Are You Overpaying for 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 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.

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.

Julie Driscoll is Vice President of Strategic Marketing & Product Management for aPriori, a provider of product cost management software solutions. With more than 18 years of experience in marketing and service delivery, she holds a Bachelor of Science in Industrial Engineering from Worcester Polytechnic Institute and an MBA from Babson College.

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