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 business...
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.