For those in discrete manufacturing, one of the most widely accepted truths is that continued cost reductions are vital for both success and survival. Organizations continue to push their supply management teams to find new, innovative ways to reduce costs and protect profits. Traditionally, the feasibility of year-after-year incremental cost reductions has been called into question. Is it actually possible to achieve endless reductions, all while maintaining value, mitigating risks, and streamlining processes?
Some industry veterans say no. The current belief system is that for all organizations, cost reductions eventually have to slow down; at this point, it will be up to supply management teams to find different ways to create value. But is this founded in reality? The answer is that it depends.
Debunking the “Limited Cost Reductions” Myth
First, let’s establish the should-be obvious. It is, of course, impossible for organizations to diminish their cost to $0. But basing the aforementioned argument on this fact is too literal a stance to constitute an industry-wide shift in priorities and goals. Instead, we need to think more figuratively and consider the idea that there are always new ways to cut down on costs...you just have to get creative and utilize the right resources.
Take, for example, the common practice of supply disruptions and price gouging. It’s standard for suppliers to take advantage of market volatility to raise prices as high as possible. That way, once the natural price erosion process kicks in, they’re starting from a higher price point and, as a result, are able to squeeze extra spend from their buyers for longer periods of time. To complicate matters even further, most companies tend to launch new products without placing enough of a focus on cost, which inevitably becomes crucial when competition increases and price becomes a prime differentiator in the market.
In this case, after your organization has utilized every standard practice to reduce costs, you might assume that the final price, albeit more than usual, is the “best” you’re going to find. It’s at this point that supply managers might indicate that further cost reductions are impossible and that the only available avenue of recourse is to provide value in other parts of the supply chain.
This method of thinking is representative of the traditional approach, but with new technologies and solutions available, there are other ways of further reducing costs. The key is to harness the information overload and turn mountains of data into specific predictions and actionable recommendations. AI-powered supply management systems provide a holistic overview of the market and notify users of best-price opportunities based on deals completed between peers and their suppliers. With this information, supply management executives have the information and recommendations needed to:
- Identify available opportunities to modify splits or rationalize costs across plants and suppliers
- Spot categories and parts that don’t line up with market pricing
- Identify alternate parts and suppliers that meet your form, fit, and function requirements
- Identify which market trends indicate what your next risk or opportunity might be
- Generate negotiation playbooks to set the strategy and determine the likelihood of achieving it
The same logic can be applied to scenarios in which alternative, previously unknown parts are discovered in the market, or when suppliers create new versions of components. These alternative parts or new versions may be cheaper, smaller, consume less power, or more environmentally friendly. With the right solutions, you can quickly determine where replacing your parts with new and improved ones could allow you to redesign your own products to leverage price compression benefits of new innovation.
Achieving More With the Right Resources
Supply chains have been flipped on their heads, and market volatility is here to stay. But waiting for the markets to calm down and return to equilibrium should not preclude or slow down your cost reduction efforts. Instead, now is the time to push past the tried-and-true and start looking toward the innovative solutions available to help achieve more.
- The Power of Data AggregationAre you paying more than your competitors or peers for the same component? If so, which negotiation strategies—or alternative sourcing […]
- The Role of Data in Sourcing SuccessIt's difficult to source and buy direct materials at scale. While simple transacting may seem easy enough to understand, the […]
- Protecting BOM Health & NPI With Portfolio MonitoringOrganizations are experiencing an increase in unplanned product redesigns, leading to missed product launches and missed shipments of sustaining products. […]
- Lessons for Navigating a Post-Pandemic Supply ChainTwo years ago, I wrote about what I had learned from supply chain executives trying to manage business continuity in the early […]