Experience?
So what’s the lesson here? Understand Commodity vs Niche Services and price points can go out of the window in the latter.
I’m hoping for you to open a debate If you’ve experienced this or this gives you some value, leave a comment below and we can get any questions that you’ve got around that answered.
So when you’re looking at either cost cutting in your business, cost management in your business, improving your bottom line, which is a great way of doing it without improving sales, or you’re looking to hire a cost management consultant, make sure that you split these costs into two, the commodity purchases that are, and rightly so, on a like for like basis, can we improve the price point that we get?
Maybe you buy at the same price and we get faster delivery, that’s also a win if your business is time sensitive.
Then start to split out things like niche services like vehicle leasing.
If you look at my service as a whole, there are a million and one non-execs out there that would be £500 a day cheaper than myself.
- Do they have the experience?
- Can they give the same added value?
Of course, they would argue they would, but … And there’s a lot of non-execs who are more expensive than me.
So there’s always a price point based on experience and value, and service and relationship.
I think that’s where cost management consultants fail to understand the relationship between the company and the service or niche provider.
And also where businesses who are cost cutting or cost monitoring themselves always seem to look over it.
And there’s a great saying out there, isn’t there, about
“You buy cheap, you buy twice”
How many times have you had to circle back on the U-turn and go back and do that?
I just want to highlight it.
It’s something I’ve experienced this week, something that I thought was a very poor, very one-dimensional, where a multi-spectrum sort of approach needed to be done, and clearly this management consultant didn’t get the business and we decided to pursue alternative options.
So leave a comment below, let me know your thoughts.
I hope that’s going to improve your bottom line without increasing your sales, just tightening up your costs to improve margins.
If you’ve got any questions about doing this internally, leave a comment.