Beyond sourcing – working with your suppliers to take out cost
Supplier Collaborative Cost Reduction
As organisations develop the capability and sophistication of their procurement functions, opportunities to drive out additional savings by focussing exclusively on price will eventually begin to plateau. However, by shifting the focus of procurement from price to cost, new saving opportunities become increasingly possible.
In recent years, some of the most successful savings projects have been delivered through direct collaboration with strategic suppliers, utilising an approach known as Supplier Collaborative Cost Reduction (SCCR).
Shifting the focus from ‘Leverage’ to ‘Strategic'
Procurement development is a journey. In the early stages of development organisations can achieve benefits by reducing the price they pay for goods and services through commercial leverage techniques such as negotiation, tendering, and eAuctions – techniques all relying on the fundamental commercial lever of competition.
For spend categories and suppliers where adequate competition exists in the supply market and internal and external restrictions are few, the market provides the best mechanism by which to drive down prices and deliver savings. The same techniques can (and should) be applied on a regular basis; supply markets are dynamic and new suppliers, innovation and market competition will provide fertile ground for ongoing savings.
However, the law of diminishing returns applies. Whilst savings can be squeezed out with each initiative, it gets harder and harder and the actual level of savings reduces as we approach a theoretical limit at which suppliers will not reduce pricing further. The reason for the limit is that these approaches only affect supplier price; the supplier’s cost isn’t impacted and it is just their margin that is being reduced.
Where next after sourcing?
Taking procurement to the next stage involves a shift in focus from price to cost. The model below shows the evolution of procurement control over time. As a default, supplier’s costs vary according to their input costs and without professional management, supplier’s prices creep up with time. Once professional procurement becomes established the tactical techniques above work on that margin and bring prices back down. But what next? Where do you go when these categories have been “sourced to death”?
Focus on supplier costs and bring down the price
The next stage of procurement must focus on supplier cost – working with the supplier to collaboratively reduce their cost, in order to bring down the price. We call this Supplier Collaborative Cost Reduction and it takes a fundamentally different approach:
|Tactical Sourcing||Supplier Collaborative Cost Reduction|
|Targets leverage categories||Targets high-value strategic suppliers|
|Works against the current suppliers||Works with the current suppliers|
|Supplier’s margin decreases||Supplier may increase margin but lower price|
|Challenges supplier relationships||Strengthens supplier relationships|
|Often requires supplier change||Doesn’t require supplier change|
|Difficult with contracted suppliers||Works for suppliers in contract|
|Requires competitive “hard-nosed” buying capabilities||Requires sophisticated creative and collaborative procurement capabilities|
|Incremental savings impact||Step change savings impact|
Supplier Collaborative Cost Reduction (SCCR) is an externally-facilitated, structured and managed process which takes the buyer and supplier through a measured and analytical process to identify, quantify and implement a wide-range of cost reduction techniques
The SCCR toolkit should include:
- Value Analysis/Value Engineering
- Commodity Cost Management
- Total Cost of Ownership
- Complexity Reduction
- Buyer-supplier process and Supplier Cost-to-Serve optimisation
- Logistics optimisation
- Packaging optimisation
- Wastage reduction
- Vendor Managed Inventory
- Asset Sharing
- Tier 2/3 supplier sourcing
- Joint sourcing initiatives
- Reciprocal trading
Step-change savings impacts
Because SCCR focuses on high-spend, strategic suppliers, the financial benefits can be significant with step-change savings as well as the softer benefits of supplier-led innovation and strengthening of key supplier relationships.
However, whilst the impact can be significant, there are also some limitations.
Whilst SCCR works with suppliers of services as well as products, it is not suitable for all relationships. For example, proprietary products suppliers are unlikely to collaborate with a single buyer, unless they have significant share of sales. One of the key success factors is in the initial selection of suppliers for a SCCR programme.
The second challenge is in buyer skillset. Achieving success requires a sophisticated, creative and collaborative approach; skillsets not necessarily present in tactical, price-focused procurement functions. To overcome this, we work with buying teams to provide external facilitation for SCCR processes, providing a third-party management of the process which is key in building an open, trusting and mutually beneficial environment for buyer-supplier collaboration.
Points to consider:
- Supplier Collaborative Cost Reduction can deliver savings from high-value, strategic suppliers that have been previously untouched by traditional tactical sourcing
- Select the right suppliers - not all are suitable
- Use an external expert to facilitate the process and create the right environment for successful collaboration.