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How to negotiate highly engineered manufacturing products

Words: Waldo Saville
Sourcing thousands of highly engineered components across the globe with high material and labour content, and high supplier change barriers is a huge challenge

Negotiating highly engineered products such as machined parts, fabrications and castings can be a challenge due to the quality of available specifications and drawings, fragmented and heavily localised supply chains, high qualification costs and complexity in switching suppliers.

Scoping

First, scope out the project, making sure not to ignore small value tail parts. Address all the recurring parts by supplier. Look at multiple years of data to identify recurring parts in a changing product mix. 

A low-value part could be critical to enabling a high-value part, so losing sight of the small stuff can cause serious operational issues or price hikes if a supplier loses significant business and no longer wants to produce them

A low-value part could be critical to enabling a high-value part, so losing sight of the small stuff can cause serious operational issues or price hikes if a supplier loses significant business and no longer wants to produce them.

Depending on the size of the supply base and number of stock keeping units (SKUs), you may want to initially address only the core suppliers. Any tail suppliers can then be tendered through an accelerated target acceptance process (based on the results achieved from the core suppliers) providing the process family mix is similar.

Next, segment the parts into lots aligned with supplier production capabilities, e.g. production process, material, size, tolerance, weight etc. These process lots can drive key insights in negotiations but also act as filters when suppliers need to review all the specifications and drawings.

When developing your baseline, use forecasts wherever available or align historical volumes to projected sales forecasts. Furthermore, optimise order frequencies rather than relying on the historical records for the tender. You want bidders to quote against indicative demand parameters, not fixed commitment, with the exception of safety stock which you will need to manage with your suppliers. 

Commercial and capability assessment

Run a multi-round clarification and negotiation process unless you have decent ‘should-costs’. Use the market bid data to generate targets, which should be driven by both the supplier production region and SKU-using region. Applying targets will enable faster quoting and allow suppliers to prioritise their efforts.

Labour differences between Asia and EU/America are huge ($3-4 vs $25-30), but with highly engineered parts you’ll be limited on what you can move. Since probably no more than 25% of parts can be moved, beware of directly comparing costs with the US/Europe, which will create overly aggressive targets and put bidders off.

Next examine capability. It’s likely some of your suppliers are not optimally set-up for the parts they are making due to longstanding relationships or lead-time driven decisions. Also consider raw material costs. Index-linking mechanisms are preferable if a material is a significant portion of the cost and we don’t want suppliers adding heavy risk contingency into their bids.

Changing suppliers will reduce in-year savings due to implementation times, but you will need to balance in-year vs annualised savings due to local budgets and exec level desire for immediate cost reduction

Supplier selection

When awarding parts, start with the incumbent and then consider the part and/or product family, which should be kept together. Other constraints around global sourcing may include country of origin restrictions and lead times. For example, for Low Cost Country Sourcing (LCCS) on parts with volatile demand profiles it is difficult to manage the right amount of buffer stock. If the SKU is inexpensive, you may want to increase your working capital where savings are significant.

Savings will be driven by a mixture of straight price reduction from incumbents and re-sourcing. Most savings will likely come from the small proportion of parts you do move as these will go to other incumbents or new suppliers which are better set up to produce them. Changing suppliers will reduce in-year savings due to implementation times, but you will need to balance in-year vs annualised savings due to local budgets and exec level desire for immediate cost reduction.
 

Masterclass in action

Efficio recently ran a $50m global tender for machined parts for 8,000 SKUs from 50 core suppliers across eight plants in the US, Europe and Asia; achieving 17% savings (38% of achieved savings on SKUs without supplier change) while resourcing less than 20% of the portfolio. This helped to extend the supply chain, build a more capable and competitive supply base while creating a practical and manageable transition process.

The machining tail items (non-core suppliers) were also subsequently addressed through a target pricing, packaged into process lots and offered up to the most successful bidders. Over 80% of the targets were accepted across 3,500 SKUs, with over half from the existing incumbents.

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Waldo Saville Principal

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