Cost Savings Best Practices

Manufacturing executives consistently cite “adding value to the company’s bottom line” as a top priority for purchasing.  We highlighted how purchasing can contribute bottom line value by aiding in new business pursuit in an earlier Purchasing Insights; in this issue, we address the topic of cost savings.

We recently completed a survey on cost reduction tools and savings achievement.  Purchasing leaders shared that their 2017 saving achievement ranged from 1% to 6% of spend under management, with an average of 3.4%.  Here are some best practices from organizations that are adding value to the bottom line by aggressively driving cost savings.

Manufacturers looking to aggressively drive cost savings should:

Clearly articulate a company’s vision for success and purchasing’s role in that vision.  Jack Welch once said “Good business leaders create a vision, articulate the vision, passionately own the vision, and relentlessly drive it to completion.”  A purchasing organization can have tremendous impact on a company’s success – with 60-70% of manufacturing company revenue going to purchased good and services – but purchasing’s impact will be affected by how well purchasing strategies are aligned with company strategies.

Establish a culture of cross-functional support.   Purchasing leaders who deliver high levels of cost savings often point to the support they receive from other functional leaders for material cost savings.  Company leaders can create a supportive culture by making sure company initiatives have clear goals, ensuring metrics assigned to different leaders do not conflict, and creating opportunities for functional leaders to collaborate together.

Measure cost savings to drive value.  Organizations that measure cost savings strictly on a PO-to-PO basis are missing much of the value purchasing can provide, and consequently promote purchasing not delivering the full value that it can.  For example, total cost savings metrics should address cost of quality, testing costs, cost impacts on production, and cost avoidance.

What purchasing organizations should do to achieve higher cost savings:

Develop an aligned purchasing strategy.  Cost savings are best achieved with the support of company leadership and other functional leaders.  The first step to obtaining this support is to develop an understanding of the CEO’s vision and what each functional leader within the company is trying to deliver.  Actions can then be taken to align the supply base and purchasing organization to fulfill the CEO’s vision and the plans of other company functional leaders.

Engage suppliers in collaborative cost methods.  Our experience is that purchasing organizations achieve much greater cost savings when they have a deep understanding of supplier cost structures and collaborate with their suppliers.  Advantages include being able to engage suppliers for design insights and standardizing on key cost drivers like raw materials and purchased components.

Develop a well-defined set of cost tools and a methodology for selecting the appropriate tools for each commodity.  A variety of cost tools are needed across various commodities.  Examples are attribute-based quote models, knowledge-based quote models, and open book costing.  Just as importantly, the right cost tool must be applied to each commodity to optimize the savings-to-effort required to implement the tool.