The role of commodity buying teams
Filed Under Blog
If you consider that a typical organization (manufacturing or service provider ) may procure thousands of different products and services to support the creation/manufacture of its own product – then it would be sensible to consider that a free for all procurement approach (buy anything from anywhere) would not drive down cost – so what could the answer be? The answer for many organizations is commodity management.
What is a commodity?
The process of developing a segmented approach to procurement is known as commodity management. Commodity management is the categorization of individual parts, products and suppliers into groups known as commodities. There are various goals of commodity management – but commonly it targets to:
1/ Provide a method of spend analysis and aggregation
2/ Develop insight into the market
3/ Meet business targets on cost, delivery and quality
Examples of commodities
While there is no hard and fast rules of how you group your spend there are common commodities categories that are utilized within industry – these include
1/ Electronics
2/ Fabrication
3/ Raw Materials
4/ Stationery
5/ Bearings
6/ Chemicals
Implementing commodity management
Organizations that choose to adopt commodity management will typically structure their procurement organization into teams (mirroring the commodities managed) these teams will have responsibility for analyzing spend and developing and deploying an appropriate strategy for sourcing, supplier management and spend profiles
Need for analysis
Robust data is required to support commodity management – this is typically the same data used in a spend analysis system – in that you need to know as a minimum by supplier (and in some cases by part) the spend and demand profile. Coupled with this there may also need to be some requirements gathering to ensure that the completed commodity strategy meets the needs of business in terms of future needs, QCD requirements and other non price related variables.
Need for specialist commodity managers
Given how spend is grouped into commodities – many organizations choose to recruit specialist commodity managers who are likely to have specific expertise in that field for example
• Product knowledge
• Supplier knowledge
• Market knowledge
This is especially true of complex commodities such as electronics. A commodity manager may lead the strategic aspects of the purchasing function for that group.
Summary
For medium to large sized organizations commodity management is commonplace. It helps to segment spend allowing the supporting teams to develop focused strategies and develop key skills and knowledge for their niche. While often used as a cost reduction tool – commodity management can drive a range of improvements to a previously fragmented supply chain not least risk reduction through continuity of supply.
A common problem which a lot of businesses face, especially with long term projects, is occurrences of cost overruns. When cost increases impact businesses – there is usually a clamour to return to the budgeted position resulting in a cost reduction requirement. All too often this requirement gets passed straight to procurement to solve – this often results in taking the problem to suppliers requesting further discounts and possible fluctuation to a settled supply chain.
For many senior executives this is often seen as the easy route to cost reduction. By simply running a Pareto analysis across your procured parts – prioritizing, then negotiating with your suppliers it’s probable that some reduction can be achieved.
However before placing the task purely at the door of supply chain, organizations should consider how the cost base has been constructed in the first instance. Whilst procurement are often tasked with obtaining savings they are really at the end of the food chain – the cost itself start with the original design and specification – procurement are to a large extent merely reacting to the business need.
Tackling design to cost and alleviating specification?
Value Engineering / Design to cost
When considering cost reduction programs Value engineering and design for cost can have an important part to play in driving down spend. Workshops with cross functional engagement, reviewing high cost items should be convened to carry out detailed analysis of the design and requirement. Considerations into materials, manufacturing methods, complexities, tolerances should all be included as agenda items. Where the item includes high cost parts are there alternatives (often made from different materials) that could be utilized?
Stakeholder engagement
When facilitating any design to cost review – it’s important to get a wide diversity of stakeholders – and its important to challenge the current thinking – Avoid the “we’ve always made it like that approach” – Does the organization have a “gold” specification when “bronze” would do?
Due consideration should be applied to the impact of redesign? What is the influence on the product lifecycle? What about impact to the customer?
Design to cost is not the easy path for certain – however it should be viewed as a partner for supplier activity. Organizations that focus only on the supplier side of cost reduction will see the well run dry at eventually – and company’s must realize that supply chain are only reacting to business requirement.