Buyer Looks Beyond Price to Reduce Cost

In real estate - "it's location, location, location". In politics - "it's the economy stupid!". When it comes to cost containment, "it's price, price, price" right? Well, not exactly. Purchasing professionals that suffer from price bias often limit their company's ability to control costs. Take the following example of a manufacturer that turned an 8% price increase from a supplier into a 20%+ cost reduction.

I was once asked to assist the materials manager of a large manufacturer in negotiating a new corrugated box contract. The supplier was proposing an 8% increase. During my first meeting with the materials manager (let's call him Bob), I learned that Bob's goal was to reduce the proposed increase from 8% to 4%. Bob had done his research and explained to me that rising raw material prices in the corrugated box making industry likely justified the increase, and, that he had forced this particular supplier to absorb increases in previous negotiations. In his opinion, negotiating down to a 4% price increase would be a victory, and could easily be achieved by threatening to move the business to another supplier. Incidentally, Bob felt my involvement in the process was entirely unnecessary.

So what was the problem with Bob's approach? Simply put, his fixation on the amount of the proposed price increase blinded him to several opportunities. For example, Bob overlooked the fact that corrugated boxes were only one component of the company's overall packaging spend, and that the supplier providing the corrugated boxes also supplied several other packaging items. In addition, he failed to review how boxes and other packaging materials were actually utilized in the plant. In short, Bob knew a lot about buying packaging, but not very much about how packaging was being used.

I was able to convince Bob to modify his approach. Together, we not only eliminated the 8% corrugated increase, but saved the company an additional 15% on overall packaging costs. Here are the five steps we followed:

Set the Goal: Rather than settling for reducing a proposed corrugated increase from 8% to 4%, we targeted an overall savings on packaging of 20%. I knew that the company had not engaged in a comprehensive packaging review in over 2 years, and my experience told me that significant savings opportunities were likely.

Share the Goal with Employees and Suppliers: Engaging employees and suppliers to uncover cost saving ideas was a key element of our approach. Bob and I spent several hours in the plant reviewing how packaging materials were used and asking employees to share their cost saving ideas. In addition, we invited the two current suppliers of packaging materials along with two additional suppliers in for separate meetings and shared our 20% cost saving goal with them. Each supplier was provided the opportunity to audit packaging areas and recommend improvements. We made a point to assure each supplier that any unique, cost saving ideas they shared with us would remain confidential from their competition. This was critical to motivating suppliers to provide their best ideas and resources.

Test & Validate: Employees and suppliers helped us develop several ideas we were confident could work. For each idea, we wrote a specific set of performance criteria that had to be met for the idea to "pass" and shared it with employees responsible for that particular packaging function. For example, one department used a plastic film to protect parts from dirt and scratches during shipment. A supplier recommended an alternative plastic that was 33% thinner with similar protective characteristics that would save the company $20,000 annually. Employees in the department helped us write a performance specification to ensure the new plastic provided equal or improved protection to the current plastic.

Establish a Trial Period: Once an idea and/or material had been tested and approved by the employees in the plant, a full trial order was placed with the selected supplier. We targeted an order size that would allow for 30 days of testing. If the trial order performed consistently to the written performance criteria over the 30-day period, the new product/supplier was approved and an agreement was signed.

Monitor, Measure, & Report: A monthly reporting format was developed to ensure that the performance and cost targets we had set were being met or exceeded consistently. Monitoring, measuring, and reporting gave us an opportunity to catch any below par performance, take corrective action, and ensure that all participants in the process were aware that their hard work was paying dividends.

The impact for Bob and his company of broadening the scope of cost reduction beyond "price, price, price" resulted in reduced costs of over 20% within the packaging category. Bob was recognized and rewarded for his contribution, and best of all, he was able to apply his new found skill in other critical cost areas.

Please contact us if you have an area you'd like to review for cost savings. We'd love to help!