Are You Overpaying for Outsourced Parts?

Utilize the right steps to pay the right part price


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 isn’t enough time to solicit bids from other factories. In others, a supplier may lack the manufacturing capabilities to produce the part more efficiently and cost-effectively.

Too often, sourcing professionals rely on historical cost data when dealing with suppliers. But as material prices change daily and more new factories come online overseas, historical data does not always reflect today’s realities.

So the question becomes: ‘Is your company paying too much for outsourced parts?’ With hundreds of thousands of parts, it’s not possible to know every option available, nor is it practical or efficient to solicit quotes from every possible vendor.

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 continue to rise, the sourcing function’s ability to affect change does 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 obvious—small sourcing staffs, too many suppliers in too many countries and an overflow of parts. It’s impossible to work through it all. On top of that, sourcing professionals lack the detailed information they need to enable them to easily identify cost-saving opportunities and conduct more meaningful supplier negotiations.

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

Prioritize parts for total savings

To drive costs out of outsourced parts, the first step is to identify the parts or subassemblies with the potential for the greatest savings. Determining the right parts is a 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 achieved manually, there are software solutions available that use more sophisticated filters to help analyze a greater number of parts faster. Regardless of the method, this first step narrows the total universe of parts to a smaller group that offers the potential for the biggest savings.

With candidates for savings identified, the next step of the process looks at each part and quantifies its cost-savings opportunity. The key to this second phase is to know what it should cost to manufacture the part in question. If you know what it “should cost” to manufacture the part in an efficient supplier market (across various geographies), you could compare that amount with the price currently being paid and identify the parts that are out of line. 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.

The key is to have access to a “should cost” for each product. Company cost experts can manually assess what it should cost to make a few parts but not the hundreds or thousands that most companies have. Software solutions and databases make this information available on a dynamic basis leveraging 2D and 3D product designs. Ideally, this information includes the information about the part’s geometry, the materials being used and production volume to generate a precise “should cost” number. It might also consider the most-efficient (lowest cost) manufacturing processes for producing the part based on production volumes, materials or factory locations. As a result, the sourcing team not only has a target price but also a wealth of supporting information that can be used in any re-quote, re-bid or renegotiation process with suppliers.

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