Major cost savings on the smallest product purchases

posted by Marc van de Ven
12 February 2018

From raw materials to parts required for machine maintenance, buyers are constantly looking for lower prices and ways of consolidating their supplier base.

Most companies choose to focus primarily on the largest, most important suppliers. Understandable: actively maintaining relationships with suppliers only seems interesting when purchased quantities are large. For relatively low-cost items produced in smaller quantities, this often doesn’t seem to be worth the effort. Nevertheless, there are huge potential savings to be found in the tail of the purchasing portfolio.

Experience shows us that ten to twenty percent of the least-bought items are responsible for around sixty to seventy percent of the hours spent on purchasing. This is, for example, because there are no fixed agreements with suppliers, or because stocks are not monitored or employees do not know where to order certain items. Therefore, potential savings exist with regard to pricing, but especially in ensuring availability and improving logistics processes.

Optimising the supply chain

How can companies best optimise their supply chain? There are two elements to consider. When it comes to the first element: the Maintainance, Repair and Opperations (MRO) supply chain, product availability is a critical point. Experience shows us that repair and maintenance technicians often have no idea which materials are in stock or where these can be sourced.

Technicians are confronted with thousands different slow moving products that need to be ordered with more than a hundred different suppliers. The technician needs to regulate the order and follow up with suppliers before he is even able to start with maintenance. A way to optimize the MRO supply chain is by monitoring supplies, so that it is always immediately clear which materials are in stock and which items still need to be ordered. 

Besides that, it is useful to efficiently structure the warehouse in such a way that materials are readily available to engineers and that drawing up an inventory will be done in a more cost efficient manner. 

When it comes to the second component; supply chain of parts for finished products or the Bill of Materials (BOM), it is important to have an insight into what is needed to manufacture a product and where these components are sourced. Finding and ordering low-grade product components often require multiple manual operations.

If it is clear where products can be sourced, it is easier to determine which suppliers can best provide the materials required. Not only with regard to pricing, but also quality and delivery time. These insights make it easier for manufacturers to make sure that all the required materials are available during the production processes. 

Time saving

Supply chain optimization is a time-consuming process. Understandably, many production companies are more focused on their larger suppliers. Nevertheless, every little screw or rubber hose that is part of a machine or a product to be manufactured is essential to the manufacturing process. Cost savings can be realized on precisely these low-priced products. This can be achieved by, among other things, negotiating a better price, improving material availability, and optimizing inventory levels.

My advice? Outsource the tail of the purchase portfolio to an added-value service provider. This third party is fully specialised in that part of the supply chain, allowing the organisation to concentrate on key suppliers and products. In this way, companies may optimise the supply chain across different areas and realise cost savings, whilst remaining entirely focused on their core business. 

Marc van de Ven is director operations at MAG45.

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