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Cost Savings Ideas: EDMC Case Study


PurchTips - Edition #102

By Charles Dominick, SPSM

 

Can You Use Similar Cost Savings Ideas?

Soheila Lunney, PhD is the Vice President of Procurement for Education Management Corporation (www.edmc.com), which is among the largest providers of private post-secondary education in North America, based on student enrollment and revenue. This interview with Dr. Lunney will share how EDMC used cost savings ideas for small package delivery. cost savings ideas

CD:   What gave you the idea that there was an opportunity for savings in the small package delivery category?

SL:   Prior to January 2004, different campus locations were acting independently and there was not a centralized approach to purchasing products and services for EDMC as one organization. In 2004 with the formation of a new Procurement organization, I was brought into the organization to leverage EDMC's buying power and foster the spirit of acting as one company. As a result, through interview sessions with top level management as well as other employees in the organization and data collection, it became evident that a national agreement in the area of small package shipment can produce quick results in terms of cost savings and improved service level.

CD:   If you had to distill all of your hard work into a series of steps, what steps would a purchasing professional follow in a small package delivery sourcing initiative?

SL:   The steps I recommend would be:

1) Team development and opportunity identification - It is important to have a team with an effective mix of skill sets. Following a brief strategic sourcing training program to educate team members on the process, they will then develop a team charter and work plan based on the scope of the project.

2) Study, assess and recommend strategies – Collect and analyze internal and external data and develop conclusions. These conclusions must be accepted by all stakeholders as they will lead to the development of a sourcing strategy.

3) RFP, negotiate agreement(s) and develop implementation – Establish purchasing requirements by converting the Team's sourcing strategy for small package delivery into specific requirements that are appealing to suppliers (RFP). Prior to negotiations, it is important to identify and evaluate options based on your company's wants, needs, opportunities and constraints.

4) Implement agreement(s) and sustain strategy – once you have the buy-in from all stakeholders and plan to implement the new agreement, you must remember that the relationship extends beyond signing the agreement. You must monitor and manage the agreement(s) to maximize benefits of the sourcing strategy.

CD:   How did you go about analyzing your usage? Did you have to know specific routes, delivery time requirements, future demand, and so forth?

SL:   We analyzed our usage by acquiring annual volume reports from our previous suppliers. We validated the information with the data that we obtained from EDMC's internal system. We were aware of our most common routes to/from our campus locations and could forecast our future demand based on analyzing prior yearly reports and EDMC's growth strategy with new start-up locations. Prior to going to one supplier for the entire organization, we were using many suppliers. The majority of our campus locations did not have a negotiated rate. We were not taking advantage of our buying power.

CD: You implemented an interesting idea where you sometimes require your suppliers to use your contract with the selected package delivery vendor when they ship goods to EDMC. Can you tell me more about that idea?

SL:   We are always looking for creative opportunities to bring value to EDMC. Our strategy is based on managing our supply chain. We are not only looking into one-on-one supplier relationships. If we can take advantage of one agreement to leverage added value for our company with other suppliers while not adversely harming them, we will pursue them.

In this case, it brings value to our other suppliers as well. To lower our freight rates with potential suppliers for the purchases of other products, based on the specific routes from their distribution center(s) to our campus locations, we sit down with them and compare rates to determine whose would be the most cost efficient. If EDMC's costs for delivery are determined to be more efficient, we provide our new supplier with our account information that allows them to ship goods with our selected supplier under our contracted prices. By doing so, we not only reduce our overall freight costs, we increase our spend with our selected small package shipment service provider. This will give EDMC higher rebate rates, improved pricing (due to the negotiated tier pricing structure), and also commitment for a stronger relationship.

CD:   How much annual savings do you anticipate realizing as a result of your small package delivery contract?

SL:   Benchmark studies indicate that when companies utilize strategic sourcing concept, they reduce their costs for small package shipment by 20 – 30%. We have been able to achieve similar results since March 2004 when we signed a national agreement.

CD:   Were there any particular challenges that you faced in implementing these cost savings ideas?

SL:   The biggest challenge is change management. Getting employees to realize that by working together, "acting as one company" and "speaking with one voice" they can leverage their buying power, take advantage of added value services, and contribute to the bottom line.

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