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.

Supply chain accounts for a significant amount of costs within any business so it is important to save money wherever you can. Our top 10 tips to cost savings on your supply chain are listed below, so check out just what you can do to save some money when securing supplies.

1. Always ensure that you implement supply chain performance ( such as Supplier performance) management techniques. This may seem as if it will take up some time, which it will initially, but in time you will be repaid for the input you devote. Measuring performance will show you what areas require improvement enabling your business to run more cost effectively.
2. Concentrate on quality at the right price. When you are looking for supplies it can be tempting to look at the price first. But instead you should be looking for quality items that are offered at the right price. If you concentrate on securing cheap goods only, you are likely to receive more defective or shoddy goods.
3. Focus heavily on planning and supply chain forecasting – getting this right will ensure your not driving unnecessary inventory or cost into your organization and that you are tuning your supply chain effectively and mitigating problems like the
4. Have an appropriate organizational structure. This means setting up an efficient purchasing or procurement team. This will help stamp out any unnecessary spending and this will translate into spending. It can take time to change the culture and mindset when it comes to supplies, but a strategic approach will ultimately save you money.
5. Eliminate waste within the supply chain. This can ensure that the supply chain becomes more focused on Just In Time supplies or having the optimum level of supplies only. So analyze the supply chain and try to ensure that you reduce waste in whatever form.
6. It is also important to set up some Key Performance Indicators and some Key Risk Indicators to help you to manage the supply chain. These need to be used throughout the organisation so that the supply chain is managed by all sections of the company.
7. Run a spend analysis. This sounds obvious, but many companies are blissfully unaware of exactly what they are spending. The analysis can be done using software, but until you establish exactly what you are buying, it will be impossible to save money.
8. Select your global supply chain with care, watch for hidden costs.
9. Benchmark your suppliers. Do not assume that simply because you have used a supplier for a long time, that they are providing you with the goods you want at the cost you want to pay. Benchmarking suppliers can show up any weaknesses within the supply chain and then allow you the opportunity to secure new suppliers if and when required.
10. If the benchmarking process does show up weaknesses within the supply chain then you need to ditch those suppliers and secure new ones who will offer you a better service. Changing suppliers is never a desirable thing to do, but if it will save you money and enhance the performance of the supply chain, then it is worth the time and effort. Complacency can set in and if you fail to challenge this, then you will continue to spend money unwisely!