Analytics to combat rising costs

Applying analytics to inventory and products can free up cash and maximize profit

January 4, 2018
by Tracey Smith

Tracey Smith is the president of Numerical Insights LLC.

From the December 2017 print edition

If most of your parts and supplies are sourced from Canada or the US, you’re currently seeing the impact of inflation reflected in rising prices. As prices rise, it becomes even more important to put strategies in place to offset these cost increases. Analytics can be applied to help you determine actions you can take.

Consider the following scenario. You work for a global company that, over the years, has acquired several smaller companies. As each smaller company is merged into the larger one, the list of products you offer to your customers increases. A consequence of this is that the number of unique parts that procurement is responsible for sourcing also goes up. The result is an increased workload for procurement in sourcing and contract management activities.

What many merging companies fail to do is to take the time to examine the current list of product offerings to see if they now have duplicate or overlapping offerings. This happens frequently in manufacturing. Performing this activity is the perfect opportunity to consolidate the product list and reduce the number of unique parts that procurement needs to source and manage. Whether your parts list grew through acquisition or organically over time, analytics can help you reduce that list and save money. Let’s take a look at inventory as the first example.

Analytics to reduce inventory
If you provide physical products to your customers, you undoubtedly stock inventory. From a financial point of view, inventory ties up cash and prevents you from using it for other company initiatives. If you can reduce your inventory, you can free up cash flow.

By studying customer ordering patterns over time, data analytics can be used to help determine how much inventory you should stock of each product or part. Data can show you how many of each part is used by customer orders each month and how stable or volatile that usage level is over time.

Analytics can determine which parts are “high runners,” which parts have stable order patterns and which ones are highly volatile in terms of order and usage quantities. As a real example from a manufacturing company, basic analytics determined that roughly one third of the parts they stocked were only used once a year, yet they were carrying inventory for all parts. This company re-evaluated the parts it chose to stock based on the usage data, the cost of the part and whether the part was subject to degradation.

Analytics to consolidate product offerings
In our first example, we illustrated how to use analytics to re-evaluate your inventory stocking decisions to free up cash flow. In this second example, we will illustrate how a re-evaluation of your product offerings can consolidate your product portfolio and maximize profit.

We saw that as a company grows, its list of product offerings grows. Product teams excel at the creation of “the next great thing,” but rarely is anyone responsible for “cleaning up” the product portfolio. People love to work on new products. It’s far less exciting to analyze the overall portfolio, but this is where procurement professionals, in combination with engineering teams, have a chance to really impact the business by using product analytics.
Product analytics is an area of data analysis which helps companies focus their efforts on the products that generate the majority of their profit. A simple analysis of each product’s overall contribution to total profit will do the trick. This contribution is a product of the profit margin for each product combined with the volume of product that is ordered. Analytics can show you which products are growing your bottom line, which are tapering off and which ones are costing you more to manage than the profit they generate.

Evaluating the list of products that are low-volume and low-profit is key. Can you migrate these customers over to an alternate product in your portfolio? Is it worth it to continue to offer this product or should it be eliminated? If you choose to keep it, can your engineers modify the designs to use common parts that are being used for higher-profit products?

Taking the time to apply basic analytics to your inventory usage and product offerings on a regular basis can help free up cash flow and maximize your profit. These are two examples of where procurement and supply chain professionals can utilize their skills to impact the bottom line.