4/1/2008 | 3 MINUTE READ

Competitive Challenges: Profits Out The Back Door

You may see the profits coming in the Front Door. But do you know what's happening out back?
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Think of your home.


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Think of your home. You thoughtfully lock the front door and set the alarm. But then you leave the back door unlocked and someone enters and walks out with your jewelry. And perhaps you don't even know it's missing. That's what may be happening in your company every day. If the back door of your company is open and you don't have a good idea of what's going in and out, 10% to 20% of your company's total expenses could end up being wasted.

Most managers have good control of the front door of their company, where expenses and profits directly related to their products, sales and manufacturing are carefully monitored, tracked, audited and counted. But they often cannot define or tally categories of "indirect spend" for non-production items necessary in the day-to-day operations-the back door.

Let's look at the Front Door, the Back Door and how a Supply Chain Management (SCM) professional can help capture the monies being lost to the company's bottom line. SCM is the process of planning, implementing and controlling the operations of the supply chain as efficiently as possible. It encompasses the planning and management of company activities involved in:

  • Sourcing
  • Procurement
  • Conversion (finished or consumed products)
  • Logistic management (inbound, in-house and outbound)

An SCM professional coordinates and collaborates with all the groups involved in your business-suppliers, intermediaries, third-party service providers and customers. Effective and efficient SCM is a leading contributor to bottom line profitability, but it must pay attention to indirect (Back Door) as well as direct (Front Door) expenditures. Industry experts estimate that 10%-20% of total expenses of the average company are "Back Door" expenses that grow uncontrolled and are lost to the bottom line.

Why Is It Open? The main reason for the Back Door to be open is growth-through increased sales, mergers and acquisitions. These often result in a lack of updated, standardized systems, policies and procedures that are necessary to run the business in an efficient manner. The best way to close the Back Door and control the expenses is through development (or re-development), training and implementation of standardized systems, policies and procedures to maximize efficiencies in all areas of the business.

But there are always obstacles to overcome - primarily a lack of manpower that can be dedicated to the project or limited internal knowledge and expertise in key areas of SCM and Systems Development. SCM professionals are constantly challenged to improve the bottom line because of their ability to impact the Back Door or profit margin vs. what is required to achieve the same effect focusing purely on the Front Door, or increased revenue.

Many companies do not take advantage of savings available through leveraging and/or overall cost reduction target initiatives. Indirect expense categories that represent the largest potential savings include:

  • Transportation (Inbound and Outbound)
  • Energy management (Both consumption and billing)
  • MRO-Inventory Management
  • Tooling and equipment
  • Mobile equipment / Fleet management
  • Trash & recycling
  • Telecommunications (VoIP, cellular, long distance, Intranet, Internet)
  • Office, janitorial, personal protection

Additional savings are available through the Material Handing/Material Flow optimization. Expense categories that represent significant savings include:

  • Inventory reduction-Production (needs + transit time + safety stock)
  • Inventory reduction-MRO (effective materials management)
  • Increased floor space-Based on Inventory Reduction
  • Indirect labor reduction-Material Flow Efficiencies

Shutting It. The people and tasks required to close the Back Door are, in many cases, only required for a limited time. It is difficult-if not impossible-for small- to medium-size businesses to justify hiring full-time professional systems development experts, or an experienced non-production purchasing staff. Rather, it makes considerable sense to utilize outside professional consultants who specialize in SCM for systems development, integration, training and implementation. And once the Production and Logistics systems development work is complete, existing internal resources must be engaged and held accountable to sustain improvements and ensure target savings are achieved. For Sourcing and Procurement, companies should research the option of outsourcing non-production altogether. Procurement service providers, in many cases, can secure lower pricing through leveraged purchasing and significant category expertise across many non-production purchasing areas.

Many companies have paid little or no attention to the Back Door because quite frankly the cost associated in the Front Door is the biggest piece and opportunities tend to be more obvious. The big companies haven't concerned themselves with it for many years to the degree they should, and that culture has carried to Tier 2 and 3 suppliers, as well. But many companies that are in the need of 2% and 3% give backs on a regular basis could gain considerably with a focus on the Back Door. The truth is that when coordinated properly, a company can gain control of the so-called "indirect spend" items and close the Back Door.