CPSM Blog

Cost management program strategies for purchasing

The cost management program strategy for purchasing section is at the core of the supply management leader's role. To find a seat at the Chief Officer table the Supply Leader must be able to understand not only the costs in terms of dollar terms but be able to hold her/his own in discussions with the CFO (Chief Financial Officer). For earlier posts on this Section 1-B-2 scroll down. It has 9 sub-sections some of which you are very likely to have dealt with in your jobs.

It is very likely that you have dealt with the question of "total cost of ownership" which includes the purchasing cost, installation cost, service cost and disposal cost. If your organization is strong on sustainability the disposal cost, mode and impact on environment can be an important consideration. Thus if two vendors provide comparable total cost solutions but one has a better sustainability element - you might decide to go for the more sustainable solution.

Included in this section are the concepts of value analysis and value engineering that are sometimes used interchangeably. However, value analysis is about studying existing processes and products relevant to what you are purchasing. For example, value analysis for the purchase of a low value bottle-neck item might reveal that the processes of purchasing sometimes can hold up production. Here, it might be better to just have approved vendors and allow shop floor managers to buy items using a fixed value P-Card.

On the other hand value engineering is connected with the development stage of the new product and innovation process. Here when you are turning a concept into prototype, value engineering can be useful. Thus the development team for a machine might consider a design that allows for easy access inside a machine for servicing and save service costs down the line when the machine is installed at a customer. Such value engineering at the design stage can greatly help in cost management. 

Defining and measuring supply management department performance

In this section, the methodology of measuring supply management performance is discussed. The section starts with a discussion of expectations from supply management from top management. Ideally, the top management should have a measurement of supply management expectation consistent with the company's mission. For example. historically Southwest airlines had the mission of "THE low cost airline" and you'd expect that supply management would have a similar aim.However, the website has the following mission :"The mission of Southwest Airlines is dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride, and Company Spirit". So if you lead the Southwest airline supply management you need to have a sense of the history and what is expected going forward. So along with "low cost" you are supposed to deliver "warmth, friendliness, individual pride, and Company Spirit. " You need to therefore make sure that you are able to measure the department's performance from the point of view of passengers, suppliers, individual department members- against the explicit website mission statement and the implied,historical low cost idea.

Once you articulate specific metrics of goals for the department,individuals users you need to measure how well you did. For example, if you want a 90% reliability of supply delivery date according to the delivery date in your  purchase order terms, you must have data that are able to show what the actual reliability number is. It's fine if you are at 85% in the first year and its great if you have 87% in the next year. In other words, the idea is to keep track of how well you are doing as per standard. So long as you are working towards the goal (85% moves to 87% in the second year against the target of 90%). it's fine. If you are short then you need to have a remedial action in place like giving suppliers more lead time that in turn must be supported by early requisition by the users. You don't need to beat every target , but you need to have an explicit plan and progress data as you keep trying to improve the metrics.

How do you set up cost management program strategies?

Cost savings is either reducing historic costs or avoiding additional cost increases through the use of strategies that are clear, sit well with realities of the organizations market, economic environment etc.
Value analysis and engineering is part of these considerations. For example what exactly adds value (to the onward activity of the buyers organization) needs to be understood by the supply manager. For example, the seller might be emphasizing how great their service is because their sales/service executive makes a plane trip every 3 weeks to see your production folks. This routine trip - may or may not to adding value to your colleagues in production but you can be sure that the travel costs are added to the suppliers price! Solution: make a trip every two months - just call or email otherwise.

Cost modeling is another interesting idea of this section.  Modeling involves creating a formula - a regression  or just a spread sheet that allows you to plug in changing variables and see what the impact is on your purchased product. Thus, if  you buy a product or service that depends on oil prices - and if you have modeled what the per barrel price does to the costing of your buy (say freight) then you know that today you'd need to plug in $100/barrel and see exactly what it does to your freight .....