Are businesses undervaluing the impact of Master Data Management (MDM) initiatives? If they are not looking at the many, often unexpected, ways that data management can impact the top and bottom line, they might very well be doing so.
It is firsthand knowledge that data management initiatives are seldom viewed as an opportunity to create significant value within an organization. You may be wondering how to entice your stakeholders with an MDM project when the ROI may seem intangible. Although it may seem elusive, the business case below outlines how one company realized a return of over $75M on a $25M investment.
This company manufactures consumer electronic devices, computers, and other equipment bearing household names and has hundreds of thousands of employees working in more than 100 factories worldwide. As you can imagine, a company of this size should enjoy tremendous economies of scale when procuring the components required to manufacture finished goods. Unfortunately, this was not the case. The manufacturer was often paying more for components than it should. To understand the significance, we must first understand how contract manufacturers make money.
The two largest costs to a manufacturer are materials and labor. Labor costs are typically fixed or increasing, not allowing for substantial margin improvement. Therefore, efforts are concentrated on the manufacturer’s ability to impact material costs. Careful negotiation of the bill of materials (BoM) and executing on the lowest price point present significant opportunity for margin expansion.
fFor example, when producing a gaming console for a customer such as Sony or Microsoft, the manufacturer will define a BoM. The BoM specifies the materials required to build the unit. The manufacturer and the customer agree to an appropriate price point for each item on the BoM as well as an agreeable margin to represent the manufacturer’s profit. The contract manufacturer then attempts to increase margins by realizing Purchase Price Variance (PPV), sourcing the materials at a lower price than agreed upon in the BoM. In order to maximize PPV, the company engages in structured price negotiations with suppliers. Leveraging scale is crucial during price negotiations as common materials can be used on multiple BoMs. To effectively leverage scale, a manufacturer must consider the full volume of materials and components needed to fulfill all BoMs when negotiating to ensure they attain volume discounts.
Defining the Problem
Now, here is the problem. When managing relationships with hundreds of companies located throughout the world, it is vital for a manufacturer to have a comprehensive understanding of its supplier domain. However, this manufacturer lacked this knowledge and therefore missed opportunities to further leverage scale in negotiations.
For example, think about Samsung. Samsung is a massive supplier with an extensive global distribution network. Despite being part of the same entity, a company this size operates under different names in different regions. There is “Samsung Americas, Inc.” in North America, “Samsung China, Inc.” in China, and “Samsung, Inc.” in South Korea. Are you starting to understand the issue? Now think about the problems this causes when aggregating your BoM data if your purchases are not classified by the name of the larger entity. As you can imagine, It creates confusion and chaos to see multiple Samsung entries for the same component.
Such was the issue for this contract manufacturer. The manufacturer was unable to leverage its buying power in supplier negotiations, and close inspection of internal reports showed the manufacturer was only renegotiating the price of 60% of the components purchased every quarter. The theoretical goal was 100%. The gap was attributed to the company’s inability to aggregate transactions across the supplier domain. This presented a tremendous opportunity to improve margins.
Now here is where we introduce the MDM solution. With efforts to improve MDM, the manufacturer set an initial goal of a 70% negotiation rate. If successful, a 10% increase in negotiations would result in $4 billion worth of additional components negotiated each quarter. The project had four key components:
An MDM software solution to aggregate the data. This implementation was significant as it involved integrations with the MRP’s in every factory.
An MDM team to ensure that solution was functioning correctly and data was being classified appropriately. This team would monitor the effectiveness of the solution using defined metrics and adjust MDM rules as required.
A new central portal to become the source of record for creating and editing suppliers. This involved both a process and technology change. Previously, new suppliers were created in a local MRP systems, and the data was then transmitted to a global system. With the new portal, suppliers would be created first in a global system, and then the data would be cascaded to the local systems.
Engaged MDM Champion:
Executive sponsorship for the adoption of an MDM solution. As with any data management business case, the fourth component was critical. Successful implementation required complete agreement across the organization. Without a commitment to an MDM solution, the business case would have little chance of delivering the expected value.
The MDM Difference
The MDM solution proved invaluable. The new system enabled the organization to exceed its targeted 70% rate, resulting in the negotiation of 75% of all components and an incremental 1.5% savings on the purchase price of negotiated components every quarter. Overall, the implementation resulted in a $25 million annual savings and a 300% return on investment in the first three years.
The system also brought significant intangible benefits to key roles within the organization. First, commodity managers, who negotiated discounts, now had access to robust information to leverage in supplier discussions, eliminating the suppliers’ previous advantage. Next, product line managers were now able to identify all components purchased from a given supplier. This provided valuable insight into which components should be negotiated and where they should utilize existing customer-supplier relations for lower pricing. For example, the manufacturer’s customer, a company such as Apple or HP, may have existing relationships with suppliers and therefore lower negotiated rates. In some instances, the manufacturer may be able attain the customer’s negotiated pricing from the supplier for a given component, resulting in an even greater cost savings than if they had negotiated.
The Value in the Data
The results experienced by this contract manufacturer were significant. Focusing on how data management could supercharge the economic engine of the company created a sense of purpose that ultimately captured the focus and will of the organization.
As with all business cases, there is an invaluable lesson to from the case of the contract manufacturer. When initially assessing the value of an MDM implementation, do not fixate on cost. Rather, ask yourself, “What is the value of improved data to my organization?” The value may be incremental or it could be significant.
If the contract manufacturer had fixated on the initial cost, the project would have stalled. Instead, the organization focused on the value improved MDM would add to the organization. As a result, the company was not only able to accomplish its initial goal but also created unexpected value for key roles in the organization – a return that can never truly be measured.
Remember to focus on value creation instead of cost, and you will find significant value in your data.
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