How to achieve transparency in supply chain for continuous cost reduction

Strategic sourcing and procurement groups often view continuous cost reduction efforts as unsustainable, or believe the only opportunities to reduce costs beyond the initial efforts would require reducing the quality of the product. In reality, over time more opportunities can present themselves to allow further cost savings without sacrificing quality.

As the economic landscape of the industry changes, and factors that effect the costs associated with direct materials used, there is constant potential for further savings. The procurement experts at Source One have a few best practices for achieving continuous cost reduction with downstream suppliers based on their experiences, and they've provided three methods for delivering cost savings by creating transparency in your supply chain.

1. Track annual price increases - While it is typical to receive price increases from downstream suppliers at the beginning of each new fiscal year, documentation justifying the price increases is still important to collect to ensure the increase is even. This gives you the opportunity to anticipate increases, mainly for direct materials, and be aware that your supplier will increase the cost of your goods.

2. Negotiate superficial cost increases - Procurement professionals possess quality negotiation skills as demonstrated during the sourcing process, but they can apply these tactics when suppliers announce the annual price increases year to year. If suppliers are aware that your business will want to discuss the price increases and won't simply accept the superficial cost, they'll allow you as the customer to negotiate savings.

3. Request a paper trail to ensure price increases are justified - As the customer, you can ask detailed questions and make requested that require the supplier to be more open about where the price increase comes from. If they can provide documents stating the price increase and you can match it to their increase passed on to you, your business can be confident the supplier isn't padding their margins with the new price for your commodity or service.

Source One Consultant Ken Ballard provides further details on the most effective methods for discovering saving opportunities regularly in his recent podcast Achieving Transparency for Continuous Cost Reduction. This episode is the first in it's series, as Ballard continues the conversation by discussing leveraging economies of scale, streamlining transactional and manufacturing processes, and decoupling value added services such as design and development from a product's unit cost. This episode is featured in Source One's Countdown to ISM2017 series, in anticipation of the international industry conference hosted by the Institute of Supply Management later this year. Source One is the exclusive sponsor of ExecIn, a subconference designed specifically for high level procurement professionals attending the event.