• Operations Rx

Two Simple Steps to Realizing Material Cost Reductions 

While there are numerous avenues to Material Cost Reduction initiatives, many companies focus primarily on pressuring their current supply base for price reductions. Attempting to do so without an underlying foundation will be both futile and non-sustainable. Price reductions must be mutually beneficial to both parties for them to be sustainable. Switching suppliers for price alone often leads to several issues and can result in constantly chasing price.

A more sustainable approach, one which will be beneficial for the long-term, involves consolidating the supply base and re-engineering your products. The first, consolidating the supply base, has several benefits. The most obvious is that it gives more volume to a supplier, giving them incentive to give you preferential (lower) pricing. In addition, this approach will give you leverage when supply gets tight or a commodity goes on allocation. Suppliers will see you as a true partner and thus give you top notch customer service and react more quickly to delivery and quality issues. Often a supplier that is a true partner will present cost reduction ideas of their own as they realize the importance of doing so in order to grow their business. Finally, your costs will decrease in places like supplier management.

Product re-engineering gives you a reason to approach either a current or new supplier for a price reduction, assuming you engineered cost out of the product. Such initiatives often involve alternative materials, approving materials from another source the supplier can use, or redesigning the part. The redesign does not have to be major, just enough to open the discussion with the supplier. 

Following these two simple steps will get you on your way to substantial material cost reductions which are sustainable for the long term.

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