Finding Untapped Savings Opportunities

Now that we have passed mid-year, most organizations are deep into business plan development for 2013, with purchasing being asked to identify savings opportunities for the upcoming year.

A commodity-by-commodity review of company spend can often times turn up untapped, easily implementable savings.
 

To start, take the time to write down the questions you should be asking, about each commodity in your spend, that will help you identify which commodities have a savings potential.
For example: Answering no to some or all of the following questions is a strong indicator of such low hanging fruit:

• Are there ample suppliers in the supply base to generate pricing pressure?
• Do you receive commodity specific detailed cost breakdowns from suppliers?
• Do you have knowledge of the manufacturing costs of the products being purchased?
• Have robust financial analysis been performed when sourcing new parts/products in this commodity? Have the new costs/prices been compared to historical?
• Have costs for design changes been analyzed?
• Do the buyers have the time and skills to analyze costs and pricing on this commodity?
• Have non-piece price total cost of ownership (quality, inventory, shipping, packaging, testing, etc.) been reviewed?
• Are there any inhibitors to changing sources?
• Is there a cross-functional process for strategic commodity management of the commodity?
• Are cost reduction ideas obtained from suppliers, evaluated and managed to implementation?
• Do your buyers frequently review the suppliers manufacturing processes with the objective of understanding manufacturing costs and identifying cost reduction opportunities?
• Are the practices being used to control costs on this commodity as robust as what you have experienced in other companies?

Once completed ask the questions for each of your commodities. Prioritize commodities for further analysis/review based upon the answers generated.

Five Top Tips for Program Team Negotiations, by Jeoff Burris

When we consider negotiations we often think about discrete issues that occur and need to be resolved and put behind us. However, frequently we are members of a project or program team that is responsible for delivering a set of objectives.

Take for example an automotive supplier that has won a major business award with a customer on a new vehicle that starts production in 2-3 years. Over the course of the 2-3 year period between when the business is awarded and the start of production, the supplier and customer will face a myriad of issues covering design content, timing, cost and delivery. A common rule of thumb is that 70% of the cost will be determined in this design phase. But will this pricing ultimately favor the buyer or the seller?

Before I lay out the Top Five Tips for getting the pricing that favors your company’s interests, let’s consider the key differences between the discrete negotiations and the new business award:

• The new program negotiations will occur over years, while the discrete negotiation usually lasts from minutes to days.
• Both the customer and the supplier involved in the new program negotiations will have multiple personnel involved from different functions within the companies. Oftentimes, individuals will rotate in and out of the project due to position or responsiblty changes, phase of the program development, etc.
• Functional objectives will conflict due to each team coming from different functions within their company.
• Differing approaches to negotiations by all the individuals involved in the process.
• The negotiations will occur face-to-face, via email and on the phone.

Whether you are on the buyer or seller side of program team negotiations, following are the Top Five Tips:

1. Have the better structured approach, one that weaves negotiation strategy with good program management processes. For example, does the other side's program management methodology create gateways that can be used to your advantage as the negotiation deadline nears?
2. Have a clearly defined scope of work that identifies yours and the other team’s roles and responsibilities for the program/project. A good scope of work that has been agreed to by both parties can be used as objective criteria to help resolve (and prevent) many minor issues.
3. Understand the key interests and measurements of your team and the other team. Remember, the best time to confirm the other party’s interests are when there are no major issues on the table.
4. Identify a team member to be responsible for negotiation issues. We strongly recommend one individual on the team be responsible for commercial issues and have the ability to involve others as needed.
5. Have frequent internal team meetings to reinforce and review your team’s objectives and key metrics. You want to be better organized than the other party at every step of the process.

In addition to these Tips, remember the keys to any successful negotiation are Power, Preparation and Aspiration. Since Preparation is key to improving Power and Aspiration, always take the time to Prepare.

Want to learn more? Click here for details on APD’s Negotiations for Program Teams Training Course on March 8, 2012.

Using Contracts to Manage Capacity in this Up-Down World By: Dan Sharkey, Brooks Wilkins Sharkey & Turco PLLC

As Yogi Berra said, “Predicting is hard, especially about the future.” Suppliers would love slow and steady growth, but for the past few years, volumes have fluctuated wildly.

Contracts can help suppliers manage volume uncertainty. Because demand for vehicles is inherently unpredictable, few automotive supply contracts list a specific quantity. Under the law, however, contracts must have a quantity, unless they are expressly tied to customer requirements. And if you provide an estimate of volume toyour suppliers, you cannot later demand an amount “unreasonably disproportionate” to that estimate.

Quotes often condition pricing upon actual production volumes being with in a certain range of forecasted volumes. But most terms and conditions of purchase say the opposite: that volumes are not guaranteed, but prices are, regardless of volume.


While the legal landscape is far from certain, buyers have been faced with suppliers
attempting several ways to address volume issues in contracts:
1. Tie prices to volume ranges (e.g., require price adjustments for anything beyond plus or minus X% of projections);
2. Index variable costs (e.g., raw material) to market costs;
3. Treat any dedicated initial investment (e.g., capital and equipment) separately, akin to tooling, or amortize it over the lowest possible volume;
4. Communicate to sub-suppliers volumes committed to the customer, and lock those same volumes in with them;
5. Raise the floor: reserve the right to not only increase prices, but also reallocate capacity if forecast volumes don’t materialize; and
6. Lower the ceiling: document maximum capacity, and don’t promise a volume that you or your suppliers can’t reach.

Purchasing professional should be on the look-out for these attempts, and prepared to deal with them. While most buyers try to reject them, because so many suppliers are now demanding capacity protection measures, these discussions are becoming more difficult than simply saying no.

Before you send out your next RFQ, think about capacity, and what will happen if volume is twice, or half, what you anticipate. With see-sawing volume, capacity issues in the supply chain will only continue. Whether a rebound or a nosedive comes next, thinking through your contracts with your suppliers can only help your company. Dan Sharkey is a partner with Brooks, Wilkins, Sharkey & Turco, PLLC. He can be reached at 248.971.1712 or sharkey@bwst-law.com.

Want to know more? Join APD and Dan Sharkey on February 29, 2012 for Succeeding in the New Competitive Landscape, a business and legal briefing, to learn about challenges facing buyers and sellers and strategies to succeed in the changing landscape. Click here for more information and to register.