The Untapped ROI Opportunities of Indirect Material

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Indirect Materials ROI

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Multiple Drivers Increase Focus on Indirect Materials

Lean or quality programs have made Indirect Material management more

important

Need to reduce inventory costs

Need to improve asset utilization

Indirect Material spending has become a much larger portion of our overall spend

0% 10% 20% 30% 40% 50% 60% 70%

44%

49%

55%

59%

% of Respondents

Source: Aberdeen Group

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Customer Challenges

Lack of accountability and visibility• No tracking or control of usage

Shortages or stock outs of key material• Entire production lines go down

Maverick spending• Uncontrolled spot buy

Lack of effective tools to manage the process• Existing solutions do not address indirect materials

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Indirect Material ROI Opportunities

Reduce Material Usage

Reduce Procurement

Costs

Reduce Excess and Obsolete Inventory

Improve Management Capabilities

Increase Worker Productivity

Increase Service Levels (Reduce Stockouts)

Reduce Inventory Management Costs

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Reduction in Indirect Material Usage

• Improved visibility of materials • Allow users to find existing material vs

unnecessarily buying new material

• Higher accountability of material usage• Track all usage to individual workers• Link material issues to job for activity-based

material costing

• Tighter controls of material issuance• Reduce self-service issuance • Recording of all issuance activity

Opportunity: Reduce material usage by 10-20%

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Reduction in Inventory Management Costs

• Increased inventory visibility and accuracy allows reduction of safety stock levels• Pull-based replenishment process improves

inventory utilization and reduces occurrence of purchasing unneeded material• Inventory cost reduction opportunity includes:

• Freeing up working capital previously tied up in higher inventory levels

• Reduction in inventory carrying cost (storage, management, shrinkage, insurance, etc.)

Opportunity: Improve inventory turnover by 10-20%

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Reduction in Procurement and Management Costs

• Automation of replenishment cycle for routine items

• Streamlined processes for improved productivity

• Ability to effectively monitor and manage materials processes

• Ability to identify inefficiencies and implement solutions to eliminate

• Potential impact: • Reduce spend 1% annually• Increase inventory turnover 10%

annually• Increase procurement efficiency 10%

annually• Reduce E&O inventory by 10%

annually

ManagementProcurement

Opportunity: Reduce the average cost to process a purchase order by 25-30%

Opportunity: Implement continuous improvement programs to gain annual incremental benefits

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Reduction in Excess and Obsolete Inventory

• Increased visibility to what is in inventory ensures available material is used before being purchased• Visibility to aging inventory allows management to

proactively disposition potential E&O material• E&O inventory reduction opportunity includes:

• Release of working capital• Reduction in inventory carrying cost (storage, management,

shrinkage, insurance, etc.)

• Opportunity: Reduce E&O inventory as a percentage of total inventory by 50%

Opportunity: Reduce E&O inventory as a percentage of total inventory by 50%

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Savings Opportunity

Area OpportunityReduction in material usage •Reduce usage by 10% of annual spendReduction in inventory • Increase inventory turnover by 10%Reduction in procurement costs •25% of baseline procurement costsReduction of excess and obsolete inventory

•10% of baseline E&O inventory

Continuous improvement •Consumption reduction: Ramps from 10% in Year 1 to 15% in year 5• Inventory reduction: 10% improvement each year•Procurement cost reduction: 2% improvement

annually

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Wrap up

• Significant ROI potential in indirect materials (25-30% in hard benefits only)• Soft benefits, while sometimes difficult to quantify, should not be

ignored• For the largest impact, companies should evaluate their indirect

materials management practices and processes holistically; it is not just a procurement issue or an inventory issue• Companies that get their indirect materials house in order can turn

their indirect materials into a source of competitive advantage

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Questions?

www.MarginPoint.com or Give us a call 888-229- 3685