Why Procurement Savings are Especially Valuable in Capital Intensive Industries
We all know the value of procurement savings both hard and soft to many organizations. They are often recoverable immediately with little or no capital investment. Often a cross-functional team comes together and develops the savings which does take time but usually very little if any capital expenditures.
The paper industry is very capital intensive. A new paper machine can cost over one billion dollars to install. This does not include the costs of warehousing, logistics, and other costs. Environmental permitting is long and costly.
One paper company that I worked for sold a popular roll of toilet paper for $.50. It was so popular that they could not make enough of the product. They made approximately $.05 profit on each roll. In order to make a million dollars profit they would have to make and sell 20,000,000 rolls of this brand. The company was currently stretched to its maximum capacity for this brand roll. In order to make more of the paper rolls the company would need more capacity or specifically a brand new paper machine costing approximately one billion dollars in capital minimum. There were other options, like buying another paper company for additional capacity, dropping other brands and reducing their production etc.
A cross functional team was formed, which included some suppliers, employees from other departments, additional stakeholders and procurement. The team came up with a list of paper machine process speedup ideas and waste reductions that saved one million dollars directly attributable to this brand. In essence the savings were equivalent to the profit of selling 20,000,000 additional rolls of this brand.
The issue is how do you count, justify or take credit for all the savings? I am not a financial or accounting expert I am just raising some questions. Most folks would agree that the $1,000,000 savings are hard savings and could be readily verified. It will definitely improve cash flow. Here are some other possibilities. What about much of the cost of goods sold avoided for not making 20,000,000 additional rolls? Is it a true cost avoidance? What about opportunity cost? By not spending the money making the additional 20,000,000 rolls the company avoided most of the costs of making them and thus could have created more options at investing in more profitable brands. The assumption is that the company will use the cash to make a more profitable decision. This does not always happen, as indicated by many stock buyback efforts. What about the sustainability aspects? By not making the rolls how much carbon footprint was avoided? Can this be quantified monetarily?
Many including me would probably not include the complete capital avoidance of a new one billion dollar plus paper machine. But what if the demand for the rolls were so strong that the company could literally sell as many rolls as they could make? I recently wrote an article on that illustrates some other positive aspects and savings that procurement provides the organization.Take the time to review for more creative savings ideas. I am sure the reader can infer many additional savings both direct and indirect.