Apr
28
Cost Down – Supplier negotiation vs Design for cost
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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.
Apr
20
How Supply Chain helps mitigate business risk
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All organizations face risks, they can come in various shapes and sizes and can impact the business in a variety of ways with various degrees of severity. Against these risks, most businesses will employ some method of risk control to devise mitigation activity, where required, and appoint owners whose roles it will be to co-ordinate the risk reduction activity.
Supply Chain can both be a key contributor and mitigator for business risk. Supply Chain will typically control the flow of materials both into and within an organization. Where severe problems occur an organization can be quickly bought to its knees.
Consider the impact of a supplier going bankrupt and unable to supply goods – those goods might be crucial to the assembly of a particular product with the result a stop in production, while an alternative supplier is sourced. This could result in an unhappy customer, potential lost sales and serious financial impact.
Common Business Risks
There are thousands of risks that a business could face. However supply chain risks tend to fall into a number of categories.
Risk of Interruption of manufacture/production
The supply chain community can do much to support the business in mitigating this risk. Continuity of supply is perhaps the key benefit to an efficient and targeted supply chain team.
Commercial Risk
Inadequate contracts with suppliers can leave organizations exposed – this is especially true where contract terms from customers are not flowed down within supplier contracts. In the event of customer commercial terms being envoked this can leave organizations with heavy penalties without recourse onto it’s supply partners.
Business Continuity
Business disruption, loss of facilities or key machinery can cause significant disruption – while supply chain is not typically the owner of business continuity planning it does provide important information for key suppliers to be used and key equipment that may need replacing in the occurrence of an event.
Risk of cost escalation
Significant cost escalation can affect competiveness and bottom line financials. Managing costs is a very common supply chain task with supply chain departments (in particular procurement) getting closely involved in cost reduction programs.
Types of supply chain risk mitigation
As with any risk management process – mitigation is a key step – there are various fundamental supply chain functions that have a by-product of risk avoidance.
• Stock Management
• Sourcing arrangements
• Supplier relationship management
• Obsolescence Management
• Supplier rationalization programs
• Contingency planning