There is an optimal way for a Purchasing organization in a manufacturing company to achieve savings. Old school Purchasing methods will put your organization at a distinct disadvantage. Negotiating with market price mindset just tells you the lowest cost you were able to negotiate from the suppliers you considered. It doesn’t tell you the price you SHOULD have paid for the product. There are three essential factors that must be in place to maximize savings:
1) The architect of savings can no longer be thought of as a “buyer”. The concept of “buyer” must be replaced by that of “supply chain manager”
2) All Purchasing activities must start and end with integrity and fairness.
3) The commodity manager must know the product he/she is buying as good as, or better than, the potential suppliers. You must know the lowest possible cost method to produce the product you are buying and rate suppliers based on their gap to that benchmark.
The thought behind each of the key factors is below.
Buyer or Supply Chain Manager?
The days of the simple “buyer” are over. These professionals are analyzing, deciding and implementing commodity strategies in a complex global environment. They have to decide whether to go to a low cost country or buy the product locally. They have to optimize the combination of factors like manufacturing footprint, scale to award to a supplier, percentage of your business that you are willing to award to a single supplier, pack density, logistics, border crossings, taxes, etc. to make decisions on the supply chain. Mastery of these subjects requires a very capable, entrepreneurial individual.
Integrity in Dealings
The idea that integrity and fairness are required for a win-win negotiation should be self-evident. Anybody that thinks they are going to “stick it to” the person they are dealing with is thinking short sighted. If the seller isn’t making any money, the supply chain is at risk. If the supplier is not making as much as the market commands, they will end up selling their capacity to someone who will provide competitive margins. Having your supply chain disrupted is more costly than a stable and predictable operation. Savings through stability.
Customers are Not Willing to Pay for Waste.
If you rely on market pricing with competitive bids, you only learn the best price you can find from the subset of suppliers from whom you solicited quotes. If you get lucky enough to have solicited a quote from the benchmark supplier, how would you know? If they are remarkably low, you might discount them as trying to buy the business. If they were in the middle, they wouldn’t stand out at all. So, you’re at sea. You have no idea where you stand relative to your competition or whether your supplier bought the business and is introducing expensive instability into your operation.
You have to know how much it would cost the most efficient operation imaginable to produce that which you want to buy. The most effective tool is a “ground-up” cost model created by a capable Finance person. Then you know how stable you can expect to be. You can rest with the knowledge that you know that your supplier is profitable but that you are buying “right enough” that your competition cannot possibly have a stable competitive advantage based on price.
For every penny you’re paying over what a benchmark operation can produce the product for, you are funding waste. In today’s hypercompetitive world, customers will only tolerate such waste until there is an alternative.
Much more to follow…
1) The architect of savings can no longer be thought of as a “buyer”. The concept of “buyer” must be replaced by that of “supply chain manager”
2) All Purchasing activities must start and end with integrity and fairness.
3) The commodity manager must know the product he/she is buying as good as, or better than, the potential suppliers. You must know the lowest possible cost method to produce the product you are buying and rate suppliers based on their gap to that benchmark.
The thought behind each of the key factors is below.
Buyer or Supply Chain Manager?
The days of the simple “buyer” are over. These professionals are analyzing, deciding and implementing commodity strategies in a complex global environment. They have to decide whether to go to a low cost country or buy the product locally. They have to optimize the combination of factors like manufacturing footprint, scale to award to a supplier, percentage of your business that you are willing to award to a single supplier, pack density, logistics, border crossings, taxes, etc. to make decisions on the supply chain. Mastery of these subjects requires a very capable, entrepreneurial individual.
Integrity in Dealings
The idea that integrity and fairness are required for a win-win negotiation should be self-evident. Anybody that thinks they are going to “stick it to” the person they are dealing with is thinking short sighted. If the seller isn’t making any money, the supply chain is at risk. If the supplier is not making as much as the market commands, they will end up selling their capacity to someone who will provide competitive margins. Having your supply chain disrupted is more costly than a stable and predictable operation. Savings through stability.
Customers are Not Willing to Pay for Waste.
If you rely on market pricing with competitive bids, you only learn the best price you can find from the subset of suppliers from whom you solicited quotes. If you get lucky enough to have solicited a quote from the benchmark supplier, how would you know? If they are remarkably low, you might discount them as trying to buy the business. If they were in the middle, they wouldn’t stand out at all. So, you’re at sea. You have no idea where you stand relative to your competition or whether your supplier bought the business and is introducing expensive instability into your operation.
You have to know how much it would cost the most efficient operation imaginable to produce that which you want to buy. The most effective tool is a “ground-up” cost model created by a capable Finance person. Then you know how stable you can expect to be. You can rest with the knowledge that you know that your supplier is profitable but that you are buying “right enough” that your competition cannot possibly have a stable competitive advantage based on price.
For every penny you’re paying over what a benchmark operation can produce the product for, you are funding waste. In today’s hypercompetitive world, customers will only tolerate such waste until there is an alternative.
Much more to follow…
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