I taught a full day public seminar this week on the topic of “Catapulting Your Cost Savings Results”.
There are so many opportunities buyers leave on the table. It’s my job to get purchasing professionals past that and to help them see all the big TCO areas they’ve never even looked at.
For instance, purchasing professionals spend so much energy trying to reduce price, and through really sophisticated measures too, such as supply base reduction, expenditure aggregation, reverse auctions, bidding, cost models, benchmarking, negotiation techniques, etc.
So what’s the problem, you ask?
Well, If the only thing you have in your bag of tricks is creative and sophisticated ways to reduce supplier price, you’ve missed the boat. Completely.
There are an entire supply chain worth of unnecessary or bloated costs that are getting passed straight onto you as the purchasing professional. Your goal is to get those costs out of the supply chain, agreed?
So what happens when you negotiate a price reduction? You reduced price, but did you reduce cost? You did not. All you did was push costs back up the supply chain in reverse gear. As a consequence of your actions, no matter how brilliant and effective they were, you have not made the supply chain any more cost effective, agile, or effective.
In the final analysis, it was a pretty self serving move. So before you blow up at me, let qualify my comments: We are ALWAYS going to ask for and pursue price reductions, and this should never change. Are we friends again? 🙂
OK, but let’s continue with this thought process. If you really pay attention, what we have been doing in purchasing is getting more and more sophisticated at pushing costs back UP the supply chain, rather than focusing more energy on the much larger opportunity of taking costs OUT of the supply chain.
And we talk about Win/Win a lot in purchasing. Is it really Win/Win if you are pushing costs back up the supply chain? If so, who is winning? Even the end consumer doesn’t win, because they still bear the burden of those costs, because all supply chain costs still roll down hill, even if purchasing claims a cost savings on those same costs.
So my point here is not to point fingers at purchasing. We deserve credit, and you deserve credit, a lot of credit, for how well we have developed the art and science of purchasing, negotiations, and supply chain management. Now it’s time to take the next step.
So what kinds of things are we talking about? How do we take costs out of the supply chain?
The surprising thing is that some of these opportunities are really low hanging fruit and are right under your nose. For instance, one of the biggest ones is ensuring the specs and/or SOW are written for TCO.
If the specs involve custom parts or the SOW involves custom services instead of standard, you will pay for the nose for that. Even if you negotiate the best price in the world, you will still save tons of money.
Want proof? Compare the Mercedes S Class to the Mercedes CLS class. These are two cars that are nearly alike in every way, from a features, engine, luxury, and quality perspective. The S class has 4 doors and the CLS has 2 doors, and the CLS is more aerodynamic looking, but they are about the same size actually. They are pretty comparable in most every way. Except one costs about $25K more than the other.
Why? It’s simple. The S class comes any way you like it, with or without such options as heated seats, rear camera, ventilated seats, navigation, dual zone climate control, and so on. This means it is made to order. The production line has to constantly make adjustments and incur set up costs and productivity loss in order to accommodate such adjustments. This adds cost. LOTS of costs.
The CLS comes with one standard package. All you choose is inside color and outside color. The production line goes much faster. No thinking has to happen, no real customization has to happen, and in fact they can produce the same exact type of car many times in a row (including color) before they’ve built enough and move onto the next color car. Nothing changes but color. Fewer machines, fewer parts, almost no customization, no significant setup costs, and so on. This takes tons of costs out of the supply chain.
Now do you see that the cost advantage of the CLS has nothing to do with getting suppliers to charge less and pushing those costs back up the supply chain? Instead, costs are surgically removed, and you never see them again. In this case, we are talking in the neighborhood of 25% cost savings, without negotiating with suppliers at all!
There are many other examples, and I’ll go through them in my blogs over time. For now, ask yourself the following:
Is your exclusive means of achieving cost savings derived through pushing suppliers for a lower price? How long do you think you can keep doing that with the same suppliers? Are you focusing on taking cost OUT of the supply chain instead of just pushing them back up the supply chain?
Keep being your best, and help us make this profession better. Work with me, and I’ll take your game to an entirely new plateau. We’ll talk again next week.