Why Reduce Procurement Costs
According to a survey conducted by the Ministry of Economic Affairs on “factual analysis of manufacturing operations,” as many as 63.49% of the manufacturers in the manufacturing industry believe that fierce market competition is the biggest difficulty in operation, followed by The fluctuations in exchange rates, too high wages for employees, insufficient labor force at the grassroots level, stagnant market demand, and insufficient management and technical personnel. Therefore, how to reduce procurement costs has become important.
This shows that enterprises are facing increasingly fierce competition internationally. In addition, the product production cycle is gradually shortening, and consumer demand for products is gradually diversifying. So if the company cannot effectively “open source”, then “throttling” will become one of the effective ways for the enterprise to respond. Especially under the trend of an increasing proportion of procurement expenditure, reducing procurement costs is the most direct way for procurement personnel to provide value.
Ten Ways to Reduce Procurement Costs
According to statistics of the cost-reduction methods used by Fortune200 companies in the United States, the most effective top ten items to reduce procurement costs are as follows (because the performance of each method varies from company to company, the following ten items are not sorted in order):
1. Value Analysis (VA)
2. Value Engineering (VE)
This refers to the study of the function of a product or service, with the lowest life cycle cost, through elimination, simplification, change, replacement, and other methods to achieve the purpose of reducing costs. The former applies to the new product engineering design stage while the latter engineering applies to exist products. But today both are considered the same concept.
Negotiation is the process by which buyers and sellers reach a mutually agreed agreement for their own goals. This is also the most basic ability that purchasers should possess. Usually, you can expect a price reduction of about 3 ~ 5%. If you want to achieve a larger reduction, you need to use price/cost analysis, value analysis, and value engineering.
4. Target Costing
Peter F. Drucker, a master of management, mentioned in the article Five deadly business sins of a company that the third fatal mistake of a company is the cost of pricing. Driven (cost-driven pricing). Most American companies, and almost all European companies, set the price of a product by cost plus a profit margin. However, as soon as they brought the product to market, they had to start cutting prices, redesigning products that cost too much, and bearing losses. And they often have to give up a good product because the price is incorrect.
Product development should be premised on prices that the market is willing to pay. Therefore, the market price of competitors’ products must be assumed before the price of the company’s products is determined. Because pricing is influenced by the old cost-driven thinking model, the Minsheng electronics industry in the United States no longer exists. In addition, Toyota and Nissan pushed German luxury cars out of the US market as a result of price-driven costing.
5. Early Supplier Involvement (ESI)
This means that in the early stages of product design, a supplier with a partnership participates in the new product development team. The new product development team puts forward requirements for the performance specifications of the suppliers and uses the expertise of the suppliers to reduce costs.
6. Leveraging Purchases
Various institutions or different departments increase the bargaining space through centralized procurement. If you do not do this, but each unit purchases separately, it may cause each unit to purchase the same parts from the same supplier, but at different prices. Lost opportunities to save procurement costs.
7. Consortium Purchasing (combined procurement)
Most buyers of non-profit enterprises (such as hospitals, schools, etc.) will use this method. This method refers to integrating the demand of different purchasing organizations to obtain better volume discount prices. What’s more, purchasers in general business activities also use this method. Relevant emerging industries have Third-party Purchasing, which specializes in serving those business units with a small MRO demand.
8. Design for Purchase (DFP)
We could refer to the existing industry standards during the design phase of the product to facilitate the availability of raw materials. This not only greatly reduces the technical support required for the design, but also reduces the costs required for production.
9. Cost and Price Analysis
This is the basic tool for professional procurement. It is very important for buyers to understand the basic elements of the cost structure. If the purchaser does not know the cost structure of the purchased goods, he will not know whether the purchased goods are fair and reasonable prices, and will lose many opportunities to reduce the purchase cost.
This method refers to the standardization of implementation specifications. On the one hand, this can mean using common designs and specifications for different products or parts. On the other hand, this also means reducing the number of custom projects to achieve the purpose of reducing manufacturing costs. But this is only one part of standardization, and the organization should expand the scope of standardization to operating procedures in order to obtain greater benefits.