5 Keys to Implementing Purchasing Cost Savings Quickly

Implementing cost reductions is a priority for most manufacturers, but the path to achieving these savings can often be long and complex. Traditional strategic sourcing is a proven sourcing strategy, yet it requires significant time and resources, typically spanning 8-18 months before yielding substantial results.  

This timeline is sometimes not possible in dynamic manufacturing industries with global sourcing. This article outlines a streamlined approach, focusing on quick wins that can deliver tangible savings within as little as four months, without compromising on quality or supplier relationships.  

Strategic Sourcing Benefits and Considerations 

Strategic sourcing is a proven approach to delivering cost savings while better aligning the supply base with business objectives. It typically takes 6-8 months for a team to execute the procurement process of forming a cross-functional team, analyzing the spend and supply base, interviewing leadership and other stakeholders, developing segment-specific ideal supplier profiles, identifying and vetting potential suppliers, conducting a multi-round market test, developing cost models, and negotiating new supply agreements. 

While some savings can begin to be realized at the end of this process through negotiated cost downs with current suppliers, the majority of savings from strategic sourcing projects come with resourcing. Depending on the need for customer approvals and supplier validation processes, this can take another 6-12 months. 

That’s why I characterize strategic sourcing as a high investment, high payoff strategy. We’ve conducted successful strategic sourcing projects across a variety of industries and categories, and they’ve all achieved significant cost reductions along with improved supply chain resilience, quality, and access to supplier innovations. Not to mention better alignment with strategic business initiatives such as expanding into new markets, launching new products, and optimizing the make vs. buy roadmap.

Strategic sourcing is the preferred approach when you have categories with $10M+ spend under management, a long runway to start seeing savings, and there’s a need to realign the supply base to support business strategies. 

But what if your organization needs to achieve cost savings quicker than 8-18 months?   

A Faster Approach to Purchasing Cost Savings 

There’s another approach to implementing cost savings on existing spend that is designed for quick implementation, with savings typically beginning within 4 months. The first step is to focus on categories where customer approvals and lengthy supplier validations are not needed, and the main lever for all the steps outlined below is to tap experienced category experts with thorough knowledge of the commodity and supply market. 

Category experience and expertise is important to speedily carrying out all five steps outlined below. Category experts bring a wealth of knowledge – and a network of contacts – to help: 

• Swiftly identify segments where multiple capable suppliers will want to compete for your business 
• Rapidly estimate the likely cost savings that can be achieved for the target segment(s) 
• Immediately outline the key questions you need to ask stakeholders to understand the supplier capabilities they require 
• Speedily identify suppliers who will want to compete for your business and the capabilities needed to meet stakeholder requirements  
• Quickly list the key details you need to include in the RFQ quote template to evaluate supplier quotes 
• Assist with supplier negotiations in real time 

5 Steps to Quickly Implementing Cost Savings 

1. Select a target with “low hanging fruit” 

We’ve completed assessments of dozens of purchasing organizations and always identify one or more spend segments with untapped savings potential. It’s not that the purchasing teams were doing a poor job, it’s just they were focusing their efforts where the spend is the most strategic for the business. This focused approach leaves six-figure savings opportunities in the commodities they aren’t addressing simply because they haven’t developed a deep understanding of a commodity’s cost drivers or the competitive supply base. 

The ideal targets to quickly implement cost reductions are not closely managed and don’t require customer approvals or lengthy supplier validation process to resource. Sometimes we find categories that fall outside the top 80% of spend (where the purchasing team focuses their efforts), other times the category spend is larger but there’s been a revolving door of category buyers so it’s gone unmanaged for some time. Sometimes, there is a segment within a larger category that is mostly customer directed, but still has significant spend under management that isn’t being closely managed. 

A good starting point to identify segments with untapped savings potential is to identify categories that are at the “head of the tail”. That is, the largest segments that have enough spend to generate substantial savings but fall out of strategically managed categories. Typically, there are several categories with $2M to $20M spend under management fit this description.   

We find it very helpful to check with category experts for feedback on potential targets. The characteristics of your products and spend will determine which categories are attractive to suppliers. Experienced category experts can quickly point to those segments where multiple suppliers will aggressively compete to win your business. 

2. Develop a savings estimate to energize the team 

You’ll need to form a cross-functional team to identify and implement savings quickly. Typically, these teams are led by a Purchasing Manager or Director and sponsored by the company CFO or COO. 

For example, a cross-functional team focused on reducing costs on corrugated packaging should include: 

• An indirect buyer responsible for corrugated packaging 
• A packaging engineer 
• Materials representatives from each plant 

Pulling the team together is a start, but you need something to point to in order to get them motivated to prioritize their participation amongst all their other job duties. We’ve found the key to this is to commit to a cost savings goal that everyone believes is significant and achievable. 

Once a target segment is selected, the next step is form the team and develop that cost savings goal. This typically requires a lot of investigation and categorizing of item spend into actionable buckets. For example, the majority of your MRO spend might be identified as “factory supplies” and “credit card spend”, but you can’t develop a savings estimate based on these numbers.  You need to put in the work and analyze the line-item details. 

Experienced category experts are really helpful in the procurement process, determining how suppliers view the spend within a specific category so you can bucket the spend accordingly and optimize your sourcing strategy. They are also invaluable for establishing realistic savings ranges for each of the backets that you can roll up into a significant and achievable total savings goal for the category. 

3. Interview stakeholders to understand needs from suppliers 

Your company relies on stakeholders for much more than the items you purchase from them. Think about all the potential mis-disconnects that can happen between a supplier and your company: 

• They don’t provide the finance team with the information needed to easily complete a three-way match 
• They don’t provide the logistics team with real-time delivery tracking  
• They don’t support the plants needs for stocking VMI inventory or vending machines 
• They don’t package items to fit dedicated plant storage locations 

You’ll want to interview a variety of people from each function and plant to capture all the needs that a potential supplier must fulfill. For example, for an MRO savings project, you’d want to interview plant buyers, material managers, EHS managers, plant controllers, production supervisors, and maintenance supervisors.   

Start by identifying the functions that rely on the suppliers of your target category for something. Then identify representative for each function for each plant/division (including their contact information). 

Next, develop an interview guide with 3-5 questions for each function. Tap your experienced category expert to identify the key questions you need to ask stakeholders to understand the supplier capabilities they require. Be sure to include questions on what they rely on from suppliers, pain points with current suppliers, and any improvements they’d like to see.   

Finally, interview the stakeholders. We typically interview 30-40 people for a strategic sourcing project, keeping each interview to 15 or 20 minutes. We conduct these by Teams/Zoom, letting them now up-front why we need to talk to them. 

4. Identify and vet potential suppliers 

The information gained from stakeholder interviews will be revealing. But to operationalize stakeholder needs, we like to use a tool called an Ideal Supplier Profile that summarizes the specific attributes your organization needs in areas such as location, manufacturing capabilities, industry experience, fit for your product mix and volumes, willingness to achieve target costs, and available capacity. For each attribute, identify the best case targets and the least acceptable condition.  

Tap your category expert again to identify suppliers that will likely fit the attributes you’ve identified. Then, interview these suppliers and use the Ideal Supplier Profile to grade their fit.  It will become obvious pretty quickly that some suppliers looked good at first, but turn out to have multiple red flags and shouldn’t be included in market testing. 

5. Conduct a streamlined market test 

Because the focus is on implementing savings quickly, you should Contact suppliers that are likely to be a fit for your needs while you’re still organizing the RFQ package. Ask them to present their capabilities up-front so your team can become familiar with them and invite them to ask questions to become familiar with your company. 

There are four pain components of an RFQ package, you need to provide suppliers with the right information so that they can quickly respond with competitive quotes: 

• An RFQ that clearly states supplier requirements and timing of the market test 
• Market basket of representative parts with volumes and MOQs for suppliers to quote 
• A Statement of that describes the required capabilities and service levels from suppliers 
• A quote review form, including a cost breakdown that identifies the cost details needed for thorough quote analysis 

With a streamlined market test, you should be able to narrow the quoting suppliers down to your top choice and a back-up. Negotiate terms with the top choice, knowing you have your back-ups quote in case the top choice isn’t willing to collaborate to strike a deal that works for both parties. 

Achieving material cost savings quickly requires a focused approach, leveraging category expertise and cross-functional collaboration. By targeting low-hanging fruit and efficiently executing the steps outlined, your organization can realize significant savings without the long lead times associated with traditional strategic sourcing.  

Remember, the key to success lies in identifying the right categories, setting achievable goals, and engaging the right stakeholders from the start. With these strategies in place, your team can deliver impactful results quickly, often within 4 months. 

Read how companies have implemented quick cost savings

Fast-Track Savings – APD Consulting

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