Ripley’s Believe It or Not, the Procurement Version: Cost Savings of 80%

- March 18, 2014 2:41 PM
Categories: Guest Post, Supplier Collaboration | Tags: ,

Spend Matters welcomes another guest post from Santosh Nair of GEP.

Charles Darwin’s statement “It is not the strongest species that survive, nor the most intelligent, but the ones most responsive to change” has never been truer in today’s business environment. Big changes in technology, industry structures, business models, consumer preferences, and global boundaries are altering the shape of every company. Some companies are thriving in this environment through ongoing innovation, whereas others are struggling to adapt.

In my experience, a critical success factor to innovation is incentivizing and empowering suppliers to share innovative value creation approaches with their clients. Many companies struggle to find this balance in their supplier relationships and are not able to use the untapped value of their suppliers to the max.

In a recent client engagement that GEP was part of, we worked with the client to segment their supply base. This exercise enabled us to identify a few suppliers who could be strategic partners for the client and could form a trust-based long-term collaboration partnership. One of these suppliers had a multi-million dollar business relationship with the client and provided several critical components. This supplier also had the capability to provide additional products to the client and expand their business. The nature of this relationship enabled us to incentivize and empower the supplier to explore additional innovation value drivers.

The mutually beneficial nature and expectations from the strategic partnership was explained to the supplier’s leadership team, who received it with enthusiasm. We conducted a joint brainstorming session, and the supplier submitted multiple ideas on value creation, based on their working history with the client. An internal cross-functional team screened these ideas and prioritized them based on their overall value, implementation effort, and long-term benefit.

The first of these ideas was recently implemented, reducing the expenditure on an item by over 80 percent. The client purchased plastic cases from the supplier to enclose a critical business product. Due to unique specifications and business criticality, these items were historically sourced from the supplier for approximately $100 per unit.

The supplier did not make high margins on the cases and supplied this product as part of a broader portfolio. The manufacturing process for the case involved machining of a large resin block to chip away at the block and create the case. This involved significant manual labor and also a lot of scrap material. The supplier proposed a new design and manufacturing process for the case, while retaining the core functional requirements. This process involved development of a mold into which liquid resin would be poured to create the case, minimizing manual labor and scrap.

GEP facilitated discussions with several client functions including Procurement, Marketing, Engineering, and Operations before formal internal approval was received on the new design and process. The client and the supplier invested jointly in developing a new mold and conducting trial runs of the new case. Within two weeks, the new plastic case was replacing the older version and the cost per case dropped by approximately 80 percent. The supplier did not mind the lower price since their efficiencies and margins improved, and the strategic partnership opened doors to other business opportunities with the client. So in this case, both sides truly benefited.

I’ve seen few companies that would invest the time and trust in developing such strategic relationships with their suppliers but the ones that do, realize long-term business benefits.

For more interesting thinking on procurement, visit the GEP Knowledge Portal.

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