Commodities prices may be high, but here is a way to control other costs
By Paul Teague, Editor in Chief -- Purchasing, 1/17/2008 7:00:00 AM
Steel and chemicals prices will go up this year, even in the face of weak demand, while other raw materials will go down in price. As usual, the cost-increase picture is slightly out of focus, especially given the economic realities that businesses face as we enter 2008. You can gaze at that picture in the feature pages of this issue, and hear an audiocast on the economy by our Commodities Council on www.purchasing.com. Our pricing report and the Council's thoughts will help you in your planning.
While hard negotiating and deep knowledge of your markets are two well-known weapons for controlling metals, plastics and chemicals costs, a third, less obvious one, is knowledge of the goals, tools and process of your nonpurchasing counterparts who will use the raw materials. So here is a suggestion for a new year's resolution: Learn about those tools and processes so you can communicate better internally and make suggestions that will reduce overall costs even before you order the raw materials.
In manufacturing, one big group to communicate with is engineering. And unlike in the past, when many engineers closed their ears to any purchasing involvement that went beyond hiring engineers' favored suppliers, product designers and manufacturing managers today want to get the best advice purchasing can give them. After all, they want to lower the costs of their designs too.
"When we develop products, we involve purchasing from day one," says George Valaitis, manager of mechanical engineering at MDS Analytical Technologies. "We don't let engineers talk to suppliers about cost issues."
Target costing is key
Helping establish the cost of a product is a critical role purchasing can and should play. "By using target-costing tools, purchasing can line up pre-qualified suppliers," says Jay Mortensen, cost-optimization professional at KPMG. Target costing is the process of arriving at a product cost that will ensure you hit the budgeted profit by making design improvements during the planning and early design stages of product development. Too often, cost reduction efforts begin after a product is in production.
Both Valaitis and Mortensen are believers in and users of Design for Manufacturing and Assembly (DFMA) processes formalized several years ago by Boothroyd Dewhurst. Both were panelists in a recent roundtable survey on how to reduce operational costs. Most panelists agreed that applying DFMA-like principles in product development could help save money. One other panelist, Mike Shipulski, director of engineering at Hypertherm, claimed that Design-for-Lean principles helped his company cut costs 38%.
Two other related engineering and manufacturing principles that purchasing should become familiar with are rapid tooling and rapid prototyping. Both enable companies to make prototypes quicker and cheaper so they can test them out before committing to full-scale production. Rapid prototyping, combined with computer-aided design and manufacturing, can turn ideas into products faster and easier than before and cut the costs, writes Ronald L. Hollis, CEO of Quickparts. You'll find his book on the subject, "Better be running," at the Purchasing bookstore on purchasing.com.
Purchasing plays a key role in design, manufacturing and target costing, says KPMG's Mortensen. But you can only play that role if you understand the principles and can communicate effectively with engineers about them and other aspects of design. You can find a report on the DFMA and Lean roundtable survey at Purchasing.com. You'll also find a feature story entitled "Tech Talk—a buyer's how-to guide to working with engineers" in the April 19, 2007 issue of Purchasing. It's on Purchasing.com in the magazine archives section.
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