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An implementation of the AIM and DRIVE method

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  1. Executive summary
  2. Background
    1. Bob's farm stores
    2. Description of commodity/service to analyze
    3. Why this particular project
  3. Agreeing on a primary cost
  4. Identifying critical costs in the supply chain
    1. Process maps
    2. Secondary and tertiary costs
  5. Measuring secondary and tertiary costs
  6. Defining the key cost drivers and developing strategic options
  7. Cost drivers and functions
    1. Po rate
    2. Navo rate
    3. Lead time
  8. Reducing, changing or eliminating activities that cause costs: the strategy
    1. Constraints
    2. Strategic option: implement mid-tier erp system
    3. Strategic option: po consolidation through blanket po's
    4. Strategic option: standardize authorization process and increase # of authorized vendor base
  9. Implementing
    1. Mid-tier erp
    2. Po consolidation through blanket po's
    3. Standardize authorization process and increase number of authorized vendor base
  10. Appendices

Based on industry benchmarks, Bob's Farm Stores is spending more than it needs to on its purchasing process. We believe that they could save a total of $1,065,462 by implementing three strategies, namely 1) implementing a mid-tier ERP system, 2) consolidating the number of annual purchase orders through the use of blanket purchase orders, and 3) standardizing their vendor authorization process and increasing the number of authorized vendors.

Implementing a mid-tier ERP system
Our company deals with 650 different suppliers, having each hundreds to thousands of SKU's. The current manual ordering process is overwhelmed by the complexity of the supplier base which has resulted in severely inaccurate forecasts, redundant process and data entry, and increased lead time. With the implementation of a fairly off-the-shelf, mid-tier ERP system we believe that we can 1) Increase forecast accuracy, 2) Eliminate redundant processes, 3) Decrease the amount of labor required to generate and process each PO, and 4) Decrease the lead time by 4 days. Total net expected savings are $624,462.

PO consolidation through the use of BPO's
By using blanket PO's we believe that we can conservatively achieve at least a 0.5% reduction in annual materials spending per year. The risks associated with this strategy include exposing ourselves to price fluctuations (market price could drop during life of contract) and increased dependency on our forecasted demand (we may overbuy). Total net expected savings are $240,000.

Standardization of vendor authorization process
Standardization of the vendor authorization process and increasing the number of authorized vendors will decrease the negotiation and order processing time which will decrease the lead time. We expect to reduce the lead time of non-authorized vendor orders (NAVO's) by 25% resulting in a net expected savings of $240,000.

[...] A good's price fluctuation would have an impact on the timing of our purchasing and the terms of the contract. We could expect that if there were more price fluctuations, buyers would have more difficulty to estimate the demand and adopt more observational purchasing and spot buying (increases PO's). Knowledge of buyer: The buyers' knowledge plays a critical role in the order process. Buyers depend on their experiences to adjust the suggested order amounts from an ERP system and proactively aggregate PO information for the demand of all the stores. [...]

[...] We defined negotiation rate as the number of negotiations it takes in order to arrive at a price and other requirement consensus for an average NAVO. Knowledge of the market for the items being procured from the non-authorized vendors would be an asset for an Assistant Buyer going into the negotiation. From our information on the case, there is a high amount of variation between different Assistant Buyers, as far as their negotiation skills and negotiation rates are concerned. The firm has a list of 650 authorized suppliers and, owing to the traditional and fixed mind-sets the management is not very methodical in increasing this list on on-going basis. [...]

[...] Lastly, we did not quantify the time saved by decreasing the labor per PO in terms of salary saved because the Buyers and Assistant Buyers will still be engaged in purchasing process activities. Total expected savings are $960,462. Strategic Option: PO Consolidation through blanket PO's (Key Cost Drivers: PO Rate and Lead Time) We are given the value of average inventory; $800,000 per store. There are 24 stores. Inventory turnover for the industry is 2.5 times per year. Therefore we have an annual spend of ($800,000) x x ( 2.5 ) = $48 M. [...]

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