Purchasing & Procurement Analyses for Management Consultants

Purchasing has a big impact not only on cost but also the inventory levels. Wrong quality of products bought will lead to problems both in sales and in production.  In this section, I will show you: goals of purchasing, purchasing value drivers, typical problems in purchasing.

The primary goal of Purchasing is to buy what is needed at the lowest possible cost and keep low inventory at the same time. I will discuss what does it mean in practice.

Several drivers related to purchasing have impacts on value generation.  In this lecture, I will go over them so you know when to look for potential improvements.

There are a few typical problems that usually occur in Purchasing. I will go through the ones you should pay attention to. On top of that, I will show you what analyses you should carry out to see whether they exist in your customer’s company.

Let's see where Purchasing Department can be located in the organization

In this brief section, I will shed some light on standard frameworks that you can use during the consulting projects to analyze Purchasing & Procurement.

Here I will show you the general framework for decreasing the costs in retail

Purchasing will help reduce costs in the following areas

Let’s have a look at the general framework for liquidity improvement.

Let's see what impact purchasing has on Liquidity of the firm

During consulting projects, you will be pressed for time. Therefore, you have to identify quick wins that will help you achieve a big impact fast.

In this lecture, I will show you how to use the 80/20 rule also known as the Pareto principle.

In this lecture, we will talk briefly about applying the low-hanging fruit in practice. I will show you the principles of using it as well as a practical example.

Let’s look at how the quick win framework looks for savings. We will look at 2 dimensions:

• What are the potential savings we can achieve

• How easy is it to implement it?

We will have, thanks to 4 categories of projects that we can consider:

• Cow savings – easy to kill and big

• Elephant – difficult to catch yet big

• Chicken savings – easy to kill, yet you need to kill a lot of them, so as not to be hungry

• Bat savings – small and difficult to catch

Remember that the potential reduction in costs depends on 2 elements: potential percentage cost reduction and the cost starting point:

• Potential % cost reduction

• Cost starting point

We will discuss this in this lecture

Imagine that you have to identify quick wins in cost reduction for an international chain of drugstores. We know their cost structure

• A few pieces of information about the firm that we will be analyzing

• They have 4 000 stores

• We have their cost structure

• They have sent us a list of projects that will help them reduce costs

• Estimate the potential and group them using the quick wins framework

In this lecture, we will solve the previously introduced case.

In this lecture, we will solve the previously introduced case

In this lecture, we will solve the previously introduced case

There are some ways to estimate the potential reduction in costs

• Get benchmarks

• Carry out a 1-day audit

• Measure a sample

• Ask experts

• Ask suppliers of tools/IT solutions/machines

• Organize auction/tender

• Do a consulting project with a consulting firm

In purchasing, we can have 2 types of impact. Therefore, we will have to adjust our quick wins framework.

Let’s imagine that you have to carry out a project for a juice producer. Do a rough estimation of their Purchasing spending and potential savings using the bottom-up approach.

In this lecture, we will solve the previously introduced case

In this lecture, we will solve the previously introduced case

In this lecture, we will solve the previously introduced case

In this section, we will discuss make or buy analyses.

Here we will discuss a very useful concept that is used in business and should be also used when making serious long-term decisions the so-called total cost of ownership.

Let’s imagine that you were to decide whether it makes more sense to buy a car or to use Uber.

In this lecture, we will solve the previously introduced case

In this lecture, we will solve the previously introduced case

In this lecture, we will solve the previously introduced case

Imagine that you have to analyze for a consulting firm whether it makes sense or not to produce an online course devoted to Data Science. In this lecture, I will show you a few pieces of information about the firm that we will use to pick the optimal solution.

In this lecture, we will solve the previously introduced case

In this lecture, we will solve the previously introduced case

In this lecture, we will solve the previously introduced case

In some cases even if it is more expensive to make than to buy it still makes sense to make:

• There is no content on the right level

• Your standard differs from the general standards

• You treat the teaching system also as a standardization tool

• You grow drastically in terms of people

• You want to keep the knowledge to yourself

• There are no specialists in a specific area

• Legal reasons & NDAs

We are back to Maria. Using the previous case study we will try to decide which activities she should delegate using the make-or-buy analysis.

In this lecture, I will show you the solution to the previously introduced case study.

In this lecture, I will show you the solution to the previously introduced case study.

One of the ways to reduce costs is to replace Opex with Capex. In this section, we will discuss how to do it. You will learn how to analyze such situations and pick optimal options.

Imagine that Eric is the CEO of the construction company, and he has to perform preparation work for the new project that he will start. Help him decide using Capex vs Opex analysis.

In this lecture, we solve the previously discussed case study

In this lecture, we solve the previously discussed case study

Imagine that a Fashion Retailer is analyzing the cost associated with building new stores. Let’s have a look at how a company can reduce the costs using Capex vs Opex analysis.

In this lecture, we solve the previously discussed case study

In this lecture, we solve the previously discussed case study

You can achieve a lot by reducing how often you use something or changing its specification. We will discuss in this section this area of savings.

Imagine that you are analyzing a newly bought company that is providing Data Science services. Your boss wants you to look at usage and decide what to reduce

In this lecture, we solve the previously discussed case study

In this lecture, we solve the previously discussed case study

Now we will have a look at a cosmetics producer and we will try to measure how much they can save by using less. We will look at 3 areas of their activities

In this lecture, we solve the previously discussed case study

In this lecture, we solve the previously discussed case study

In this lecture, we solve the previously discussed case study

You were asked to help the drugstore chain find potential savings by introducing cheaper substitutes. You have picked 4 potential topics

In this lecture, we solve the previously discussed case study

In this lecture, we solve the previously discussed case study

In this lecture, we solve the previously discussed case study

Prices have a huge impact on how much we spent on purchasing. Therefore, if you address this issue properly you can achieve huge savings.

There are 6 main ways how to gather data on prices

• Check historical prices

• Compare prices offered by different suppliers

• Internal benchmarking

• Send a request for proposal or information (RFP of RFI)

• Organize Auctions / Tenders

• Check publicly available data on prices

One of the ways to reduce costs is to take advantage of the price seasonality. Let's have a look at how the price seasonality can be used.

Let's imagine that a bread producer would like to reduce production costs. Let's see how tracking the seasonal prices of raw materials can help him in this.

In this lecture, we solve the previously discussed case study

In this lecture, we solve the previously discussed case study

In this lecture, we solve the previously discussed case study

• In Value Stream Analysis you try to estimate the implied price you should be paying for a specific product, given certain assumptions on cost drivers, fixed costs, and profits

• You compare it with the price quoted by the supplier to check whether you are not overpaying for the product

Imagine that your firm is buying 10 M cardboard boxes. You want to check using Value Streaming Analysis whether your supplier is not overcharging you.

In this lecture, we solve the previously discussed case study

In this lecture, we solve the previously discussed case study

In this lecture, we solve the previously discussed case study

One of the ways to determine exact requirements before you buy something is to create the so-called specification where you describe what is needed.

Let’s have a look what are the advantages of creating the specification

• Improves purchasing process

• Helps create purchasing standard

• Eliminates misunderstanding

• Is used to estimate costs of projects, activities

• Clearly defines what kind of materials / products are needed

Let's look at how you can use the specification to cut costs

• Ask what is the purpose of specific features

• Remove things that you no longer need

• Remove things that only marginally improve the situation

• Introduce modularity

• Standardize the raw materials

• Create standard choices

One way to cut costs is to ask what is the purpose of specific features and why they are important to the users. In many cases, the specification will be too advanced, given the needs.

Imagine that you were asked to buy computers according to a specification. You decided to analyze users’ needs and adjust the specification to the users’ needs.

In this lecture, we solve the previously discussed case study

Here we will discuss the so-called 5 Why method

People by nature are lazy. Therefore, in most specifications, you will find things that are no longer needed. Let’s have a look at the 5 Why method that is extremely useful to uncover such situations.

In many cases, you have to pick from 2 solutions. One of them may be marginally better but costs much more. In such cases, you can save money by going for the cheaper yet a bit worse option.

In many cases, you can design the products in such a way that using the same modules you can build different products. Such an approach helps immensely in Purchasing.

Let’s imagine that you were asked to help a chocolate company reduce costs. You decided to work on the Christmas packaging. Estimate how much they can save by introducing modularity.

In this lecture, we solve the previously discussed case study

In this lecture, we solve the previously discussed case study

Standardization in material management means producing a maximum variety of products from the minimum variety of raw materials and Work in Progress.

In this lecture, we solve the previously discussed case study

In this lecture, we solve the previously discussed case study

In order to improve the purchasing process, it is worth considering introducing restrictions on the number of possible options for purchased products, components, or raw materials.

In this section, we will have a look at how you can save cash by revising investments and picking the right ones from the point of view of your cash position.

We will discuss how you can improve the cash position by revising investments.

We will start by sharing some general thoughts on investments, why we do them, and what we want to achieve. We will use this to, later on, define the way we calculate the expected returns and to check whether the investment makes sense or not.

Different animals are investments in bottlenecks. Here we don't' look at cost savings but rather the greater impact we can make on the EBITDA. This is what we will analyze in the next few lectures.

In this lecture, we solve the previously discussed case study

In this lecture, we solve the previously discussed case study

In this lecture, we solve the previously discussed case study

In this lecture, we solve the previously discussed case study

In the next lectures, we will see how to calculate whether an investment that will help us save costs makes sense or not. This time around we will do it for a retailer and we will see whether an investment in LED bulbs makes economic sense.

In this lecture, we solve the previously discussed case study

In this lecture, we solve the previously discussed case study

In this lecture, we solve the previously discussed case study

In this lecture, we solve the previously discussed case study

Purchasing Department can immensely help in increasing cash position of the firm by lowering inventory, reducing costs and extending payables

There are 4 main components that create Inventory:

Raw materials, Work in Progress, Finished Goods, Goods

Let’s have a look at the general framework for inventory reduction

There are 3 ways to unify packaging and materials:

• Implement modularity of finished products

• Standardize similar things and limit the number of materials used

• Unified version for a big number of use cases

Let’s have a look at the general framework for payables improvement

We are back to our case study of a consulting company buying a Data Scientists firm. Now we will give more attention to the scenarios where we increase payables

In this lecture, we solve the previously discussed case study

In this lecture, we solve the previously discussed case study

In this lecture, we solve the previously discussed case study

In this lecture, we solve the previously discussed case study

In this lecture, we solve the previously discussed case study