As the front-line professionals who work with suppliers on a regular basis, procurement agents are in a good position to be able to negotiate prices and contract terms in a way that truly affects the bottom line. “Buyers can definitely make a difference when it comes to cost reductions,” says Rich Rafdahl, founder and president of Chicago-based procurement consultant Cost Reduction Specialists, Inc. “When done right, even minor adjustments and negotiations can translate into significant savings.”
Here are Rafdahl’s three “Cs” of procurement cost reduction that all buyers should be using:
Consolidate similar suppliers: If you’re dealing with cost-intensive challenges like high supplier minimum order levels, consider consolidating the number of similar products to fewer suppliers. “Having a larger spend with fewer suppliers will significantly reduce the number of supplier minimums issues,” says Rafdahl. This strategy will also increase your leverage and importance with the remaining suppliers – thus encouraging further cost reductions, improved service levels and other accommodations on the supplier’s part.
“Buyers can definitely make a difference when it comes to cost reductions,” says Rich Rafdahl, founder and president of Chicago-based procurement consultant Cost Reduction Specialists, Inc.
“Consolidation can be a major win on a number of levels,” says Rafdahl. To eke the most benefit out of the supplier consolidation process, Rafdahl says buyers should align with plant engineers and other end users. Explain that the company is working with a particular supplier to make an impact on cost savings, for example, and encourage those users to specify that supplier of choice’s products. “Otherwise, you wind up placing under-minimum orders with a range of vendors that all sell similar products,” says Rafdahl, “and incurring the associated costs.”
Shop on consignment. Some suppliers will be open to a consignment program that will allow you to carry the inventory right at your location. In these setups, actual payment is only required when the product has been used or shipped.
“There are a number of versions of consignment programs,” says Rafdahl, “but it is a great option since it allows you to have the product onsite to fulfill immediate needs while benefiting your cash flow.” Rafdahl says suppliers that are attempting to penetrate a new market or secure new customers are often willing to offer consignment programs. “It beats investing in inventory and hoping that it’s going to get used,” he adds.
If your suppliers don’t bite the consignment hook, ask for a more lenient return policy (120 days to return the items for full credit – less a restocking charge – if the parts aren’t used, for example). “That way you’re not on the hook for inventory that sits idle for too long,” says Rafdahl.
Create customer agreements. One of the best ways to lower procurement costs is to avoid over-buying in the first place. It sounds simple enough in theory, but the situation can change quickly when a large purchase order from a brand new customer throws the procurement department into a tailspin.
“It’s not uncommon for a company to be so excited about securing a large client that it overlooks the importance of establishing a mutual working agreement with that new business partner,” says Rafdahl. “Without detailed rules of engagement for both parties, significant inventory investment could sit idle for months.” Payment for the large contract could extend beyond what was expected, for example, or misunderstandings and tensions could affect the budding relationship.
The problems exacerbate when large customers expect your firm to carry specific inventory on their behalves. To avoid challenges related to such arrangements, Rafdahl tells buyers (and/or the salespeople, engineers or other involved parties) to hammer out the written customer agreements before procuring the related products or services.
When implementing any of these three “Cs,” Rafdahl says it’s good practice to get other departments, managers and key staff members involved in the process. Doing this will ensure the best possible return on investment and most impressive cost savings. “Don’t go it alone,” he cautions. “Get a sense of what’s going on company-wide – particularly when it comes to supplier consolidation strategies – build a case around the cost reductions, and keep everyone informed on the benefits of the initiatives.”
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