By Michael O'Donnell
22nd October 2022
So what would you do with an extra $ 750 k to your bottom line? Or alternatively how about trying to make it up in $25m extra sales?
So the guy said, “We’re in hundreds of countries, and we’ve up to half a dozen suppliers in those countries. We need a way to pick the cheapest supplier quickly and switch to them as soon as month-end is done. Our competitors haven’t really been able to do this, so if you can do it …”
Now, we need to anonymise the client. Let’s call their suppliers “Suppliers” and the product bought and sold “Bananas”. Bananas could mean concrete blocks, designer watches or scented candles.
The Big-E
Quickly we built up a simple Excel model exporting off the database that enabled us to rank the countries and suppliers by the amount spent on the bananas and volumes sold. We were then able to see the price per banana within that country.
The suppliers in those countries were specific to those countries – the actual product could only be bought and sold locally. (We couldn’t import product from an adjacent country).
We now had our list of priority countries - ranked in order of whom we had the highest spend - and who were the leading suppliers in those countries.
A piece of Pareto
Rather than picking easiest low-hanging bananas, we focused on the juiciest ones at the top first. 80% of our saving was in the top 20% of our supplier cost base.
We then sent our list of changes to colleagues in Procurement who re-prioritised whom they gave most business to, sometimes minimising a supplier until they gave us more competitive prices. Procurement also needed to consider quality and other non-financial factors.
Gross Margin
Gross Margin varies wildly depending on the businesses and sector; tight margins and wide margins. In this company the margin was 97%.
They didn’t buy and sell bananas!
On the first sweep we saved $ 750k in costs at a margin of 97%.
What did that mean for the business? The cost saving for the switching was $ 750k, and the margin was 97%, so the equivalent Revenue was: $750k / (1-0.97) = $25 m
We could write it this way:
Virtual Revenue saved: 25,000,000
Actual cost saved: 750,000
Virtual profit: 24,250,000
Margin 97%
Put simply this meant:
$25m in customer spend that we didn't have to seek out. And we all know how tough it is to get new and repeat business.
$25m not needed from branching into potential new markets
$25m not needed from new and pushed-through product lines
$25m not needed from rushing improvements to existing quality
Improvements to working capital and cash flow
If this strikes a chord with you and your business needs this type of improvement, get in touch and we can model your data quickly.
Michael
Images: copyright InCtrl & Shutterstock