3 Ways To Trim Costs In The Supply Chain
PurchTips - Edition # 59 October 5, 2004
By Charles Dominick, C.P.M., SPSM

Your Supplier Has Minimized Its Margin, Now What?
Let's face it...there is only so far a supplier can reduce its margin until it is unprofitable to do business with
you. But that doesn't mean that cost reduction discussions should stop.

Here are three ways you can reduce costs in the supply chain without driving your suppliers out of

Eliminate Redundancies In The Supply Chain.

For all supply chain partners, create a flow chart of all activities involved in the procurement, set up,
production, inspection, storage, and transportation of all materials and components that go into the final
product. You will likely find activities that are repeated by different supply chain partners (e.g., outgoing
inspection by one supply chain partner immediately followed by incoming inspection by another). If you can
work with your supply chain partners to eliminate such redundancies, you can reduce their costs and, as a
result, your price.

Shift Tasks To The Most Efficient Supply Chain Partner.

Sometimes the capabilities of supply chain partners overlap. Let's consider a customer's purchase of
engraved plaques. The customer's immediate supplier may do direct marketing, fulfillment, and engraving.
That supplier's supplier may do design, manufacturing, and engraving. In this case, who should do the
engraving? The most efficient supply chain partner should, assuming that either can meet quality, delivery,
and service standards. But this means that you have to question "the way we've always done it" so that
you can do it the best way.

Leverage The Supply Chain's Buying Power.

Often, the products and services purchased by second tier suppliers are also purchased by a first-tier
supplier. Many times, that first-tier supplier gets a better price than the second-tier suppliers. In cases like
these, the first-tier supplier can negotiate to add second-tier suppliers' volume onto its agreements,
thereby getting even deeper discounts for itself and reducing total cost throughout the supply chain.


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