The development of an integrated value chain cost reduction methodology

• Main Author: Welman, Abraham Jacobus Frederik
• Format: Others
• Language: English
• Published: Nelson Mandela Metropolitan University 2013
• Subjects: Corporations > Finance > Management; Manufacturing industries > Cost control; Industrial procurement
• Online Access: http://hdl.handle.net/10948/d1012954

The reason for the existence of any company is to make a profit, which means increasing turnover and keeping costs as low as possible. Optimisation of the Value Chain and Procurement were identified as the two largest contributors when one needs to improve the bottom line of any company. The purpose of this research was to develop an integrated Value Chain and Procurement cost reduction methodology and system specifications for a software solution which captures, tracks and accurately reports the impact of the improvement initiatives. The main research question was structured as follows: What should the specifications of a software solution be that will integrate the cost reduction processes of the Value Chain and of Procurement, in a manner that will ensure maximum sustainable bottom-line savings for companies in the manufacturing or service industries? The objective was to define the key phases in the Value Chain and Procurement cost reduction process and to determine how and where they integrate. It is important to note that according the literature review and the survey, both the Value Chain and Procurement cost reduction processes consist of seven phases. The phases of the Value Chain cost reduction process were: Phase 1: Budget/ABC costing and data analysis; Phase 2: Generate ideas; Phase 3: Evaluate and approve ideas; Phase 4: Implementation planning and approval; Phase 5: Development of project (idea) specific KPI's; Phase 6: Implementation of ideas; Phase 7: Track and report savings. The phases of the Procurement (Strategic Sourcing) cost reduction process were: Phase 1: Team selection/data collection/spend analysis/work plan development Phase 2: Access requirements/internal and external analysis; Phase 3: Develop strategy/shape value proposition; Phase 4: Screen suppliers, issue RFI/P/Q, implementation planning; Phase 5: Conduct commercial event/negotiate/finalise contract; Phase 6: Implement contract; Phase 7: Contract management/track and reporting. The above two cost reduction processes integrate at each phase of the respective processes and should thus be implemented at the same time due to their interdependencies. Based on the findings of the research it was clear that an integrated Value Chain and Procurement cost reduction process alone is not going to solve the cost reduction problems of companies. It is essential for the successful implementation of the integrated cost reduction process to develop skills and knowledgeable resources to implement the integrated cost reduction process, improve collaboration between the Value Chain and Procurement, and to implement a system to track and report performance during implementation. Further research should include how to adapt the current company processes, structures, procedures and systems in order to gain maximum benefit from the implementation of an integrated cost reduction process. The integrated Value Chain and Procurement cost reduction process, supported by a software system, should improve the success of cost reduction projects in companies. It is, however, important to note that the application of the methodology will vary between industries and that service-related industries might put more emphasis on Procurement cost reduction, while the manufacturing industries might place a bigger emphasis on cost reduction in operations. In conclusion, irrespective of the industries, it is evident that this methodology will enhance the cost reduction results previously obtained from similar efforts.