Cost Reduction Ideas (Beyond Sourcing)
PurchTips edition #167
By Charles Dominick, SPSM, SPSM2, SPSM3
Have You Considered Alternate Cost Reduction Ideas?
When seeking to reduce its expenditures on goods and services, the first thought in many organizations is "Let's find cheaper suppliers." But in many cases, sourcing for new suppliers is either not practical or it's a suboptimal alternative.
Fortunately, there are several ideas for achieving cost reductions without switching suppliers. Rob Patton, an associate with sourcing consulting firm Paladin Associates, has identified seven such cost reduction ideas, including the following four:
"Ask & You May Receive" - "Ask your suppliers if they have cost savings ideas," suggests Patton. "You never know when the answer may surprise you."
Aggregation - According to Patton, Aggregation is "any effort that makes the buyer's requirements more attractive to the seller by bundling those requirements with the volume of other buyers. This can be internal across business units or geographies or external with other companies." For external bundling, you can build your own consortium or join an existing group purchasing organization.
Spec Rationalization - Spec Rationalization involves looking at the goods and services you buy and determining smarter ways to specify them. Patton shares an example from previous employment: "We discovered that we had between 80 and 100 different specifications across the company worldwide for water. No reasonable person in Purchasing or Engineering is gonna say that we really need that many specs for water."
Leveraging The Supply Chain - "In this technique, you're looking at suppliers' suppliers, one or two steps back in the supply chain," Patton explains. Sometimes, "the biggest cost component in the equation is really out of your own immediate supplier's direct control." Patton recommends working to identify situations where several of your suppliers buy the same material towards what they make for you and then leveraging that combined demand to drive cost reductions from lower tier suppliers.
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