Using strategic sourcing techniques when faced with cost reduction targets.

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In many firms cost reduction activities generally center around supply chain optimization and a desire to get better value from suppliers. However true cost reduction requires you to be able to cut costs more effectively and this means you need to be able to start at the very beginning of the production process, indeed as far back as design (including design for cost targets). Design and production processes have the largest effect on the costs of the succeeding activities.

Whilst Problems from the supply side often cause the most delay and disorder, racking up costs for you and your company, many organizations fail to understand the importance that product definition and requirements have on total production costs with many having the failed belief that procurement control the costs.

However this is not saying that procurement cannot influence cost and have their part to play in cost reduction projects.

Strategic sourcing

Strategic sourcing is a way to save from the supply chain. Strategic sourcing is an institutional procurement process that continuously improves and re-evaluates the purchasing activities of a company. This entails that a continuous search for new sources and re-evaluation of existing sources ensuring business requirements are understood and met.

The process could be divided into three steps, which are:
• Surveying
• Assessment
• Procurement
• Evaluation

These three processes should not be viewed as discrete stages, but as mere components of a cycle. All of these processes are done simultaneously, so you need to be able to manage them all. However, when such a system is in place, it generally delivers savings, since the acquisition of supplies is usually from the best source at the best price (this does not mean the cheapest!). It is also flexible enough to adjust to market fluctuations, due to its repetitive evaluation.

Surveying supply sources is arguably the most important step in the process. It is here that the amount of savings incurred shall be determined. Many factors should be taken into consideration when choosing a pool of suppliers. First, you should find out who sells what. Then, you need to check it against your company’s needs. If they match, you should be able to negotiate for you to find out the scope of your cooperation. Clearly to be able to put forward any saving you’ll first need to know your baseline cost that your operating from – for example is it last years budget or a forecast cost? Another important variable is the timeframe that costs will be incurred – for example you may wish to consider fixing annual escalation rates thereby mitigating sharp yearly increases (this is also a saving!) Also consider when you will realize your saving will it be at payment or invoice or earlier in the process (remember just because you’ve negotiated a cost down that does not mean you’ve made a saving as know funds have been exchanged!).

Optimization is one way to minimize costs. Through reviewing the significant sources of expenditure within your material flow and implementing a thorough strategic sourcing approach savings can be realized. Supply chain optimization is not only about reducing lead time or improving quality, but is also about getting the right suppliers for the right jobs at a cost that meets with business requirements (whether short or long term). This entails that a constant re-examination and re-evaluation of currently used mechanisms for procurement and a constant adjustment to fit market’s changing demands. practice.

Measuring supply chain management performance

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Measuring the supply chain management performance is an essential task when attempting to optimize the supply chain for your business. Supply chain management is a melting pot of different business functions and through utilizing Key performance indicators (KPIs), measurements or metrics used by management, issues can be captured and efficiencies targeted.

The American Production and Inventory Control Society (APICS) defines Supply Chain Management as an intertwined business processes that involves the “ design, planning, execution, control, and monitoring of supply chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply with demand and measuring performance globally.’’ It covers a wide array of business functions and work with the objective of long term improvement in the processes to make it more efficient and viable. This involves measurement and analysis of key performance indicators of different aspects involved in the supply chain.

Schedule Adherence

Delivery of goods from the supplier is measured and analyzed using the Delivery Schedule Adherence (DSA) metrics. It is commonly included in the quality, cost, and delivery groups of performance indicators of the supply chain. This metric is a percentage representation of the goods delivered on time versus the total deliveries. It indicates the percentage of on time deliveries of the supply chain. Management uses this metric to rank the different contributors within the supply chain and plays an important role in decision making.

Quality Performance

Performance of the supply chain can be measured and analyzed using key performance indicators or metrics on its ability to adhere on the customers’ requirement and value. Although, mathematical indicators tends to show superficial values, quality of supply chain’s performance can be represented by numerical metrics based on the critical processes, customers’ requirements, ability to correct mistakes and adherence to target. Percentages based on the total performance of the supply chain can be computed and used by the customers for their selection.

Cost Reduction

Cost as metrics is highly measurable and can be analyzed as a key performance indicator of the supply chain’s purchase cost, transportation costs, inventory storage cost, administrative cost, and capital cost. This is probably the most important factor in the management’s evaluation of a supply chain. Comparing the actual and predicted cost through material variance analysis, can establish the efficiency of a supply chain. Cost as a common metrics among the supply chains is essential in establishing the business’ viability.

Productivity of manpower

Production output in relation to number of employees of the supply chain is a key performance indicator to determine the efficiency of the supply chain’s manpower.

The turns of product manufactured and purchased order raised are part of the performance indicators considered. The management uses this KPI to determine the supply chain’s performance, and also serve as an indicator to instill improvements.

Forecast accuracy

Forecast of materials required by the supply chain is metric that can be measured and can be used as a key performance indicator. Wrong or inaccurate forecasting can result in so many issues down the line and management ensures that this is as accurate as possible. It is a critical piece of the puzzle supply chain management has to address.

Key performance Indicators are the metrics that management use in analyzing the processes within the supply chain. It is important indicator for management uses to create a cost effective supply chain.

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