The cost of change. Is it real?

Technology improvements don't require large scale investment

October 17, 2022
By Ryan Upshaw | More than a dozen years in oil & gas

Everyone knows what change brings: new, different, unfamiliar things. And we often think change is expensive. But is it?
Let’s tackle that question in three parts.

How do you measure the cost of change?
Is it even real?
Finally, if it's real, how do you mitigate and share the investment costs?

Defining the cost of change
In the general MRO and safety distribution business, the cost of change is usually defined as increasing cost of goods, time management (in time investment), data inputs, data investment, and the amount of labor associated with the change.

Got all that?

But hold up. Many of those aren't measurable, right? Because they don’t have a strictly quantifiable dollar amount. This leads to the cost of change usually being viewed as product cost.

So, when we talk about those other three, essentially the labor, the time, and the change in mentality, how do we measure that? How do we define something that complex?

Well, often, we don’t. We just file it away via emotional change. Perhaps you’ve experienced a version of this statement.

“We've done it this way for years, and if it's not broke...”

What organizations fail to realize is that that mentality costs them way more money than changing a process would.

With antiquated processes for management of the indirect supply chain your almost trying to start a race on the last lap. How do you catch up? Can you catch up?

Is the cost real?

It can be. And if you properly measure how much labor goes into change, it becomes very real. But in reality, especially in a fast-paced production facility, do you really have someone dedicated to measuring that change?

No.

But here we are trying to predict the future. Well, the crystal ball can’t tell you the industry cost to change is, on average, 15%.

As someone who’s inside this world of doing Total Cost of Ownership (TCO) measurements, I see how organizations have a hard time understanding the value of technology investments or SKU rationalization. Heck, even continuous improvement exercises are too abstract to feel good about, and those can really affect the bottom line. They are almost always dedicated to SKU cost reduction and not process improvement.

So, when somebody tells you the industry average for cost of change is 15 or 20%, can we trust where that number comes from?

It’s absolutely true that when you change a supplier or a manufacturer, or you change as an organization to focus more on technology, there is a cost associated with it.

Improvement generally has a cost, but it’s setting you up for long-term savings.

More than anything it takes an internal fortitude that most find undesirable. Sticking your neck out for a supplier sounds challenging and with so much of the indirect supply chain being siloed, it can feel almost impossible to execute.

Handling costs

Two truths: First, positive change has a cost. Second, it's often different depending on your situation. But since it is something that you want to be dealing with, what's the path forward?

Find people you can trust.

It really is about partnership with a supplier or manufacturer. What can they do for you to help avoid that 15 or 20%?

When I walk into a facility, I may see 15 different suppliers supporting something that one supplier could do. Often, that's based on deals that have been done a long time ago. And the value isn’t measurable.

And in my experience, you have a bunch of suppliers doing things that most wouldn’t consider their core competency, such as outsourced procurement, labor for transactions, etc.

So, what you have to think about is a partnership with someone who can cover the most bases. No one can cover every single one, but someone who covers most will bring value through technology to your organization. (It also doesn’t hurt if they have a flexible approach to executing and implementing those strategies.)

The number one thing that I run into with an RFP or tender is that people don’t understand what they do and don’t do well.

They don't have data that's actionable.
They can’t clearly measure what defines a successful tender.

What I think people and organizations struggle with is finding a partner who can do those things before the tender goes out.

Here’s an example.

Why are consulting organizations valuable to the biggest companies in the world? Because they look at the data, they give ideas on how to measure, and how to really understand what the Total Cost of Ownership is, and leadership has deemed asking the experts as best practice.

Who can help?

When I look at a situation, I go, “OK, as a distributor, as Fastenal, can I do that?” And the answer is yes.

Our TCO analysis that we do is a measurement we've done thousands of times for the largest companies in the world. And we can easily manage your MRO program. We can easily measure and tell you what your Total Cost of Ownership is.

For every $1 you spend, you spend X dollars or cents measure managing that material. That's not a hard formula.

Two things companies struggle with?

Knowing who in the organization has ownership of that process
Slowing down enough to fully understand those numbers and how they come to be.

Because, typically, they're not privy to the industry averages. They're not privy to what's happening on the street.

So, the clarity around the data is crucial.

And if you think about partnering with an organization, what's the difference in partnering with a $100 million company versus a $6 billion one? I think it's pretty simple. It comes down to technology and data management.

Because if you can't collect good data, you're never going to have good data to work off of. So, pull the band aid off today, start collecting the way you want.

The takeaway

The cost of change is real. And to make a positive change, you should be looking for a partner who can provide data. That data should come from supply chain technology so that you can gain visibility into your workflows, and build a much more resilient supply chain.

This doesn’t have to cost an arm and a leg. It’s a simple process. You want to establish a baseline and then look to improve.

Find the right partner, and you can put a real number on the cost to change. And it doesn’t have to be a scary number either.

If you’ve read this far, I thank you for your time. Reach out to me if you want to know more about how to handle the cost of change.

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