This week I attended a webinar by Genpact, a business process management, operations, and analytics firm that was formerly part of GE Capital Finance. The webinar was on managing the volatility of the inputs to the products and services your company may produce.
I haven't attended a webinar by Genpact before, but this event was a good start. Below are my notes, but let me know what you think. You can listen to this event through August 14th. If you don't make that cut off, they also have a white paper on the topic available by clicking here.
One of the factors in recent examples of cost volatility (the one Genpact used was food cost increases of 30%) is that suppliers have been trying to avoid passing cost increases along. Once they are finally forced to, the increase is more than may have been experienced in the past because more than just short term variability is included.
As with other analysis work, lack of visibility is an issue and often results in painful price increases across the board rather than on one product. Some products have higher profit margins than others, and based on the inputs, it is important to know which products are also at increased risk for cost surges. Clearly, products that have higher margins are going to more tolerant of input cost increases than those with thin margins.
As far as how this specifically affects procurement and supply chain, here are some observations:
- We all know that Cost = Price x Volume, but most of us spend our time focused on the price component of that equation. Volume is an overlooked lever of Cost. Obviously we can't suggest that our companies save money by not buying components, that's not realistic. What we can do is help highlight long term cost risks based on components with high volume and potential for cost surges.
- When reviewing the savings, increases, or cost avoidance at the end of a project, a helpful step is to put together a range of costs based on deltas from the baseline cost. That way the company will have a better understanding of which inputs need to be closely monitored (and therefore which categories are the best opportunities for identifying/vetting new suppliers).
- Cost volatility can be best managed by a combined team of supply chain, marketing, and finance. Those three perspectives together can provide the best chance of accurate, forward looking product cost modeling.