Markovsky On Adding Value: Adding Value By Removing Cost! What A Concept!
I had the opportunity to attend the American Supply Association's annual convention in Las Vegas at the end of September. It was highly enlightening. I eagerly joined in on the myriad meetings and break-out sessions, and was happy to note the popularity of the phrase “adding value.” Had I known what was coming, I would have kept track of the number of times the various speakers used the phrase from the start. However, that was not the case, so I only started my lumberman's log about a quarter of the way through. I recorded the use of “adding value” in some form more than 80 times! Since we started this column back in June 2003, I'd like to take credit for the heightened awareness, but I think it really came from many sources.
I was likewise surprised to note that throughout the meetings “adding value” seemed to be used interchangeably with “lowering cost.” In several of the monthly installments of this column, we have made the assumption that the two were sometimes linked, with some actions to add value necessarily lowering cost. But not all value adds lower cost. I suppose you could say that value adds either add value at no cost, at a cost the customer is willing to pay, or they lower cost, making the product or service more appealing in itself. Up until now, we've covered mostly ways to add value at little or no cost.
This month, let's talk specifically about adding value by removing cost. The danger here is to limit value adds to being just another weapon in the price war. While that may be true as it relates to cost reduction, that mentality might close your mind to the many value additions that could actually end up costing your customer more and making you more money! That said, offering your products/services at lower prices because you've squeezed down your costs can be a very powerful approach. It's a win/win. The customer gets a lower price and you maintain your margins.
As you look for ways to lower your costs, nothing is sacred. Even the most “givens” in how you run your business are subject to critical review. Oftentimes the things you believe simply can't be changed can net the largest savings. As my friend Ray Doane - the VP of Sales and Marketing at Haws - says, “To stand still is to die!”
Best PracticesHere are this month's Best Practices. Readers are encouraged to send in their own proven practices, so we can share them with others.
11. Ship sold products from the manufacturer directly to the customer.
Most distributors sell from their manufacturers' inventories, to some degree. That is, they never actually touch sold products, instead arranging for sold orders to be drop shipped directly to their customers. The higher the degree that you use this approach, the more cost you can take out of your operation, because it saves time and handling expense, as well as potential local inventory carrying costs. The danger is that the customer can much more readily draw the false impression that the distributor is a “middle man.” The danger can be rather easily mitigated by making your ordering/shipping/tracking/billing processes look seamless to the customer. If they view the distributor and his manufacturer as separate entities in the order/fulfillment/payment process, you could be in for trouble!
The advent of manufacturer-owned regional stocking warehouses has aided this approach dramatically.
12. Use state-of-the-art materials management technologies.
“Touching” some inventory is unavoidable. Between receiving, inventorying, reconciling and final shipment, certain industrial products can be “touched” as many as six or eight times at the local distributor level before they reach their ultimate purchaser! In many instances, this is a significant, unnecessary and totally avoidable overhead expense. Paperless materials management technologies have dramatically streamlined manufacturers' operations over the past decade. Unfortunately, those technological gains have not widely spread to the distributor level just yet. Speeding the process of being able to scan the manufacturers' bar codes at the local level, for example, enables distributors to manage their inventories with state-of-the-art precision and speed.
Both Best Practices 11 and 12 impact the number of people and the amount of facility space you dedicate to inventory management in your business. Proper management will better control costs, and add significant value for your customers.