Over the past 15 years we have looked at hundreds of commodity strategies. Most often the strategies are contained in long PowerPoint presentations designed to demonstrate how well the supply base is aligned with the company’s long-term strategies.
Almost all provide good analysis of the size, shape and form of the supply base that is required to support their company’s future demand requirements.
Most identify the expectations suppliers need to meet in support of quality, technology and delivery performance and strategies to get the supply base to meet the expectations.
What has been missing from 80-90% of the strategies we have reviewed has been well-defined strategies for cost management. From a purchasing perspective this is an empty suit.
Commodity cost strategies need to identified that answer the four questions we believe are fundamental to commodity cost management:
- What does it cost?
- What should it cost?
- What is the plan to close the gap?
- And if the gap is closed or close to being closed – what is the plan to reduce the should-be costs.
What differentiates the 10-20% of organizations that have effective commodity cost strategies? They have the following put in place:
- A well-developed set of cost tools like open book costing, regression models, and linear pricing models.
- Training that covers how the tools should be used and how negotiations are to be conducted.
- A methodology to help commodity leaders the cost tool that will be most effective for their commodity.
- Metrics to measure the effectiveness of commodity cost management.
Learn how AI and Machine learning are being used by leading companies to answer the fundamental commodity cost management questions:
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