Adding Value and Reducing Costs by Leveraging Procurement Organisations

ISSUE #58 –

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“Companies that involve their suppliers at the kick-off stage of innovative projects are bound to outperform those that do not.“

A NEW ROLE

The role of procurement teams is drastically changing in today’s increasingly complex landscape. From a simple  structure focusing on pressuring suppliers for greater discounts, it has evolved into a much more strategic and holistic function. Procurement is now expected not only to result in price reductions and outsourced non-core activities but also to play a crucial role in optimising costs throughout the entire lifecycle of its company’s products.

Considering that direct material costs can account for as much as 80% of the total product cost depending on the industry, sourcing decisions have a significant impact on profitability. Sourcing teams should be involved during the evaluation/ design phase of new product development (NPD), thus ensuring that product costs and supply risks are addressed as early as possible.

ENGAGING STAKEHOLDERS

Procurement teams need to work hand in hand with R&D, product management, finance, and marketing teams to ensure that the new product cost structure is in line with the price the market will bear, ensure suppliers can guarantee security of supply and meet quality requirements. Most importantly, through this early stage cooperation, companies will be able to ensure profitability and margins are optimised and sustainable.

For companies that already involve their sourcing teams in NDP, the next step is to add additional value to the project with the introduction of external collaborations. Companies have become more dependent on their suppliers not only with regards to supply continuity and ongoing cost savings but also in terms of innovation capabilities. Companies that involve their suppliers at the kick-off stage of innovative projects are bound to outperform those that do not. This process of continuous improvement will yield new ideas and opportunities for further value creation.

CLOSE COLLABORATION WITH INTERNAL AND EXTERNAL TEAMS

Firms should consistently aim to reduce product costs to maintain or improve margins as product maturity lowers price points. For instance, companies can use a Redesign to Cost approach to further improve their bottom line. Companies need to pinpoint the difference between the actual and perceived cost of a product or service in order to identify and replace expensive elements by cheaper and more standard solutions, and/or to designout unnecessary or low-value-adding elements. As Antoine de St Exupery once said: “A designer knows he has achieved perfection not when there is nothing more to add, but when there is nothing left to take away.”

The internal involvement of the sourcing team and the external close collaboration with strategic suppliers are key to organisations that want to remain competitive and innovative. Sourcing teams are instrumental in the identification of new innovation partners, as they strive to convince them of their company’s attractiveness. Smaller companies might enter into a partnership with large technology leaders if deemed leaders/ innovators in their own field or allow suppliers to enter new markets. Sourcing teams have to own the management of supplier relationship. When the relationship with the right partner is managed properly, it will be mutually beneficial. Organisations that have not yet embraced these new procurement models or do not have internally the skillsets and technical competencies needed in their teams, can work with specialised consulting companies such as Optimal Cost in order to maintain or improve their competitive edge.

By Emma Merigneux, Director, Optimal Cost Pte Ltd

Interview published in the FOCUS Magazine”New Links in the Supply Chain” – September 2015

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