How to Decrease Sourcing Costs in a Manufacturing Environment
Sourcing costs can represent a substantial percentage of a manufacturing organization’s outflows. Cost reduction is imperative in the current tough economic environment.
Here are 5 steps to reduce sourcing costs:
1. Analyze Design and Specifications
Specifications are details of user needs. This information is not systematically analyzed in many cases. Many users often outline specifications according to service offerings of the supplier. Little consideration is given to better alternatives.
There are two basic approaches to specifications:
- Conformance Specifications
These specifications state unambiguous and clear requirements. The emphasis is on the required product rather than the application. They are highly technical and non-negotiable. Hence, they restrict all kinds of change or innovation. Such specifications give higher level of control to the user.
- Performance Specifications
These clearly indicate the expected performance, application and function. Hence these specifications are centered on the outcome. The supplier must provide the right product to fulfill these needs.
Performance specifications may lead to improved supplier performance. Suppliers are encouraged to procure products that exceed performance benchmarks.
Conformance specifications have a more rigid approach. There is little room for supplier involvement and innovation.
Performance specifications can lead to better alternatives. They make it easier to implement the 80/20 cost rule and the value analysis methodology.
2. Seek More Competitive Contracts
Longstanding contracts provide opportunities for cost reduction. Contracts should be reviewed periodically to discover new avenues for cost-saving.
Several economic changes can take place over the course of months. These can have a strong impact on contracts. There can be changes in consumption patterns, fluctuations in currency value, different market conditions and other factors. It is necessary to keep these factors in mind while reviewing the contract.
Performing market research will offer many benefits. This will provide a benchmark for market performance.
While examining existing contracts for competitiveness, due regard should be given to both cost and performance benchmarks.
Adopting standardization will reduce the variety of disparate items in your inventory. The size of your inventory will decrease. This will reduce sourcing costs.
Standardization can allow organizations to achieve economies of scale for sourcing processes. Supplier relationship management will also become easier.
4. Analyze Supply Chain Costs
Supply chain mapping will help to determine costs at each stage of the supply chain. Organizations must carefully examine the implications of Incoterms. Improper implementation of Incoterms will increase supply chain costs.
You should seek better terms and cheaper alternatives. For instance, blanket insurance may be better than paying insurance for each consignment via CIF
Value analysis should also be carried out on packaging costs.
5. Look for Better Suppliers
Suppliers have a key role to play in your cost reduction program since they are aware of cost drivers.
Competitive tendering will help you to discover competitive suppliers. You should communicate your cost reduction plans with suppliers. Those that offer little in this regard should be avoided.