| The MoreSteam.com approach to purchased material cost reduction is organized along five dimensions of procurement activity:
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How much you pay - price & volume |
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What you buy - specifications and content |
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How you pay for it - terms & transactions |
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Cooperative efforts - value engineering |
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How you move it - inbound logistics |
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| MoreSteam.com Note: When evaluating purchased material cost reductions, it is imperative to employ a Total Cost perspective. If cheaper raw material is of lower quality, and causes yield problems, the net impact on the bottom line could be negative. The same goes for delivery reliability. If you save money on the purchase price, but can't get deliveries when you need them, the cost savings can be lost quickly. |
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| Proven cost reduction strategies are listed below by category:
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Pool purchases from multiple locations to increase overall volume. Larger volumes increase your leverage with the supply base. |
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Standardize purchases of related materials to increase volume and leverage. |
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Single Source MRO supplies to increase total volume and reduce cost - increases on some items may be offset by overall reductions on others. |
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Reduce the number of suppliers to increase volume, reduce administrative complexity, and enable cooperative value engineering efforts. A smaller supply-base facilitates more meaningful partnerships. |
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Use competitive bidding to reduce the cost of purchases. Competitive bidding is not necessarily at odds with single-sourcing. Use competitive bids to select the single-source, and commit to the single-source for a period of time. You can tie pricing to overall market price indexes to ensure continued price competitiveness. Use a balanced scorecard when bidding - quality and delivery are often more important than cost. |
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Differentiate your strategy between pure commodity items that may be purchased on spot basis to take advantage of favorable prices, and engineered materials where a long term relationship with the supplier is appropriate. |
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Use internet purchasing exchanges to increase the number of suppliers participating in the bidding process - particularly on commodity items. See the MoreSteam.com discussion of B2B exchanges. |
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Negotiate "Most Favored Nation" status when outsourcing to ensure that competitors are not given a better price. |
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Don't over-specify - use Design Of Experiments (DOE) to substitute lower cost materials without negative impact on the process. See the MoreSteam.com Toolbox tutorial on Design of Experiments. |
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Shift engineering to the supply base. Many suppliers have a higher level of engineering capability and lower cost. Retain only system integration engineering responsibility. |
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Include inbound freight and other value-added activities in the purchase price if the supplier has a lower cost base, OR |
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Separate inbound freight from the purchase price if you can combine with outbound freight volume to leverage overall freight costs. |
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Revise incoming packaging to reduce total cost. Bulk packaging can save on direct packaging materials as well as the time and labor required to remove the material. Consider disposal cost as well. |
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Require incoming pallets to be the same size as finished goods pallets so that you can save on finished good pallet purchases. |
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Use returnable dunnage to eliminate material cost (potentially offset by the return cost). |
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Implement consignment to pay for material only as you consume it and therefore reduce your investment in inventory. |
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Negotiate extended terms to improve your cash flow cycle. At some point there will be an offset in price due to the supplier's cost of capital, but you may be able to extend terms by 10-15 days without an offsetting price increase. |
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Offer a longer-term contract in exchange for a lower price. |
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Arrange Just-In-Time deliveries to minimize the inventory and floor space investment. |
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Consolidate the procurement function at a centralized location to reduce headcount. |
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Establish a system to limit all purchases to only approved suppliers. |
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Work with the finance department to ensure that all purchases of goods and services are made using a purchase order. |
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Use web-based e-commerce to reduce transaction costs. Ford, GM & Chrysler recently formed Covisant in order to reduce the approximate $140 cost of processing every purchase order transaction. |
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Implement a fair supplier charge-back program so that suppliers are held financially accountable for their delivery and quality problems that impact your bottom line. |
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Give suppliers visibility to your demand pattern to aid in their planning and to improve responsiveness. |
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Implement a supplier rating system based on objective criteria - a balanced scorecard that includes quality and delivery as well as price. |
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Implement joint value-engineering projects to re-engineer the components to reduce cost. |
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Hold supplier business meetings to share industry trends and the imperatives of your business/market. |
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Establish supplier point-of-use reviews to ensure that your suppliers understand your process and exactly how you use their material. |
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On a broader basis, initiate reciprocal supplier process improvement visits. Suppliers often have expertise that can help you improve your processes, and vice versa. A fresh eyes review by parties with different paradigms and mental models can bring fresh insights and identify improvement opportunities. |
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Encourage suppliers to co-locate facilities to eliminate transportation costs and facilitate just-in-time deliveries. This requires a strong partnership. |
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Shift mode of delivery: to rail vs. truck for low cost items, or to truck from rail if the value of inventory reduction offsets the freight premium. |
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Separate inbound freight cost and combine inbound freight volume with outbound freight to leverage the total cost. |
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Establish milk runs from multiple suppliers to combine shipments and offset the cost of increased frequency. |
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| For a broader discussion of logistics costs, including outbound freight, please see the MoreSteam.com Logistics Cost Reduction page, or visit the MoreSteam.com Article Archive for on-line supply chain articles and white papers.
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