Guest Column: Are You Overpaying for Your Outsourced Parts?

When discrete manufacturing companies farm out parts production to external suppliers, there is almost no way to know whether they are paying the best price for every part. In some cases, the company may pay more than it should because there is not enough time to solicit bids from other factories. In others, a supplier may lack the manufacturing capabilities/machines that could make the part more efficiently and, therefore, more cost effectively.

Too often, sourcing professionals rely on historical cost data in their dealings with suppliers. But with material prices changing every day, new factories coming online overseas and a host of other factors, historical data does not always reflect today's realities.

So is your company paying too much for your outsourced parts? With hundreds or thousands of parts, you can't know every possible option available, and you don't have the bandwidth to solicit quotes from every possible vendor. With so many variables, how could anyone know whether they are getting the best deal?

What if you could always get the best deal? Sourcing professionals are in a prime position to save their company money. That's why sourcing teams have annual cost-reduction goals. But while target goals have continued to rise, the sourcing function's ability to affect change traditionally has not.

Two obstacles that prevent sourcing teams from maximizing their cost-saving efforts are bandwidth and the lack of quality cost information. The time factor is self-explanatory: small sourcing staffs, too many suppliers in too many countries and too many parts. It's impossible to work through it all. On top of that, sourcing professionals lack information that would help them to easily identify cost-saving opportunities as well as conduct more meaningful (and fruitful) negotiations with suppliers.

To continue meeting cost-reduction goals, sourcing professionals require new capabilities to offset the ever increasing complexity of their tasks.

Steps to Achieve Product Cost Savings

A new class of product cost management software is helping sourcing teams overcome the time and information obstacles to achieve significant product cost savings. How? Through real-time, precise product cost information. With product cost management, sourcing professionals always know precisely how much a part or product should cost to produce. Access to precise "should cost" information enables sourcing experts to easily identify where they are overpaying for outsourced parts and to better negotiate with suppliers. The result is significant product cost savings en route to meeting (or surpassing) cost reduction goals.

More specifically, using product cost management solutions, sourcing personnel can meet or surpass their cost reduction goals by:

  • Identifying cost saving opportunities. In driving costs out of outsourced parts, the first step is to identify the parts or sub-assemblies with the potential for the greatest savings. Determining the right parts is science in itself. Using basic part information and simple comparisons — such as historical cost versus mass or cost versus complexity — sourcing experts can identify potential opportunities to reduce costs. While identifying potential cost-saving opportunities can be completed manually, product cost management technologies can help analyze a greater number of parts faster and using more sophisticated filters. Regardless of the method employed, this first step narrows the total universe of parts to a smaller group that offers the potential for big savings.
  • Quantifying cost-saving opportunities.With candidates for savings identified, the next step is to look at each part and quantify its cost-savings opportunity. The key is to know how much it "should cost" to manufacture the part in question in an efficient supplier market and across various geographies. Then you can compare that amount with the price currently being paid and quickly identify the parts that are out of line. Here, product cost management provides sourcing professionals with that "should cost" knowledge. Taking the difference between the historical cost and the "should cost" and multiplying it by the annual product volume provides a total potential savings for each part. Ranking the parts in order according to annual savings gives the sourcing team a prioritized to-do list.
  • Determining which parts should go for re-quote or re-bid.The easiest way to save money on your parts is to find ones for which you are simply paying too much. (A common example would be if you are paying for production parts at a rate originally quoted for the prototype volume.) Regardless of the reason, your product cost management solution has identified parts that cost more than they should. Usually, re-negotiating with the current supplier (or finding a new one) results in a lower price.
  • Determining which parts should be re-routed.In some situations, a supplier may not be manufacturing a part as efficiently as possible, driving up the cost to your company. (A simple example would be a supplier that doesn't have a laser, so parts are cut using a more-expensive turret press operation.) With product cost management, sourcing experts always have access to information on the most efficient methods for manufacturing each part. If suppliers are using different operations to make a part, asking them to re-route (and then re-quote) using the software's suggested methods should result in a lower price. Re-routing can often necessitate re-sourcing if the current supplier does not have the correct processes. Although possibly more time consuming, re-routing often holds greater profit opportunities than re-quoting or re-bidding alone.
  • Evaluating re-design alternatives for the remaining overpriced parts. Some parts may not fit the criteria for simple re-quoting or re-routing but have still been identified as being overpriced. In these cases, the reason for the higher price may be that the part was not designed as efficiently as possible. These parts become candidates for re-design. Re-design opportunities include reducing the complexity of the part, reducing material, converting weldments to castings (or vice versa), investigating stampings and more. Re-design has more potential cost savings than re-quoting or re-routing, but in most cases will involve work from engineering to determine the best new design options. This step also may require re-testing for durability and other attributes on the new part.

The preceding steps are designed to help companies identify "low-hanging fruit" opportunities for cost savings. While the effort to attain these savings is minimal, the financial impact can be enormous.

More importantly, with a product cost management system in place, sourcing team members can be sure they are getting the best deal for each new product they outsource to suppliers. Moving forward, the sourcing team will have more confidence that all of the new parts are priced correctly from the start, and there will be fewer and fewer instances where the company needs to re-quote, re-source or re-design products.

About the Author: Eric Arno Hiller is the founder and chief product office of enterprise cost management software developer aPriori, based in Concord, Mass. You can learn more about aPriori at www.apriori.com.

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