In today’s globally interlinked world there are a lot of possibilities to decrease costs. One important cost position are the supply chain costs. You can reduce these costs by reducing the number suppliers, by renegotiating existing contracts, using tender processes and other techniques. However reducing the costs should go in line with reduced risks. Let’s have a look at the options in more detail:
1) ABC-Analysis of suppliers
With this method you are dividing your suppliers in different categories: e.g. ranked by highest turnover with your company, ranked by critical suppliers for your company, etc. Then you group all your suppliers according to their group-of companies, so that you have a good picture about which companies are belonging to a certain group of companies. Once you got a good overview about your supplier-structure, you are able to reduce the number of suppliers. Some could be whitelisted and become preferred partners:
Reducing costs: Reducing the number of suppliers in line with your strategic goals will lead to reduced costs.
Reducing risks: A diversified supplier-structure may help to reduce risks, as you wouldn’t have to rely on a small number of suppliers.
2) Tender process / Renegotiating
When looking for new suppliers there are several possibilities to find the best bidder. One possibility is to use an online platform and to invite a limited number of suppliers. Then you start several bidding rounds and the best (cheapest) wins. A second possibility is to initiate a normal tender process and have your suppliers send in their offers. Once received you have to evaluate the offers and choose the best one – or start a second negotiation round with the best 2 to 3 bidders. Another possibility is to renegotiate existing contracts and trying to reduce costs,
Reducing Costs: A tender process helps definitely to reduce the costs.
Reducing risks: Risks are avoided if not the cheapest but the best bidder is chosen.
3) Operational cost reductions
You can start with operational, process driven cost reductions in your organisation. These cost reductions are not initiated by the procurement department, but by the operational departments. They are reviewing their processes and be more cost efficient – this will lead to cost reduction by reduced volumes needed.
Reducing costs: Driven by operational departments through reduced volumes.
Reducing risks: as long as not overly eagerly OK.
4) Share the same value – Approach
This rather nonfinancial approach would look at avoiding the risks of your supply chain via making sure that all the companies of your supply chain are following your principles and rules. In the end your suppliers have to accept your values and follow your values. If not, you could be held liable for violations of your principles. Often this could lead to Public Relation issues.
Reducing costs: At the beginning higher cost, but could lead to avoided even higher costs in the future.
Reducing risks: A clear strategy to reduce company risks.
All those four methods lead to reduced costs and often also to reduced risks for your company. In order to achieve these savings the project needs to be managed professionally by your internal department or external consultants.
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