Quick Identification of Cost Reduction Opportunities - A Technique

Author(s):

Robert A. Gallant
Robert A. Gallant, Chief of Supply Management, Canadian National Railway Company (CN) Montreal, Canada H3B 2M9, 514/399-7709

81st Annual International Conference Proceedings - 1996 - Chicago, IL

Summary.
CN Supply Management has met with considerable success in the application of a new and innovative cost reduction technique. The "Pop-Up" technique applies the principles of supply chain management in a quick and effective manner allowing users to easily identify cost reduction opportunities. The technique and its application are described.

In 1995 CN's Supply Management department was given the mandate to decrease the company's total procurement costs by $30 million. This meant that the group not only had to combat inflationary price increases, but that it also had to achieve significant additional savings on the $1.1 Billion worth of goods and services it procures each year.

In recent years CN's procurement function has undergone a radical change evolving from a purchasing organization to a supply management unit. It was through the application of the supply chain management philosophy that the group was able to exceed its $30 million target.

One technique that has been integral to Supply Management's success is the "Pop-Up" process. This technique was developed in-house and is based on the principles of supply chain management. As opposed to undertaking a time consuming study, the Pop-Up provides a quick and effective method for employees to identify potential cost reduction opportunities.

The technique is performed by reviewing the different elements of the supply chain to determine their effect on the total procurement costs associated with meeting internal customer needs. Each Pop-Up is led by a member of the Supply Management team. The primary criterion for team participants is that they understand the process and that they are willing to "think outside the box" and come up with innovative cost reduction solutions.

The end result of a Pop-Up session is that the group identifies any disconnects or potential cost reduction opportunities that may exist in the manufacture, distribution, procurement or application of the commodity. These then need to be followed up with more detailed research. It should be noted that for purpose of explanation, this article refers to the process as it might be applied to a product, however, it can also be used for services.

The process essentially comprises four phases: (1) learning about the product and its applications; (2) reviewing the supply chain for the product; (3) estimating the costing; and (4) looking for potential cost reduction opportunities. The entire process generally takes less than three hours, and it is not contingent upon prior detailed knowledge of the item.

PHASE I: DESCRIBE THE PRODUCT AND ITS APPLICATION
The group begins the process by examining the product's physical attributes. Before going any further the leader must ensure that the group members have a generally clear understanding of the look, size and composition of the product.

The team then examines the end use or application of the product. This is perhaps the most critical part of the analysis since it examines the customer's requirements as a separate entity from the product being reviewed; it also involves estimating life cycle, labour involved in its application, and relation to ultimate customer impact. The possibility that some other item could better or more economically meet the requirements is also explored at this stage.

PHASE II: ANALYZE THE SUPPLY CHAIN FOR THE PRODUCT
During this phase the supply chain for the product is broken down into six distinct elements, each of which is analyzed as follows:

Step 1: Raw Materials / Intermediate Products
The first step undertaken in analyzing the supply chain of a product is determining what raw material and intermediate products are used in its production. Estimates of the quantities of each material required are also made at this stage. Since this is a quick technique, common sense and general knowledge are used as the guide for estimates.

Step 2: Manufacturing
At this point, the team develops their perception of the overall manufacturing process involved in producing the commodity. The group compiles a list of the steps that they assume to be a part of the manufacturing process for the product. As well, they try to evaluate what equipment, capital assets and labour are required to support the manufacturing process.

Step 3: Delivery
Product delivery can be an important and costly part of a product's supply chain. Therefore, the team analyzes the delivery components of the supply chain. A number of key delivery variables are examined, including product packaging, distribution, and differing levels of inventory.

Step 4: Acquisition & Internal Distribution
During this step the acquisition and internal distribution processes are examined. Issues that are often considered include how and where the product is received, warehousing and shelf-life concerns.

Step 5: The Internal Customer
Supply Management can often assist internal customers in improving their forecasting and internal procurement procedures. By acting as a link between the internal customer and the supplier, Supply Management helps find synergies between the requirements and actions of the two groups. Areas of opportunity in product application, operational challenges, and life cycle are examined.

Step 6: The External Customer
The final objective of all procurement projects is to help serve the end customer. Therefore, the impact that a replacement part can have on the external customer is examined. Issues such as not receiving the product on time and product failure are analyzed in terms of their effect on CN's service delivery to its customers.

PHASE III: COSTING
In Phase III, costs are estimated for all of the elements identified in Phase II are used to establish a total "should be" cost for the product under consideration. This estimation process allows the team to determine the distribution of costs across the entire supply chain and to identify any disconnects or potential areas for improvement and cost reduction. It should also enable the team to determine where the greatest costs lie and why, as well as where hidden costs may exist. The end result of this evaluation is that it allows the group to determine where inefficiencies, problems and opportunities may exist.

PHASE IV: LOOK FOR OPPORTUNITIES
During this phase the group members essentially step back from the material they have covered and review the overall supply chain. One of the issues that the members address is whether each stage of the supply chain can be considered world class. They try to determine whether CN is imposing any inefficiencies on the supplier, if we're buying the most cost-effective product, and whether the distribution process can be streamlined. Further, potential replacement products are discussed at this stage.

CONCLUSION
After the Pop-Up has been completed, the group is, at the very least, armed with questions and areas of research necessary to either validate or refute the potential cost reduction opportunities identified. The team then decides what research must be performed to confirm if a full commodity review is appropriate.

The implementation of this technique at CN has resulted in a number of remarkable breakthroughs in total cost reduction. One of the greatest benefits of the Pop-Up is that it encourages the team to use creative thinking in tackling each commodity. As well, being a part of the initial strategy formulation helps motivate employees to participate in further research and analysis of the product and its total supply chain.

The Pop-Up technique has played an important role in helping CN Supply Management bring about a significant change in the mindset of its employees. It is considered to be a major contributor to the group's success in initiating more focused research to more quickly identify total cost reduction actions.

The impact of this success has been recognized by the corporation. In 1996, Supply Management will become responsible for numerous non-traditional purchasing areas within CN. These new areas are to include the procurement of travel services and facilities management among many others. The result of this increase in scope means that Supply Management will now be accountable for over $1.5 Billion worth of goods and services.

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