Best Practices

Best Practices


Best Practices

Watch the Money

By Sara Lefcourt

A great boss at one point in my career advised me to Watch the Money – which at the time seemed rather obvious. However, upon reflection and over time this advice became more sage and I recognized more and more what he meant.

One place to apply this is to the way you do business analysis. Everyone does some kind of analysis of a customer opportunity; typically its a calculation of the profit you expect to make on a particular piece of business. And likely you do it on a marginal basis and come up with the dollars per gallon or $/ton you will make on the deal. But dont forget to calculate the total dollars you will make both on a marginal and on a total-cost basis. Will the opportunity require significant investments of time, capital, technology budget, advertising or other costs? Is the business profitable enough to support the investment, and attractive enough versus other such investments you could make?

Another area to apply this advice is with respect to what we typically called fixed costs. These usually are understood to be costs that do not vary with volume or throughput, so they are fixed rather than variable. However what the term sometimes comes to mean to an organization is that the costs are truly fixed – unable to be addressed. Of course that is not the case. It pays to take a hard look at those fixed costs and make sure they are appropriate for your business, and that you are paying reasonable market prices for the services you are buying. Even items like taxes can be appealed or perhaps negotiated in some way with local authorities.

Take a hard look at anything you lump together as overheads and investigate further. See if you find some opportunities to redirect this money to better, more customer-directed activities or simply to your bottom line instead.

Watching what you spend money on applies even more to high-spend areas such as raw materials. The procurement area seems to get less attention than some other functions in companies both large and small, in my experience. It pays to have a professional and well-trained procurement staff and for top management to direct sufficient attention to this area. In the lubes and additives businesses we tend to buy a huge array of raw materials and it can seem complex to stay on top of the markets for all of these materials. Therefore you may want to Pareto-chart your purchases -ranking each raw materials share of your total outlay, from highest to lowest – and then pay special attention to your top 20 dollar purchases.

Soliciting bids on an annual or two-year cycle is also a good strategy if multiple suppliers are available. In order to take advantage of a bidding process it may pay to qualify multiple suppliers well in advance of your bid, and to build relationships with potential suppliers as well as existing ones.

As you build these relationships, you want to ensure that whatever material you are bidding is really the right one for your application, and that you are not paying for more than you need. Perhaps the supplier has other materials which you can evaluate and which may be sufficient for your application. By qualifying new suppliers and new raw materials, you should be able to achieve savings – even in a rising market. Setting annual savings goals and measuring progress against those goals is often a good strategy, although it may take some time to establish appropriate targets for your business situation.

As you closely consider your costs, focus not only on the price of what you are buying but also on the activity level of the item. Often there can be hidden costs and waste that you can address. Below are some examples of this:

Are you wasting some of those expensive raw materials? For example, do you do a material in/out balance on your plants, and do you understand what is leaving your plants as waste? Often waste can be reduced and utilization improved over time. Youll also want to ensure that all waste is being disposed of both responsibly and in the most economic manner possible, depending on the content of the waste.

Are you adding the right amount of raw materials to your blends? If you are overcharging due to inaccurate systems you may want to invest in better systems, especially for high-cost raw materials. Of course both overcharging and undercharging can be the source of quality issues and costly rework, so this area may have multiple benefits.

Are you spending a lot of money on tank cleaning? There may be ways to optimize your usage of blenders and tanks to save you money in this area.

Are you transporting materials via the optimum routes and modes? Logistics can be expensive in the lubricants and additives businesses. Can you move some materials up from drums to bulk volumes? You might even think about collaborating with other producers in your area (with legal advice) to move or buy materials in larger quantities to save money.

Do you understand the cost of errors in your business? There are many hidden costs associated with fixing product, returned product, off-spec raw materials, order errors, etc. Consider tracking some of these areas and determining whether they need to be systematically addressed.

Indeed, watching the money is good business practice and not as easy as it sounds! If you have examples of this from your business it would be great to hear from you.

Sara Lefcourt of Lefcourt Consulting LLC specializes in helping companies to improve profits, reduce risk and step up their operations. Her experience includes many years in marketing, sales and procurement, first for Exxon and then at Infineum, where she was vice president, supply. E-mail her at or phone (908) 400-5210.

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