As the economy starts to slow purchasing leaders are telling us that they are under increasing pressure to increase cost savings efforts and results.
A commodity-by-commodity review of company spend can often turn up untapped, easily implementable savings.
To start, take the time to write down the questions you should be asking about each commodity in your spend that will help you identify which commodities have a savings potential.
For example: Here are some of the questions we ask clients when assessing the savings potential on a commodity. Answering “No” to some or all the following questions is a strong indicator of such low hanging fruit:
- Do you have a method for calculating should-be costs for the commodity?
- Do you receive commodity specific cost breakdowns from suppliers?
- If you do not get cost breakdowns are there ample suppliers in the supply base to generate pricing pressure?
- Do you have knowledge of the manufacturing costs of the products being purchased?
- Have robust financial analysis been performed when sourcing new parts/products in this commodity? Have the new costs/prices been compared to historical data?
- Have costs for design changes been analyzed?
- Do the buyers have the time and skills to analyze costs and pricing on this commodity?
- Have non-piece price total cost of ownership (quality, inventory, shipping, packaging, testing, etc.) been reviewed?
- Are there any inhibitors to changing sources?
- Is there a cross-functional process for strategic commodity management on this particular commodity?
- Are cost reduction ideas obtained from suppliers, evaluated and managed to implementation?
- Do your buyers frequently review the suppliers manufacturing processes with the objective of understanding manufacturing costs and identifying cost reduction opportunities?
- Are the practices being used to control costs on this commodity as robust as what you have experienced in other companies?
Once completed ask the questions for each of your commodities prioritize commodities for further analysis/review based upon the answers generated.
The next analysis we often complete to assess the savings potential of the commodities is to try and develop linear and/or multi-variate models for the high priority commodities. Such modeling can be used with our without supplier cost breakdowns and will confirm savings opportunity and identify specific parts with savings potential.
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