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Learn techniques for creating value and achieving bottomline competitive advantage.
Reduced cost is perhaps the most sought-after goal in the practice of supply chain management. A primary reason for this is the leverage effect by which supply chain savings produce a proportionally greater increase to the bottomline than a sales increase of similar size. Many organizations have achieved "first-level" or "easy" savings such as price reduction from competitive bidding and elimination of obsolete inventory. How to find cost-saving opportunities at the "second level," beyond low-hanging fruit, is often a challenge to supply managers because the process of identification and achievement of opportunities becomes more complex.
Many organizations are attacking this problem using an overall strategic sourcing approach that employs various techniques to achieve the desired cost savings. Savings from such an approach may range from 5 percent to 30 percent of existing costs. The two primary requirements for strategic sourcing to achieve cost savings beyond the first level are: (1) an organized approach and (2) techniques that work. This article will identify potential sources of second-level cost savings, describe a best-practices approach, and illustrate two cost-saving techniques: market basket review and alliance savings model.
Sources of Second-Level Cost Savings
The following represent sources and tools for obtaining second-level cost savings:
| | Total cost of ownership analysis — measures all of the cost components connected to a purchased material or service |
| | Process improvements — the increase in value (or decrease in applicable costs) resulting from a modification in any phase of the purchasing and/or supply process |
| | Transaction cost reductions — activities or process changes that decrease the cost to process a purchase order for requisition, ordering, and payment cycles |
| | Material substitutions — cost savings achieved by identifying and qualifying acceptable material alternatives that meet specification requirements but cost less than existing materials |
| | Quality improvements — activities that focus on reducing material quality costs or improving performance of materials or equipment |
| | Cycle time reductions — activities that focus on reducing the total time it takes to complete the elements of a procurement or supply cycle |
| | Outsourcing of non-core activities — evaluating purchasing and supply activities in order to place non-core activities with outside contractors or suppliers |
| | Volume leveraging — activities that attempt to capture as much spend in a materials or service category as possible in order to potentially reduce costs through economies of scale and enable a buyer to negotiate more competitively with suppliers |
| | Cross-organizational synergies — proactive activities by supply management to identify opportunities to share best practices or coordinate sourcing programs to reduce costs, usually accomplished through cross-functional teams |
| | Standardization — efforts to reduce the number of specifications, material variations, and contractors in order to reduce inventory carrying costs |
| | Product design improvements — activities that enhance the functionality or performance of a material or piece of equipment |
| | Investment recovery initiatives — systematic efforts to manage material and equipment surplus in order to recover as much of the original cost and investment as possible |