Sunday, March 24, 2013

Major Areas for Supplier Cost Reduction and Management: Production Materials

Part I: Production Materials 

Professionals can miss areas of opportunity for supplier cost reduction and management.  Usually when we think about costs management, the manufacturing, retail, or wholesale environment comes to mind.  Service industries usually do not take top rung.  However, all industries as well as all areas within a business need to rein in costs for greater efficiency and profitability.  Manufacturing is not the only industry just as the inventory management process is not the only area for managing costs.  The supply chain also encompasses more than the production floor, and costs toward end user targets are just as important as costs toward value added and resale.  Three areas of opportunity exist for managing costs within a firm:

1.      Productions materials

2.      Product-related contract services

3.      Outsourced organizational components

Production Materials

The most obvious areas of cost reduction and management consist of production processes and inventories. However, the obvious does not automatically translate into management best practices. With more companies considering outsourcing for manufacturing, the following questions arise:
1.      What does the vendor outsource?
2.      Who supplies assembled component producer materials?
3.      Is your company in control of the entire supply chain concerning the number of vendor links in that chain?
4.      Does your risk management plan safeguard your supply chain?
5.      Does that plan insure provide for quality, proper disclosures, confidentiality, technical requirements, and on time deliverables?
6.      Do vendor deliverables meet your customer requirements?
Herein lay the key for supplier management: customer-driven management.  The customer drives answers to all of the above questions.  Therefore, the entire supply chain matters for quality, price, performance, and differentiation.  Brian Everett highlights this importance in Lenovo’s success.  He notes that outsourcing has its “competitive advantages” but highlights Jim Molzon’s concerns about outsourcing challenges, coordinating the outsourced pieces may indeed create new challenges in product development and procurement along the supply chain interface.”    Molzon states that some of those risk challenges include import and export execution, transportation, shipment visibility, and vendor managed inventories.  For this reason, it is important to have the supply chain trained on customer-driven management and to allow that principle to guide every vendor in the process.
On a similar note, successful manufacturing firms grasp the importance of multi-sourcing.  While doing so, best practices may not always be front and center.  Vendor transparency and risk management constantly tug at one another.  Vendors have concerns that too much disclosure will cause a loss of competitive edge while customers focus on risks with vendors.  Tension arises between these two areas.  How do you control risks while gaining greater disclosure from companies in your supply chain?
Anna Frazetto highlights several key management practices in a related supplier area – information technology (“10 Tips for Multisourcing Success,”  I will underscore five of these areas:
1.      A strong internal support team – Having a point person or team overseeing multi-sourcing
2.      Standardization across vendors – Criteria and requirements specification management
3.      Due diligence in vendor selection – A change control management team or something similar to one
4.      Proper internal governance and risk management – Governance and risk management strategic plan and written policies
5.      Key performance indicators (KPIs) and key risk indicators (KRIs) – These two types of indicators complement on another
Such a brief article cannot do justice in sufficiently explaining these five areas.   However, a good place to start is with the links provided for the above noted specified keys words.  Implementing these five best practices can provide substantial cost reduction and management. They can also address corresponding risks associated with costs due to lost opportunity, fraud, theft, and embezzlement.  Multi-sourcing best practices in themselves will drive costs down through increased vendor competition for your business and lend to streamlining internal processes.  Performance and risk indicators can highlight prior unknown areas of high business costs and set targets for further cost reduction.

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