Taking Control of Cost Management for Engineered Direct Materials

This afternoon, I'd like to welcome Akoya's Co-Founder and SVP Brett Holland to Spend Matters. In this post, Brett shares his thoughts on how companies can better understand direct materials cost management.

In our last post, we discussed the trend of cost management within the engineering group and the impact this will have on procurement and supply management professionals. As we stated, more focus on reducing costs for highly engineered, custom parts will put the spotlight squarely in the procurement group. If this is already happening to you, there are solutions that can help. If you have not been impacted by this trend, these solutions can help you prepare and get ready for this increased attention on the expense bucket of direct materials. This post briefly reviews the problems procurement and supply management have faced in the past when trying to get their arms around cost management of direct materials, then introduces the analytical solutions available today that can be used to help save time and money when dealing with direct materials.

The Problem:
In the past, there have not been very good ways to systematically find cost inefficiencies and take action on them within engineered direct materials. Companies have developed cross functional teams, conducted six sigma projects, brought in consultants and domain experts, but none of them have had the direct access to the critical data and the analytical tools to dissect it so they could have a clear picture on the factors that drive cost inefficiencies in the direct materials across the organization. On top of that, none of the traditional procurement tools offer much help. The market for these engineered parts is not efficient enough to rely exclusively on bidding processes to drive out the cost inefficiencies. Spend analytics packages do not have the level of detail in the data that they analyze to draw out the design and manufacturing cost drivers. And, activity-based costing models are not well suited to drive an organization toward the greatest opportunities (like trying to find the biggest oil reserves by drilling one well at a time).

The Solution:
Today, analytical solutions are available for product cost management that can take the data that is within your control - financial, purchasing, supplier, and manufacturing - analyze it, and present you with a highly accurate list of parts that have potential cost savings. Additionally, these analytical solutions provide reasons why these savings opportunities exist and potential actions to take to capture them. The analytical solutions can then be complimented by activity-based cost models, risk management solutions, supplier relationship management solutions, and eProcurement packages that help execute on the actions.

Today's product cost management analytics work by drawing out the elemental factors within the part and its manufacturing requirements that drive the cost. They then analyze this data to determine commonality and comparability, and can predict target costs. They augment (and sometimes correct) this predicted cost with data that determines the factors that may contribute to cost inefficiencies (you can think of it as the evidence that makes the case). From this combination of approaches, these analytical solutions can accurately assess which parts are good renegotiation candidates, which parts are good resourcing candidates, which suppliers are best at each part, and other actionable findings.

Let's take a look at how best in class organizations can incorporate the new crop of product cost management analytics into the mix of existing solutions and processes to solve specific problems around cost management for engineered direct materials.

First, let's look at cost takeout:

cost takeout

This is perhaps the most simple illustration, but it points to a real need that exists and a problem that gives many buyers heartburn on a daily basis. As I offered in the posting last week, a lot of the pressure on buyers is coming directly from the product groups and design engineers themselves, not just the ranks in the procurement organization. I think the real benefits here are that 1) the analytics help reduce what is in the buyer's inbox rather than increase it, and 2) they grant the buyers real wins on a consistent basis.

Next, let's look at strategic sourcing:

strategic sourcing

For strategic sourcing, the difficulty has come from lack of visibility into all of the options. Then, when you do have that visibility, it is critical to get a clear line of sight into the best option. As I discussed with Michael Lamoureux last week, you can see that the next logical step is optimization of the supply chain. The data and analytics exist today to get the clear line of sight, and position you for supply chain optimization from the perspective of the product.

Finally, a look at strategic cost and category management:

category management

One of the clear problems that I have seen in almost all of the organizations I have talked to in the past few years is lack of visibility for direct materials across product platforms and divisions. It is hard to learn from the best practices of the top performers in the organization when you don't have the data available to articulate it. Strategic cost management efforts have made great strides for organizations, but they are almost always limited to finding local optimums, not global ones. The benefit here from the new analytical solutions is that, like what spend analytics can do for the catalog-able items, they have the scale to find the global optimums in the engineered parts.

What do I think is the best thing about the new crop of product cost management analytics? You don't have to be a design engineer to use them. In fact, they are tailor made for procurement and supply management to use in order to lead cost management efforts for engineered direct materials. Another great thing about these solutions? They are non-intrusive and require very little resource effort on your part to set up. Data is gathered for you and supplied to the analytical engine, and it crunches the data and returns opportunities.

Analytics have been applied very successfully in other industries, but until now, not in for cost management of engineered direct materials within manufacturing. Even retailers have utilized analytics to figure out pricing and inventory allocations. Now there is a solution that can help you. Whether you have already been asked to reduce the cost of direct materials, or simply want to stay ahead of the curve, tools exist to help.

I would love to get your feedback on this post and welcome the dialog.

Brett Holland
SVP Product Strategy, Akoya Inc.

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