Spend Management Goes Upstream (Part 5 — Making it Real)

The journey to drive Spend Management insight upstream often begins with the realization that sourcing efforts can only do so much to reduce direct material costs by negotiating with suppliers. After all, the opportunity for price compression through better sourcing is limited based on the design specification made by others in the company. Once design and production decisions are finalized, it is challenging and time-consuming to "undo" engineering decisions which have already been made, even if suppliers (and procurement) have a strong case to make. For this reason, driving Spend Management information upstream early in the design process is critical.

To understand how the benefits of this approach can drive hard-dollar savings and other benefits to companies, let's investigate a few case studies which bring examples to life. You'll note that at least two of the companies that I describe below have already used Spend Management technology in the sourcing process to drive costs lower.

To begin, let's take the case of JLG, an industrial products manufacturer -- and an Ariba sourcing customer -- who augmented their strategic sourcing efforts with aPriori's software to examine costing tradeoffs in alternative product designs. In one case, by using aPriori, JLG was able to alter the design of an accessory tray mount for its lift booms by changing metal thickness, removing welds, and adding a bend, reducing product cost by approximately 60%. With another discrete manufacturer, aPriori's software enabled designers to explore cost alternatives for different plant designs and geographies, compressing the cost-roll up time for new products by more than 80% (not to mention driving costs lower).

In recent years, Akoya has worked with Caterpillar to reduce their expenditures by millions of dollars by identifying parts which appeared to be overpriced based on their feature characteristics. Before delving into this example, it's worth noting that Caterpillar has worked with a range of providers over the years on the e-sourcing and strategic sourcing fronts as well. According to an article in the Chicago Tribune the heavy industry giant used Akoya's software to "look at 2,500 cast parts such as elbows, housings, and pulleys that are used to make Caterpillar engines ... [finding] 250 appears that appeared overpriced." As a result of this initiative, Caterpillar was able to trim "5 to 7 percent from the overall cost of this family of parts".

The use of feature-based and mechanistic cost modeling is obviously a great fit within the discrete manufacturing sector. But certainly, any industry where a physical product is conceived of and ultimately created within the supply chain could benefit from cost modeling approaches such as these. Throughout 2007, I look forward to continuing to profile case examples of companies that are driving Spend Management upstream to impact cost and other variables including quality and performance.

Jason Busch

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