The 16 levers in the Purchasing Chessboard describe approaches that are extremely useful in interdisciplinary discussions (for example, with the R&D department).
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4 Strategies | 64 Methods
Whether as a result of monopolies or patents, or because specifications are excessively geared to a single supplier, companies sometimes find themselves in a position of complete dependence. When this happens, the only solution is an innovation breakthrough that fundamentally changes the rules of the game.
Much of the cost of a product is determined in the early phase of its development. When it’s impossible to reduce cost within the scope of existing specifications, there is only one thing to do: go back to the drawing board! The problem here is getting the creative juices flowing again. After all, there was a good reason for the product being designed the way it was. Thus, the key question becomes: “Do I really need X or Y to produce my product efficiently or sell it successfully?”
Value chain management
This approach systematically optimizes the value chain and the associated value-generating units. Trustworthy handling of company data (sales revenue, value stages, suppliers’ buying costs, and so on) is a fundamental requirement for implementing the improvements through value chain management.
Technical data mining
Shorter product life cycles, increased differentiation, and more product variety are making procurement ever more complex. As a result, it is also becoming more difficult to practice volume bundling or achieve economies of scale from suppliers. The first step is to apply the appropriate tools to bring order to the apparent chaos. By using analysis and benchmarking, it should be possible to identify potential improvements that a joint effort between procurement, R&D, and production will realize.
Integrated operations planning
Rather than achieving direct reductions in a component price, integrated operations planning tries to capture targeted savings by decreasing inventories and making sales forecasts more reliable, which in turn improves the capacity and demand balance. The supplier and customer collaborate in a spirit of trust and exchange information with one another, often supported by Internet applications. This is a true partnership on the operating level, but one that calls for great openness in terms of exchanging information. It is an important approach, not only for cutting costs but also for adding value, since it avoids component or capacity bottlenecks, and thus increases sales revenues.
Commercial data mining
If our company only knew what we already know! There is enormous potential hidden in accumulated commercial data—often lying dormant in SAP or Oracle systems. With the help of targeted sorting and intelligent analyses, it is possible to create transparency and identify potential through standardization and, as a result, very quickly find cost savings.
Probably the most commonly used approach is tendering. Although the effectiveness of tendering has declined in today’s volatile environment, it would be a mistake to dismiss it, for tendering is a particularly effective way to obtain transparency regarding prices on the supplier market. Successful use of this approach requires expertise in the various steps of the tendering process, including identification of potential suppliers, preparation and mailing of the tender documents, analysis of bids, and negotiations with suitable suppliers.
Volume bundling is one of the traditional procurement approaches, where¬by the company achieves savings as a result of economies of scale on the supplier’s side. Although this approach is well known, people often forget how much a company can realize by receiving its supplier’s concessions. Particularly in the case of products with high fixed costs or those requiring long set-up times, the scale effects can be considerable: for example, if the fixed cost accounts for 30 percent, doubling the volume should make price reductions of 15 percent possible.
Globalization opens up possibilities not just on the selling side, but especially on the procurement side. With the opening of markets in Eastern Europe, China, and India, more than a billion additional workers have become available globally—workers whose low factor costs increasingly go hand in hand with highly developed skills. However, using the globalization lever means taking advantage not just of low-cost countries, but of the worldwide supplier market as well.
Few suppliers are prepared to disclose their cost structures. Target pricing offers other ways to determine them. Depending on the initial situation, you can use methods with varying analytical depth to ascertain target prices. Some methods require expertise in statistics and manufacturing processes.