A recent study, “Business Strategy: 2012 Supply Chain Survey-Manufacturing Priorities and New Technology Adoption” from Manufacturing Insights Inc., found that 82% of companies greatest concern in optimizing their supply chain is cost reduction. If you happen to fall into this vast majority, finding savings in your value stream might be easier than you think. By maximizing the purchasing power of your supply chain, you can immediately reduce your costs. Surprisingly, doing that doesn’t necessitate enormous sales growth or a complete supply chain overhaul. There is one adjustment you can implement that will have a dramatic and immediate impact.
Consolidation and Aggregation of the complete Supply Chain.
Several firms we have worked with in the past discovered that two or more of their products included components that were common across the builds. Instead of sourcing these components from the same supplier at the same time, however, our clients had sourced these components at different times and often from multiple suppliers.
The ultimate goal is to drive commonality across the product line. This ultimately allows you to aggregate the components into larger purchase orders. By increasing your purchase quantities, you are bringing the mechanics of scale to your aid.
Larger purchases leverage your buying power for a lower price.
Well-established corporate giants have perfected this strategy and built entire businesses around it. Wal-Mart, for example, is notorious for using its leverage to deliver unbeatable prices to consumers. Though your final good might look substantially different, you can apply the same technique to your supply chain and greatly reduce your cost of goods sold.
Fundamentally, the concept of leveraging your purchasing power depends on scale. By buying more of a particular component from your supplier, you are giving their own production capacities a chance to scale. The increase in their manufacturing efficiency from this process allows them to then sell the components to you at a slight discount.
As a manufacturer of a final good, it's easy to overlook the economics of your suppliers. But the scalability curve continues to function at any level of your value stream. And the efficiency of upstream manufacturing directly impacts your margins. Suppliers that can create and sell greater quantities of a component will be able to manufacture these components at a lower cost.
All other things constant, increasing your purchasing power through consolidating suppliers is an ideal way to create savings in your supply chain. Most of the time, it doesn't require intensive revamps or changes in process and it doesn’t require any delays in production. In fact, it gives you the chance to improve your relationship with a supplier and add efficiency to your value stream.
Don't allow savings to slip through your fingers by failing to properly leverage the purchasing power of your firm.