Getting up to speed on "soft" costs

October 18, 2012
By: Dan Davis

I've got a friend that coordinates purchasing relationships between U.S. manufacturers and Chinese part suppliers. That may rub some people the wrong way, but his current occupation is just part of a natural evolution. He once acted solely as a manufacturer's rep for manufacturing service providers in the Midwest, but had to change his approach as everyone began to seek overseas sourcing connections. In typical American success story fashion, he saw an opportunity and jumped on it.

But this story isn't about him; it's about one of his customers. This one in particular had been a very satisfied customer until the arrival of new company management. The new regime wanted a review of all existing supplier relationships. In short, management wanted to see what cost savings could be gained by intensely scrutinizing current contracts.

My friend has been through these scenarios before, and he prepared a plan. How could he improve his position while helping out the customer? He knew it wasn't just about parts and prices; it was about solving a customer's pain—even if the company didn't know it had one.

A teleconference finally was arranged between all of the parties. My friend suggested that he could supply the metal parts he provided more cost-effectively if he could provide the rest of the parts used to manufacture the final assembly. In addition, he could have all of the parts put in kits, so that they were all there for assemblers.

The new finance guy asked, "What does that do for us?" My friend replied that, besides resulting in lower overall costs, this approach would eliminate the "soft" costs such as time and expense associated with receiving and managing deliveries from multiple parties and cutting checks to multiple vendors. It also would eliminate wasted time associated with trying to have multiple parts delivered and prepared for final assembly activities. With parts arriving in kits, the customer could take ownership of the delivery and direct it straight to the point of use—the final assembly area.

The kit approach seems like a no-brainer for a manufacturing company, yet someone in finance had to learn about what soft costs are in a shop floor environment. It just goes to show you: An outsider might be able to see ways to improve manufacturing operations for a customer that the customer itself could never see. That's why metal fabricators need to realize that they aren't just in the business of supplying metal parts; they are in the business of helping their customers become more profitable.
Dan Davis

Dan Davis

FMA Communications Inc.
2135 Point Blvd
Elgin, IL 60123
Phone: 815-227-8281