Tuesday, September 27, 2011

Working with suppliers to reduce cost

When many companies were vertically integrated there would always be discussions between
manufacturing engineering, quality and service functions with the design community. Manufacturing engineering wanted a product to be designed in a manner where it could be easily manufactured. Quality wanted a design where they knew it could be produced in high volume in a high quality manner. The service function wanted a design that if there was a failure to the product, it could be quickly and easily diagnosed and repaired or replaced using field replaceable units (FRU’s). The goal of all these activities was to keep the production and life cycle costs of the product they made down so they could be more profitable.

With the advent of outsourcing many of those internal checks and balances have gone away. That because very evident to me when I helped friends with a contract manufacturing company and saw the
way even just circuit card designs were being provided. Most needed to be "re-spun" or re-layed out so the design would fit on the circuit card and so high speed automated placement equipment could be used.This means that when you do high-value negotiations its important to have a supplier that will perform those roles. If all you do is look for your supplier to build or provide you with exactly what you have specified, many will.The cost of that may be far more than you needed to spend. If you can establish a relationship where you can work together to explore ways to reduce the cost a number of things happen.

First, you get the benefit of their experience in being able to review the design or requirement and question why certain expensive items are specified and whether they are needed. You get the benefit of them being able to look at the product, service or solution and what it would cost them to provide as it is currently designed and suggest ideas to: make it simpler to provide; reduce the amount of labor involved; and improve the quality. If you have a product that is difficult to produce you will pay for that in your product cost. The supplier can also look at design from a repair perspective to make sure that its able to be quickly and easily repaired.

If you only provided a list of functional requirements rather than a complete design being able to closely work together can allow them to understand the need for the requirements,and what the costs would be to meet those requirements. It allows for sharing of assumptions they included that simply may not apply and could be eliminated with the cost eliminated.

Most important, without the sharing they will go on to produce what you told them to with all the unnecessary costs built in to their cost structure and will be doing so according to their assumption of what you want or need. Since all those costs are real to them, your negotiations to reduce the cost becomes more difficult because to give you what you want, if they can’t change any of those requirements, the cost reduction must come from their profit.

If you were to work with the Supplier from the beginning and listen to them what you should get is a product, service or solution that costs you less. It’s a win for you and it’s a win for them as while the cost has been reduced it hasn’t impacted their profit. By having a product, service or solution that costs less from the beginning,the need to reduce the cost should be less.When you do need to reduce cost in the future you can work with the supplier to identify other potential ways to reduce the cost that gets you what you need that may not impact their contributions to overhead and profit.

In the end if you can’t find a way to reduce the cost you can still go after their contributions to overhead and profit. That negotiation may be a little easier because prior to that point those weren’t already impacted by prior reductions. If the supplier helps you win by helping you reducing your cost, they shouldn’t lose.