Supplying Principles and Practices > USPS Supplying Practices Process Step 1: Identify Needs > Identify Cost Reduction Levers

Identify Cost Reduction Levers

Cost reduction levers lower the total cost of a purchase. It is imperative to identify them during the Conceptualize Need task to ensure that cost reduction levers are implemented. These levers will aid in the creation of a more effective, efficient, and innovative supply chain process.

Cost reductions can be attained through supplier consolidation (e.g., leveraging volume and choosing "best suppliers"), continual improvement (e.g., improving operational efficiencies, changing usage patterns, and eliminating inventories), and innovations. Analyzing the preliminary total cost of ownership (TCO) and then performing in-depth analysis of the relevant cost component area(s) will lead to identification of the appropriate cost reduction levers. Additional information on cost avoidance and SCM Impact can be found in the Formulate Project Budget and Request Funding topic of the Prepare Project task of Process Step 2: Evaluate Sources.

The factors involved in identifying cost reduction levers include:

• Determine possible levers

• Develop preliminary TCO

• Perform relevant cost component area(s) analysis

Determine Possible Levers

The lever(s) selected should be the most effective and nondisruptive in reducing costs for the particular need. Examples of levers include:

• Address learning curves

• Consortium buying

• Demand management

• Distribution alternatives

• E-commerce and technology possibilities

• Equipment availability

• Innovations

• Inventory reduction

• Lead-time and cycle-time reduction

• Partnering, forming alliances with suppliers

• Reliability and maintainability

• Supplier consolidation

• Substitutes

• Sourcing methods

• Standardization

Develop Preliminary Total Cost of Ownership (TCO)

Once the preliminary cost of the need is defined, opportunities for improvement can be identified.

TCO = P + Present Value of (O + T + M + W + E - S)

Where:

P = Purchase costs

O = Operating costs

T = Training costs

M = Maintenance costs

W = Warehousing and distribution costs

E = Environmental costs

S = Salvage value

TCO is broken down by its component costs, which provide a basis for prioritizing improvement areas. For example, if a major portion of the TCO is the purchase of the need, sourcing or substitution may be the lever implemented to reduce costs. If warehousing is a major cost driver, reducing cycle time may be the most effective lever to implement cost reductions. Additional discussions of TCO can be found in the Develop Preliminary Total Cost of Ownership (TCO) Estimate topic of the Conceptualize Need task of Process Step 1: Identify Needs; the Update/Refine Total Cost of Ownership (TCO) Analysis topic of the Prepare Project task of Process Step 2: Evaluate Sources; and the Evaluate and Analyze Actual Total Cost of Ownership (TCO) topic of the Investment Recovery task of Process Step 6: End of Life.

Example of Relevant Cost Component Areas Analysis

Lowering the purchase cost can be achieved by performing a market analysis. The analysis helps to illustrate:

• Trends

• Competitive frameworks

• Substitutes

• Possible suppliers

• Strategies for success

A relevant cost component areas analysis can include:

• Market cycle studies and/or business cycles studies

• Early supplier involvement

• Products or services examination from multiple perspectives

• Porter's 5 Forces

• SWOT Analysis

Additional information on conducting early supplier involvement can be found in the Early Supplier Involvement topic of the Conceptualize Need task of Process Step 1: Identify Needs.

Quadrant Approach

A quadrant approach classifies all Postal Service purchases into four categories, depending on their impact on the Postal Service core competencies (noncore versus core) and complexities (standard versus custom). Some levers are not quadrant-specific, such as reduction of lead time and cycle time. Other cost reduction options may be dependent on the quadrant into which the need falls, as illustrated in Figure 1.5:

Figure 1.5

Quadrant Approach

Quadrant I: Custom/Noncore Purchase

Possible levers will focus on examining other marketplace alternatives and securing the lowest total cost. A lever may include outsourcing or using the organization's own resources.

Quadrant II: Custom/Core Purchase

Possible levers will focus on continual improvements and innovations. Partnering with suppliers may be a lever.

Quadrant III: Standard/Noncore Purchase

Possible levers will focus on attaining the lowest total cost and the simplest access and usage process. Vendor-managed inventory, which reduces inventory and the chance an item will run out of stock, may be a lever.

Quadrant IV: Standard/Core Purchase

Possible levers will focus on achieving innovations and cost reductions. A lever may be optimizing order quantity.

Other Topics Considered

Develop Preliminary Total Cost of Ownership (TCO) Estimate topic, Conceptualize Need task, Process Step 1: Identify Needs

Involve Suppliers Early topic, Conceptualize Need task, Process Step 1: Identify Needs

Develop Demand Management Strategy topic, Conceptualize Need task, Process Step 1: Identify Needs

Update/Refine Total Cost of Ownership (TCO) Analysis topic, Prepare Project task, Process Step 2: Evaluate Sources

Formulate Project Budget and Request Funding topic, Prepare Project task, Process Step 2: Evaluate Sources

Evaluate and Analyze Actual Total Cost of Ownership (TCO) topic, Investment Recovery task, Process Step 6: End of Life