Having experienced unprecedented upward pricing pressure over the past 2 years, purchasing leaders are telling us that they are under increasing pressure to increase cost savings efforts and results.
A commodity-by-commodity review of company spend can often turn up untapped, easily implementable savings.
To start, take the time to write down the questions you should be asking about each commodity that will help you identify which commodities have a savings potential.
For example: Here are some of the questions we ask clients when assessing the savings potential on a commodity. Answering “No” to some or all the following questions is a strong indicator of such low hanging fruit:
- If pricing has increased in the past two years due to raw material costs, are prices being adjusted downward as commodity prices fall?
- Were prices adjusted upwards in the past two years?
- Has a method for calculating should-be costs for the commodity been established?
- Do suppliers provide commodity specific cost breakdowns with their quotes?
- Are there ample suppliers in the supply base to generate pricing pressure?
- Have robust financial analysis been performed when sourcing new parts/products in this commodity? Have the new costs/prices been compared to historical data?
- Have costs for design changes been analyzed?
- Do the buyers have the time and skills to analyze costs and pricing on this commodity?
- Have non-piece price total cost of ownership (quality, inventory, shipping, packaging, testing, etc.) been reviewed?
- Are there any inhibitors to changing sources?
- Is there a cross-functional process for strategic commodity management on this commodity?
- Are cost reduction ideas obtained from suppliers evaluated and managed to implementation?
- Do buyers frequently review the suppliers manufacturing processes with the objective of understanding manufacturing costs and identifying cost reduction opportunities?
- Are the practices being used to control costs on this commodity as robust as what you have experienced in other companies?
Once completed ask the questions for each of your commodities. Prioritize commodities for further analysis/review based upon the answers generated.
Our analysis includes the development of cost catalogs and the development of linear and/or multivariable models for the high priority commodities. Performing the analysis identifies areas of investigation for cost reduction including:
- Parts or services with similar requirements but differing prices
- Suppliers who quote inconsistently
- Design attributes driving cost but not providing functionality
To learn more download our white paper, Building Attribute-Based Estimation Models.
Buyers often find untapped cost opportunities in the projects they complete as a part of our Cost Management Certification program. For more information click below.