Revisiting your spend with distributors is often one of the most fertile areas for savings opportunities, and by keeping six key elements in mind success may be close at hand. If we consider electronic component distributors as a test case we can identify the six primary stages to be needs assessment and strategy development, data gathering, data validation and preparation, supplier relationship development, negotiations and contracting, and implementation tracking.

A first step in the process that's often taken for granted is needs assessment and strategy development. During this phase we determine what the primary drivers and metrics for the initiative are. These can be as varied as ultimate cost savings or minimization of supply disruption, but are usually a combination of savings targets and risk mitigation.

To prevent supply disruption both valued incumbent vendors and possible alternates can be approached in order to define primary and secondary suppliers. We aim for a preferred supplier agreement at full annual volumes with SLAs, blanket orders, and quarterly releases or VMI agreements to maximize savings while ensuring consistency of supply.

After all parties are aligned with respect to goals, we can begin gathering the data from the engineering and procurement teams. The key here is to make sure you have all of the necessary information including supplier and manufacturer names, part numbers, descriptions, pricing, and historic annual volumes.

Reviewing the data for inconsistencies and building the market basket can often be one of the most time consuming phases of the overall process. Here, unit of measure issues often occur where components may be purchased in packs, cases, or individually, so each SKU must be converted to unit price each along with the tier the component is ordered on. Since parts tend to change rather quickly in this commodity group, validation of the data set against obsolete components and inclusion of replacements is also needed. To maximize savings while minimizing inventory levels forecast which indicate annual volume needs and determine desired stock levels must also be considered against blanket orders and release schedules.

Once all of the necessary documentation is in place, management of the supplier relationships becomes critical. During the sourcing initiative you must approach the supply base directly, not through online forms or directories. A close relationship with a representative will allow you to ask the supplier to identify generics for passive components and cables along with alternates for obsolescence components. You can also look for off the shelf components to replace comparable custom parts such as power supplies.

Negotiation of best in class pricing with the primary supplier becomes key after conclusion of the sourcing initiative. With the selected finalists you can look for sign-on bonuses and rebates along with tiered discount structure on the overall volume of business.

Perhaps the last phase is often overlooked by separate sourcing teams, but is part of day to day operations for most purchasing teams. Tracking implementation at the facility level is vital to ensuring projected savings are actually achieved. Implementation of tiered based pricing in ERP and electronic purchasing platforms to ensure compliance by buyers is the first step. And, by instituting product and pricing list, monthly reporting becomes possible to enable tracking of purchases from preferred and secondary suppliers.

It may seem overwhelming when considered together, but setting expectations, getting buy-in from all parties, and approaching each one of the six sourcing areas individually can achieve the greatest sustainable savings while simultaneously resolving supply chain bottle necks.
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Martin Przeworski

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