This article courtesy My Purchasing Center.
It’s August, and many of you are enjoying a much-deserved vacation. For those companies that are on a calendar year accounting basis, the end of summer marks the beginning of the planning process for next year. Alas, once vacation is over, it’s time for supply management leaders to begin brainstorming about new savings initiatives for the coming year. I know you are on vacation, but you can’t fight time and soon the pressure to find more savings will be upon you.
I feel your pain. I have been there, and all too often I’ve had a warm summer day invaded by frantic thoughts of how to generate more savings after having done so much already. What else can we do?
Here are five strategies that I have personally used with great success. In fact, each of these strategies became a key element of our ongoing supply management process as they yield new savings opportunities year-in and year-out.
1. Expand your sourcing activity to include more indirect spend categories.
There are huge opportunities for savings in functional indirect spend categories such as HR, Finance, and professional services. Sure you may run into resistance from the functional leaders who believe only they can make buying decisions for their departments, but don’t be deterred. Having delivered savings of up to 65 percent on purchases of everything for IT programming, service awards, tax preparation and employee health benefits, the opportunities are there for those who are willing to work collaboratively with the functional stakeholders for the organization’s ultimate benefit.
2. Take a fresh look at your spend segmentation.
Revisiting how you are categorizing your spend in terms of manufacturing requirements and cross-referencing to the supplier capabilities is a great way to identify savings opportunities. There are often opportunities to consolidate spend with suppliers who have developed new capabilities, or reallocate spend to different suppliers based on the supplier’s unique capability. I recall an example involving aerospace parts where we simply re-segmented our parts spend based on the manufacturing process requirement (e.g. 5-axis machining) and aligned the requirements with supplier capabilities. The result was supplier consolidation, reduced complexity and lower cost. It was a win-win for both the company and the suppliers.
3. Formalize supplier improvement plans.
Every supplier with significant spend (use the 80/20 rule) should have a formal improvement plan. The plan should be based on a thorough assessment of the supplier’s current capabilities and performance coupled with a benchmarking of the supplier in relation to other competitors in the market on key performance factors such as management, technology, quality, financial strength and innovation. This information provides the context for building a multi-year improvement plan with the objective of achieving annual year-on-year productivity gains. No organization is perfect; thus there are opportunities to improve. This improvement is your source for savings.
4. Tap into your supplier’s expertise.
Leveraging the effort from #3 above, invite your suppliers in to discuss ways to lower overall cost — including your internal costs. Suppliers can be an effective source of ideas to reduce cost by attacking unnecessary complexity, administration and handling costs. One tactic that produced a steady stream of ideas was an annual supplier-brainstorming day. Select suppliers were invited to our site once per year with the goal of identifying ways to reduce cost, lower inventory and increase on-time delivery. You would be surprised what you can learn if you just ask.
5. Launch a robust value-engineering program.
Negotiation will only get you so far in terms of cost savings. There comes a time when a complete re-thinking of the product is required. When you reach this point, it’s time to consider value engineering. Robust value engineering essentially tears-down a product, and systematically challenges every aspect of the design and manufacturing process to assess the relationship between customer value and the cost to produce the desired functionality. A cross-functional team works to provide the requisite customer functionality at a total lower cost. The result is cost savings without customer compromise. Value engineering should be a core part of your annual productivity plans.
Ok, now you can go back to enjoying your summer vacation, content with the understanding that you now have at least five ways to supercharge your supply chain savings program. If you need more information, or want to discuss any of these ideas, please email me at email@example.com.
For nearly three decades, Jim Jordano, Managing Director of Profectus Management Advisory Group, has been leading, managing, and driving performance improvement initiatives across a broad range of industries and segments. Jim’s functional experience in finance, supply chain, operations, and general management combined with broad experience in varied industries from aerospace to commercial building products and his global experience working in more than thirty five countries on six continents afford him the uncommon ability to assess and relate to virtually any performance improvement challenge. Jim can be reached via email at firstname.lastname@example.org, or via LinkedIn.