It appears we are finally transitioning from a prolonged period of supply constraints and rapidly rising prices to a more “normal” state. Supply-demand dynamics will vary by commodity, and the possibility of a global recession still looms, but after several years of chasing parts and battling price increases, purchasing teams are poised to return to more strategic endeavors.
We recently held Executive Roundtables where manufacturing purchasing leaders shared their intentions for 2023. Below are plans from a variety of industries, ten different paths forward that reflect their individual situations.
Vice President of Procurement for an incubation equipment manufacturer shared that they have going through a supplier consolidation exercise after merging two companies. Next areas of focus will be make/buy analysis and localization (moving supply from Asia to North America). They are also evaluating offering improved payment terms for reduced costs. They mentioned that the purchasing team does get credit for cost avoidances.
Director of Corporate Procurement for a disposable tableware manufacturer shared that they are planning to address indirect spend, which hasn’t been addressed for some time, and expect to achieve double-digit savings. In particular, they expect to see savings on steel-based MRO items and safety supplies. They also mentioned that they have a large corrugated spend and are under contract for the next year, and plan to negotiate cost-downs on current pricing as corrugate prices decrease.
Director of Indirect Purchasing for an automotive supplier shared that their 2023 savings goal is around 3%. They have been focusing on bringing an acquisition’s MRO spend under established contracts to maximize rebates and are working on combining the energy spend for four Mexican locations to improve leverage for better costs. They have formed a Sourcing Council with other companies owned by the same Private Equity firm to leverage indirect spend for better deals. They mentioned that they have been successful negotiating better payment terms when they’ve had to accept price increases, and that their CFO is recognizing a cost avoidance metric “free cash flow improvement”.
Global Director of Supply Chain for an automotive supplier of machined and case components shared that their 2023 savings goal is 3-4% of spend under management. They also have been able to extend payment terms when accepting price increases. They plan to focus on areas in 2023 that haven’t been addressed recently, including indirect, capex, tooling, and freight. They do not have a cost avoidance metric that is reported to leadership, but track cost avoidance successes to recognize their team.
Global Commodity Director for a manufacturer of CNC machines shared that their 2023 savings goal is 10% of spend under management, with a primary focus on supplier consolidation. They have been able to put net 180 day terms in place with a 2/5% discount for early payment. With a global footprint, they are challenging suppliers to analyze the foreign exchange advantages of the strong dollar when presented with price increase requests.
Vice President of Supply Chain for a trailer manufacturer shared that their 2023 savings goal is 5%. They achieved 3.2% savings in 2022, mainly through educating buyers on understanding cost drivers and aggressively negotiating with suppliers that had not had to justify pricing. Next year, they plan to address “sacred cows” such as:
- Split sourcing between domestic and offshore suppliers (the company had previously focused on U.S.-based suppliers due to tariffs)
- Establish a clear process for financial evaluations for make vs. buy decisions
- Adopt should-cost software for evaluating supplier quotes
Procurement Director for a residential building products manufacturer share that their focus has been on aggregating spend to improve leverage. Next, they will focus on rightsizing the supply base to ensure the proper amount of supplier redundancy (minimize sole suppliers and reduce the suppliers where there are too many). They mentioned they are starting to see prices going down for polymers and chemicals but continue to see tightness in glass and fiberglass supplies.
Vice President of North American Purchasing for a sunroof supplier shared that they are in the second year of a supply network optimization effort, with the goal of reducing 175 suppliers to fewer than 50, including an effort to increase nearshoring. With many direct materials controlled by customers, they achieved 10% savings on indirect this year and expect another 5% in 2023 (mainly from supplier consolidations for MRO and services). About 30% of direct materials under management are tied to indexes, they have been taking increases and are expecting decreases in 2023. When suppliers have come to them with price increases, citing rising costs as justification, they have been successful digging into the cost driver details to settle on lower cost increases.
Director of Sourcing for a packaging distributor shared that they are also focusing on consolidating suppliers to drive costs down. They expect to achieve secondary benefits as well, such as more efficient administrative costs and decreased inventory/increased inventory turns. They shared that their suppliers are battling tremendous labor issues and high input costs, and that some raw material lead times are decreasing, but not to pre-covid levels (ex: 12 weeks to 9 weeks).
Global Purchasing Director for an automotive supplier shared that their 2023 savings goal is 1.5% of controllable spend. They feel the time is right to enter into index-based pricing agreements with suppliers. They have launched a supplier suggestion initiative to solicit cost savings ideas, with cross-functional support in place to implement productive ideas. They shared that their company achieved 5% savings on indirect costs this year and expect the same for 2023.