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.