Benchmarking Cost Reduction

Selecting a benchmarking cost reduction consultant continued

What more should you know about cost reduction consultants to choose the right one to try to reduce your supply, material and services costs? Here are the additional considerations so that you save money for your company and it is a fare deal for the cost reduction consultant as well:

How do they make a profit?

The benchmarking cost reduction consultant will collect a fee from you. For every $1,000 you save with your new suppliers, they will collect somewhere between $200 and $500 depending on the nature of your contract with them. You save the net balance. Contracts generally run no less than one year. After the contract period the savings are all yours.

Some cost reduction services companies of this nature will have an alliance with the supplier and may share in a portion of the new business. You will absolutely want to know in advance if any proposed supplier has an alliance with the cost reduction consultant. This could be a conflict of interest.

What impact will it have on my company?

The first impact will be seen as a new set of supplier relationships or new suppliers. In some cases the actual supplies or services may be comparable rather than identical.

The next impact should be a reduction in supply expenses. These should report directly to the bottom line as increased profits.

What are the pro's of using a cost reduction consultant?

There are a number of factors going for this approach including the following:

	Your investment of time and effort is generally small
	There are no upfront fees
	The contingency approach minimizes your risk. Its results based.
	It's hands-off for your staff. They are spoon fed.

What are the con's?

This is what you should consider carefully in addition to the apparent no-lose proposition that is being offered to you:

	You may not like the suppliers or supplies being presented
	Existing supplier relationships are likely to be ended or significantly changed. This can be an important consideration for critical supply items and strategic relationships.
	You are bound by whatever contract you sign. You may, for example, be bound to pay for phantom savings if you refuse their supplier or lower cost alternative supplies. This could turn a "savings" into an expense.
	It's hands-off for your staff. They have little opportunity to engage in the process of smart cost reduction style purchasing. They do not gain a skill but are spoon fed. You may like this or not.

How do I evaluate a cost reduction consultant service?

Here is the checklist of questions that I use when evaluating contingency cost reduction services of this type.

How long have they been in business?

Can I talk to recent references in my type of business?

Can I meet with references in my area?

Do I know these references or can I verify them?

What supplies and services does the consultant specialize in?

Would I be better off with several specialists than a generalist?

How do they qualify their recommended suppliers?

What is the consultant relationship to these suppliers?

Is there a conflict of interest?

What happens with my existing suppliers?

Can I opt out of critical supplies without penalty?

What is the exact language of the contract? This is where your business financial, operating, and legal people must review the terms of the agreement with a fine tooth comb. Key points to consider:

Cancellation options

Cancellation fees

Penalties for not using the preferred suppliers

Flexibility in supplier choice

Term of the agreement

Contingency fee structure

Fee payment schedule on audit collections

Fee payment schedule on future savings streams.

Summary of cost reduction consutlants

Engaging the right cost reduction consultant can be a lucrative move. The savings may be considered found money. The consultant can provide results across a narrow or broad spectrum of expense categories. My strongest recommendation is that you enter into any agreement with your eyes wide open, check list in hand, and a willingness to interview consultants until you are comfortable that you know enough to pick the right consultant and make the right choices in entering into an engagement.

Get your costs and bottom line profits under control now

Cost Reduction & Profit Improvement
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