Are You Overpaying for Outsourced Parts?

Utilize the right steps to pay the right part price


Drive costs out

To drive cost out of the parts there are three options: a re-quote or re-bid; reroute; and/or redesign.

The easiest way to save money on your parts is to find the ones for which you do pay too much. A common example would be if you pay for production parts at a rate originally quoted for the prototype volume. Regardless of the reason, your analysis has identified parts that cost more than they should. The first thing to check is if the part is manufactured using the most efficient process available. If so, then this part becomes a case of simply being overcharged for a part. In this case, renegotiating with the current supplier—or finding a new one—usually results in a lower price.

In other situations, the supplier may not manufacture a part as efficiently as possible, which drives up the cost to your company. For example, a supplier who doesn’t have a laser to cut parts and instead uses a more expensive turret press operation. If your sourcing experts have access to information on the most efficient methods for manufacturing each part, you can work with your suppliers to reroute to a more efficient method and re-quote a lower price. Rerouting often can necessitate re-sourcing if the current supplier does not have the correct processes. In addition, while rerouting can potentially be more time consuming, it often holds greater profit opportunities than re-quoting or re-bidding alone.

In some instances, the initial analysis will identify parts that appear to cost more than they should, even though the most efficient processes are already used and the charged price is competitive. In these cases, the higher price may be a result of inefficient part design, thus, qualifying such parts as potential candidates for redesign. Redesign opportunities include reducing the complexity of the part; reducing material; converting weldments to castings (or vice versa); or investigating stampings. Redesign has more potential cost savings than re-quoting or rerouting but in most cases will involve work from engineering to determine the best new design options. This step also may require retesting for durability and other attributes on the new part.

Put your best practice forward

The preceding steps can 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. To date, organizations have identified and confirmed millions of dollars of savings annually using these methods—savings which continue to grow over time.

By putting these practices in place, sourcing team members can ensure they receive the best deal for each new product they outsource to suppliers. Moving forward, the sourcing team will have more confidence that all new parts are priced correctly from the start which can result in fewer instances where the company needs to re-quote, re-source or redesign products.

With few sourcing personnel, complex dynamics and grueling deadline pressures, it is nearly impossible for companies to know if they are paying the best possible price on every one of their outsourced parts. Chances are, your company is overpaying for a portion of the parts you outsource to suppliers. While this deficiency has been tolerated in the past, the constant pressure on corporate performance, combined with increasing material and energy costs, is forcing product companies to pay closer attention to what they are paying to external suppliers to make their parts.

Using the product cost management techniques outlined above, your organization can identify and confirm opportunities for significant cost savings in the short- and long-term. With real-time, precise “should cost” information, you will always have the information you need to successfully negotiate with suppliers to ensure that the price you pay is the right one.

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