Buyer-Supplier Teams: Beyond Cost Avoidance
Jim Morgan, Editorial Director Emeritus -- Purchasing, 4/22/2002 6:00:00 AM
Under the old adversarial business paradigm, procurement pros often focused primarily on price and costs associated with poor supplier performance. But, in today’s more sophisticated customer-supplier marketplace, alliances make it possible to go far beyond traditional cost avoidance tactics and really nail down significant cost reductions with such traditional manufacturing cost reduction strategies as value analysis and materials standardization. But they also open up even greater cost reduction possibilities inherent in such integrated practices as:
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Target costing. To meet breakthrough production cost targets, suppliers participate at the earliest stages of design, helping engineers to render cost-effective design choices. This often leads to innovation in process and material technology.
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Concurrent engineering. Collapses design-to-production cycle time and often enhances manufacturability for both customer and supplier.
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Cost-plus pricing. Instead of quoting prices-often based upon some combination of arcane formula and market conditions – customer might agree to pay supplier cost plus a reasonable profit margin. Process of examining supplier’s cost structure in context of the customer’s consumption behavior invariably reveals cost-reducing process improvement opportunities for both partners.
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Seamless manufacturing. By giving suppliers direct ongoing access to sales plans and existing production requirements, customer-supplier allies can reduce costs associated with inventory and expediting when production schedules change unexpectedly. Drastic leadtime reductions allow the customer to source parts and produce product based on what it sells rather than what it thinks it will sell.
Integrated supply management strategies rest, of course, on twin pillars of trust and communication. And as most procurement professionals have learned, these pillars do not exist in a vacuum. Buyers and suppliers with considerable experience in the field are finding that suppliers are more willing to come forward with cost savings suggestions if they don’t run the risk of losing an order.
Here’s an example of how one company now approaches integrated supply management with its suppliers: In the past, says one of its top PM’s, “we would implement a supplier’s suggestion, and then turn around and bid the job out for less.” But as the company became more aware of the really huge cost savings possibilities available it began to change it’s whole approach to cost reduction.
In the company’s largest and most critical purchased commodity group (machined parts), the commodity team undertook the complex task of grouping machined componentry (fittings, couplings) into families based on geometry. This allowed the firm to reduce its base of suppliers from 31 to six key suppliers, and to award multi-year family contracts (with volume price reductions). The firm also created a supplier council to foster regular communication with and among its six key suppliers. The articulated purpose for the council is to organize vital suppliers into a group or council that promotes communication and understanding of the ingredients required for the successful support of a major company division.
So far, the firm has achieved approximately 80% of its aggressive cost reduction goal. By optimizing its supply base, a major company division was able to involve its supplier allies in the process of meeting its stretch target cost. In one case a key supplier convinced the company to switch from nonstandard to standard radius on a part. This allowed the supplier to use standard tooling.
The company also has realized considerable cost savings via elimination of secondary operations and raw materials standardization. In one case, for instance, it was buying one series of parts made from carbon steel and it was buying the same part geometry in stainless. It had to plate the carbon part before it could be used, and this involved a secondary source. A supplier brought the matter to the firm’s attention and suggested the switch from carbon to stainless. This created manufacturing economy for the supplier, part of which, was passed on to the buying company.
Moral to the story: A company’s willingness to commit to suppliers on a long-term basis and to share risk provides the basis for future manufacturing cost reduction opportunities. Once suppliers realize that a company is not going to move jobs around, it gets the cooperation needed to meet its stretch cost targets.
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