As the global geopolitical horizon remains unclear, the reality of tariffs is an ongoing topic of conversation and (over?) analysis. While the understanding of the tariff impact on near-term financial performance is important, there are even more critical questions you should be asking:
- How do we know if we’re buying our direct materials at the best total cost?
- How do we control our costs when we transition supply to a new supplier (in a different region)?
- Is this an opportunity to achieve a step-function change in our direct material cost structure?
In this edition of Claudia Perspective, we’ll look at each of these strategic questions and offer some insights, based on our experience, on how you can turn this near-term challenge into a strategic advantage for your company
Question 1: How do we know if we’re buying our direct materials at the best total cost?
We frequently see companies respond with “Of course we are! Our Purchasing/Sourcing organization quotes all parts in accordance with our company policies, and they report savings every year!”
Unfortunately, it is almost always not the case. As a matter of fact, it is rarely the case, at least across the board.
Have you heard this phrase? “Three quotes and a cloud of smoke”
Purchasing organizations are busy: supply shortages, quality issues, new product development, account payable issues, etc. To “survive,” most Purchasing organizations get 3 quotes, decide, and go with the source that meets the required timeline and has an “acceptable” cost.
Bundled awards, cost trade-offs between product lines, and engineering-specified parts from specific suppliers all reduce the cost efficiency for your P&L. Add in the infamous year-over-year (YOY) supplier cost reduction requirements that align with how the Purchasing organization is measured, and your company is almost certainly NOT buying your materials at the best total cost.
You’re almost certainly buying at a known acceptable cost and funding your own YoY cost reduction!
Question 2: How do we control our costs when we transition supply to a new supplier (in a different region)?
Transitioning parts from your current supplier to a new supplier, especially due to a short-term need, is expensive. You need to qualify the supplier, purchase new tooling, obtain sample parts, and then find engineering resources to test and validate them. This is expensive and time-consuming.
What if you could leverage your supply base to not only do part testing and validation for you (yes, it may not be easy for your engineering organization to accept this!), but what if they could also help offset some of the internal costs as well? We have real experience and results in achieving this for our clients throughout our project work, and have surprised many executives and engineering organizations along the way.
Question 3: Is this an opportunity to achieve a step-function change in our direct material cost structure?
The answer is YES!
While the pressure to take action to address near-term cost pressures for your business is real, it is also an opportunity to systematically improve your supply chain to achieve even better financial results that align with your strategic plan.
Given the challenges your Purchasing organization is facing and the cost to transition supply to new suppliers in response to a dynamic geopolitical situation, using this opportunity to ensure that you are sourcing from the best total value region and suppliers and transitioning parts in ways that manage costs is what will separate you from your competitors and have your supply chain be a strategic advantage.
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Claudia’s rigorous and proven 7-step process will enable your organization to engage with the global supply base and have the data to confidently know that you are spending your direct materials budget efficiently and effectively. Beyond hard cost savings that are visible in the P&L, we have delivered non-price savings, including Transition Assistance and no-charge supplier-performed testing and validation. We’ve also been in your shoes; we’ve transitioned supply in order to achieve cost savings, while also managing supplier risk and continuity of supply.
