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18 December 2017

Major Cost Savings on Smallest Product Purchases

They must be able to respond to ever-changing customer demands and deliver tailor-made products rapidly, at increasingly lower costs. One of the ways in which companies can meet these requirements and improve efficiency is by optimizing their supply chain. This involves the purchasing and management of components required for the production process.

From raw materials to parts required for machine maintenance, buyers are constantly looking for lower prices and ways of consolidating their supplier base. Most companies choose to focus primarily on the largest, most important suppliers. Understandable: actively maintaining relationships with suppliers only seems interesting when purchased quantities are large. For relatively low-cost items produced in smaller quantities, this often doesn’t seem to be worth the effort. Nevertheless, there are huge potential savings to be found in the ‘tail’ of
the purchasing portfolio.

Experience shows us that ten to twenty percent of the least-bought items are responsible for around sixty to seventy percent of the hours spent on purchasing. This is, for example, because there are no fixed agreements with suppliers, or because stocks are not monitored or employees do not know where to order certain items. Therefore, potential savings exist with regard to pricing, but especially in ensuring availability and improving logistics processes.

Optimizing the supply chain
How can companies best optimize their supply chain? There are two elements to consider. When it comes to the first element: the supply chain for machine maintenance components (MRO: Maintenance, Repair and Operations), product availability is a critical point. Experience shows us that repair and maintenance technicians often have no idea which materials are in stock or where these can be sourced. Technicians are confronted with thousands different slow moving products that need to be ordered with more than a hundred different suppliers. The technician needs to regulate the order and follow up with suppliers before he is even able to start with maintenance. A way to optimize the MRO supply chain is by monitoring supplies, so that it is always immediately clear which materials are in stock and which items still need to be ordered. Besides that, it is useful to efficiently structure the warehouse in such a way that materials are readily available to engineers and that drawing up an inventory will be done in a more cost efficient manner.

When it comes to the second component; supply chain of parts for finished products (BOM: Bill of Materials), it is important to have an insight into what is needed to manufacture a product and where these components are sourced. Finding and ordering low-grade product components often require multiple manual operations. If it is clear where products can be sourced, it is easier to determine which suppliers can best provide the materials required. Not only with regard to pricing, but also quality and delivery time. These insights make it easier for manufacturers to make sure that all the required materials are available during the production processes.

Time saving
Supply chain optimization is a time-consuming process. Understandably, many production companies are more focused on their larger suppliers. Nevertheless, every little screw or rubber hose that is part of a machine or a product to be manufactured is essential to the manufacturing process. Cost savings can be realized on precisely these low-priced products. This can be achieved by, among other things, negotiating a better price, improving material availability, and optimizing inventory levels. My advice? Outsource the ‘tail’ of the purchase portfolio to an added-value service provider. This third party is fully specialized in that part of the supply chain, allowing the organization to concentrate on key suppliers and products. In this way, companies may optimize the supply chain across different areas and realize cost savings, whilst remaining entirely focused on their core business.

Marc van de Ven

Marc van de Ven is Chief Operating Officer at MAG45. He kicked off his career at MAG45 in 2006, prior to which he earned a Bachelor’s degree in Business Engineering and a Master’s in Industrial Engineering & Management Science.