Reducing Cost of Goods Sold through Strategic Sourcing
In today’s world of economic flux, global political unrest, and flash-in-the-pan technologies, it is difficult to strike the appropriate balance of factors your company can control and factors your company can’t control. For direct spend and engineered products, the factors within your control can seem few and far between. Companies toil to stay ahead of the market, to innovate, and to deliver finished products that perform well with customers. And before a product ever gets to market, so many hands across so many different departments have to touch it – increasing your costs and risks. The cost of goods sold (COGS) must be controlled to sustain profitability – but how can you control such an unruly element?

When cost savings is the prime directive, Procurement shoulders the heavy load of responsibility.  Using strategic sourcing techniques on indirect spend categories, companies have been able to realize cost savings and secure their supply chain operations. However, where the indirects supply base can be rationalized and pricing dynamics controlled, the marketplace for direct materials is much more difficult to control. For engineered products, spend analytics and going to market (RFx design, bidding processes, etc.) cannot deliver sustainable savings and increased profits.

The good news is that Procurement can tackle this problem by working hand-in-hand with Engineering to address matters of product design and assembly. The bad news is that these two groups don’t speak the same language, and seemingly don’t have the same goals. Procurement groups can struggle to gain traction with engineering groups when procurement’s focus is too much on cost. Obviously, Procurement’s focus on cost as a primary driver is appropriate. And stemming from rigidity or siloed thinking, Procurement groups may effectively live or die on the basis of costs savings alone.  If the organizational model and company goals all point to cost savings by any means possible, then Procurement groups may find “low-hanging fruit” by cutting corners in engineering and design. It’s easy to see how this creates an environment where Engineers see Procurement as “bean counters” who have little regard for the integrity, efficacy, and marketability of an end product.  
As with many things in business, a balanced approach wins out. Especially for direct spend, the best Procurement groups also focus on supplier financial viability, supply chain visibility, and ultimately end product quality – which naturally means better collaboration with Engineering. Procurement groups must work to understand Engineering’s point of view – why was the product designed this way? Why this material for this component?  True collaboration requires both sides to come to the table with open minds and an earnest desire to find common ground. Some companies have attempted to solve these issues through their hiring practices, specifically by creating hybrid positions such as “procurement engineer” or “sourcing engineer.” Such cross-pollination can be effective, but does not guarantee sustainable results as individuals settle into roles and the status quo takes hold.

The most reliable way to ensure sustainable results? Find the right strategic partner with a history of delivering results and advancing operations. 
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Ken Gaul

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