Reduction of 25% in costs: A case at Sanar’s Distribution Center
One of the main obstacles in the purchasing process is the cost of the products. Especially when the main raw material for books (our main physical product) is quoted in dollars, which fluctuates and influences the purchase price. Moreover, Sanar’s Distribution Center is located in Salvador, Bahia and print shops are distributed throughout the country, mostly in the South and Southeast region, which also influences the cost.
“Our Cost Unit KPI was, for a few weeks in a row, above our ideal margin, always justified by external factors, but we tried to expand the procedures to understand how we could be more active in results.”
For that, we follow these steps: goal-setting, analysis, strategy formation, strategy implementation, and strategy monitoring. Take into consideration that the study is based on books but the steps can be applied to other fields.
Goal-setting
The average purchase cost KPI is the sum of all unit products’ costs plus their unit freight costs, attributed through apportionment, divided by the total number of units purchased in a period.
We noticed a growth trend, and we wanted to maintain our price within a margin even with raw materials’ fluctuation. This initiative was not part of our Objective and Key Results. Nevertheless, we dedicated a lot to it and surprised ourselves with the results. I recommend to you, as a lesson learned, to do goal-setting and be data-driven.
Analysis
At this stage, we gathered as much information as possible involving internal and external scenarios and we were able to make a division at two big sides of cost influencers: cost of production itself and freight. From that, we could correlate other costs that we had already observed such as quantity required, color and placement of ink, finishing, page count, paper, and negotiation method.
Strategy Formation
After reviewing all information above and correlating it with data, a detailed study was made on our purchases profile and also our SKUs’ characteristics. Books were divided into groups followed by their demand’s information with a historical basis. To forecast purchases, we considered, in addition to history, product vision and marketing projection.
Once the issues were prioritized, we could formulate a strategy to solve them.
Strategy Implementation
We were aware of identifying opportunities, threats, strengths, and weaknesses about these points analyzed.
- Specs
All inputs and specifications required for each type of book were detailed to identify which could be replaced, what would be influencing each one on the final product’s price, and which could be optimized.
Technical meetings were held with our suppliers to evaluate ways of replacing cheaper inputs without losing quality. Whatever the change, it needed to be faithful to the product proposal.
Considering the amount of paper used has a strong influence, in a meeting with our suppliers we managed to arrive at an ideal number of pages (and their multiples) for greater resource use.
- Negotiation
First, we reviewed our payments policy on what would be more advantageous with our finances. Another key point was to divide providers by their specialties, for smaller runs we would get more competitive prices with digital printings, for colored books, there were specialized options. Having this classification helped enormously in making negotiations.
We started to combine more SKUs at the same acquisition to obtain greater discounts with suppliers. We expect to make bigger negotiations respecting the schedule of launches and stock replenishment when currency is more opportune. Thus, with fluctuations in excess, prices could be frozen for a period agreed with the supplier.
- Quantity
Based on this, strategies and negotiations were developed to purchase larger quantities — also considering impact of storage costs and space limitations — for books that were above our purchasing margin and were being purchased with lower print runs due to a rule that did not correspond to current consumption patterns.
- Freight
If we now turn to transportation’s cost component, with reduction of shopping time, the need for fast shipping (which is the most expensive freight) would be reduced. Normal freight rates were evaluated and tables of all carriers were compared and negotiated to meet deadlines and appropriate amounts.
Strategy Monitoring
To be successful in that stage we must have performance measurements. Every quarter we review internal and external issues that may be affecting that cost, evaluate specified parameters, and shall take corrective actions if outstanding.
If anything that we didn’t count on is discovered, or if anything changed, we need to record these data to help with future improvement.
The most striking observation to emerge from the data comparison was that the sum of these actions prevented cost from accompanying the growth rate of the dollar and contributed to a reduction of 25% in costs obtained compared with the previous quarter.