One of my clients retained me to see if I could find cost reductions in their second tier of suppliers. These are suppliers that are significant but do not provide my client’s vital materials. The suppliers had been somewhat ignored over the past year due to staff turnover and the expectation for cost reduction was low. I met with the first two today and presented an approach that included increased volume through supplier consolidation; increased visibility through vendor managed inventory; a high expectation for shipped on time, product quality and service; and increased communication through use of blanket purchase orders, quarterly reviews and frequent visits from supplier personnel to be sure that service levels are being met.
The benefit to my client would be reduced inventory, increased service levels, reduced stock outs, reduced numbers of invoices and overall cost reduction. The benefit to the supplier would be much higher volumes, a sole source relationship, much longer planning horizons and potentially a broader range of product offerings.
The suppliers responded with estimated cost reductions of 10% to 18%; much higher than I expected!
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