Case Study #1
MID-SIZE NETWORK OF PRIVATE EDUCATIONAL INSTITUTIONS: $65 Million in Sales Revenues and $28 Million in Total Purchasing Spend
Commodities prices are going up, the prime distributor is looking for a mark-up increase, and the CEO is mandated by the Board of Directors to control and eventually reduce the cost of goods purchased, in order to maintain institution tuition rates.
The CEO recruits OPTIMBUY but also expresses concerns with the potential reactions of end-users/operators to any change in the organization.
OPTIMBUY diagnoses the situation to identify major issues and challenges, analyzes current suppliers’ contracts and benchmarks current commodity pricing.
A further evaluation of the potential savings is suggested:
- by improving performance on the distribution side (drop size and frequency),
- by rationalizing products and consolidating the network of suppliers.
Specific targets are established to improve performance without disrupting current business and services. On-going communication is maintained with end-users.
Major suppliers (80/20 rule) are invited to Corporate Headquarters to review options and renegotiate contracts, especially major manufacturers and distributors. Negotiations spanned over a 2-month period to reach final terms and to initiate savings and results.
Tracking, reporting and control systems were upgraded at minimal cost by in-house IT staff with OPTIMBUY guidance. New systems effectively monitor implementation of agreed-upon terms with manufacturers and distributors.
The suppliers and product rationalizations are completed in just a few weeks.
The contract with the major prime distributor was renegotiated to reduce mark-up by 2.5% (instead of projected 2% increase) leading to savings of $500,000 on a yearly basis (instead of an increase of $400,000).
Programs and volume rebates are implemented with major manufacturers leading to annual savings of $1,600,000. Contracts are also renegotiated with secondary suppliers for additional annual savings of $300,000.
The CEO and the entire management team got full bonus for exceeding company’s profit goals.
Total savings: $2,400,000 and total cost avoidance: $400,000
OPTIMBUY impact: $2,800,000 translating into 10% of Total Purchasing spend.