Strategic sourcing can transform direct materials spend for any firm, but how can you ensure those savings are sustainable?
A company’s prowess is rarely an indicator of its efficiency. Global household names may be powerhouses with high turnovers but they can be unwieldy and inefficient; while small firms considered innovative and agile may lack the necessary infrastructure to grow.
Strategic sourcing for any business – and then protecting the savings you’ve worked so hard to achieve – will always represent a unique challenge regardless of size, set-up or sector.
Better control of pricing was the next goal. The business had already invested in an ERP system to store pricing information and contracts and now has a spend management tool to achieve consistent visibility and compliance. New contractual arrangements for part numbers mean that any attempt to order parts at a different price triggers an authorisation request. This enables the business not only to track savings and compliance but also to identify non-compliance and find out the cause.
Successful transfer of multiple part numbers from one supplier to another requires not only technological support but human buy-in too. Sourcing decisions are a collaborative effort between engineers, technical, sourcing and operational personnel. Engineers define specifications so systems are needed to reflect the correct part number to prevent new systems being designed using old parts. Once awards were made, change notices (ECNs) were issued and all parties were aware of any modifications and the rationale behind them.
The company had multiple ways of doing project costing but did not have a consistent company-wide standard costing methodology. It relied on cost-plus and list pricing, as well as market pricing practices, which typically required understanding the actual costs. This meant that when pricing was newly negotiated with suppliers, these procurement efforts might not be fully leveraged within the organisation.
The company is now working on implementing a more consistent methodology for costing projects across the disparate operating sites, the primary lever being reference costing. This allows it to protect its margin and strategically decide how best to use it when evaluating projects and opportunities.
Another, often overlooked, area of opportunity is what’s referred to as ‘go-between business’. These are instances where a business acts as an intermediary in the purchase or delivery of particular items, or passes along expenses associated with a service without marking up those costs.
An example would be on outbound freight costs. If it costs $100/lb to ship a part from A to B and you negotiate that down to $80/lb, you have the choice to keep the savings, pass the savings on, or anything in between. Similarly, securing better deals on food, accommodation and travel for technicians means you can reduce the daily stipend you charge for their expenses, or keep the savings for your company.
Having list prices enables businesses to manage the savings they have so skilfully achieved.
Not all go-between business can be addressed but changing the conventions here motivates the right kind of sourcing behaviour, opening the way to multiple savings.
Not all go-between business can be addressed but changing the conventions here motivates the right kind of sourcing behaviour, opening the way to multiple savings. But it requires the right foundations. Once you have strong systems and processes you have a fighting chance to tackle these opportunities.
Embedding best practice
An incentive scheme is one way to encourage and accelerate that change of behaviour. At the manufacturing business, staff were not only asked to do the right thing, but a bonus pool was also set aside to reward those that do. Employees who help the business implement the budgeted savings are eligible for a portion of the bonus. It’s all part of incentivising the right behaviours.
Maximising and sustaining savings in the long term also means replicating best practice and building on the momentum. In reality, this company is just at the start of its journey. Having proven success in some of the accelerated categories, the market is now positively engaged in all others.
The plan was to tie in all these system enhancements before going to supplier selection and transitioning to execution. Thanks to some early wins, these changes have been met with enthusiasm throughout the company.
More layers of sophistication will follow. Preferred supplier lists are being formalised in order to establish strategic supplier partnerships. A more collaborative approach will, in time, lead to further enhanced technology, design and innovation, helping future-proof both the company and its supply base.
Specific approaches may change from company to company or between sectors, but the key tenets remain the same. Visibility of spend and being able to manage and control that spend ensures savings are sustained and allows you and your suppliers to grow together.