Reducing material and purchasing costs through an annual buy program
October 9, 2007
Material is the largest cost component for stamping companies, but does not receive much management attention. An annual material buy program can help stamping plant managers make substantial cuts in their material costs and other costs associated with the purchasing department.
Material is the single largest cost component for stamping companies—about 50 percent to 60 percent of annual sales. This amount may vary depending on the extent and composition of secondary operations. Direct labor represents only about 6 percent to 8 percent of sales, but it gets the most management scrutiny because it is something everyone in the organization can see. Idle equipment and people standing around have maximum visibility.
Changes in material costs, however, can easily go unnoticed. Many buyers simply follow the mandate to support production requirements. They are left to their own devices, with little guidance in the form of a meaningful purchasing strategy, other than the usual humdrum of "best price, delivery, and quality." However, this does not translate to lowest cost, fastest delivery, and acceptable quality.
In most situations, management accepts material cost increases as something they have little control over. Management often fails to recognize that this is the age of the Golden Rule: Those that have the gold make the rules.
Stamping companies must master the art of using leverage to develop purchasing practices that actually reduce material costs. The major automakers and Tier 1 suppliers will not give an inch when one of their suppliers attempts to raise the price. They also insist on price reductions in each subsequent model year. Their indifferences are accepted without question because they are the customers and the stamping plants need the business as a means of survival.
Stamping job orders from the major automotive and truck manufacturers or the Tier 1 direct supply base usually are for products used on specific auto or truck platforms. In most cases, the plants receiving the orders can depend on that business for as long as the platform is in production, assuming customer service levels are satisfactory.
Although automakers fluctuate demand and the variation can be as large as ± 20 percent, it usually is substantially less. This creates conditions that are perfect for annual material buys to maximize purchasing leverage.
An annual material buy program can help you achieve just-in-time (JIT) material availability while minimizing inventories and reducing total procurement costs. As a stamping plant manager, you can achieve these goals by focusing on developing strategic trading partner relationships that strive to:
Before entering into an annual buy program, you will need to resolve several issues in advance with the vendor base. The ideal vendors are those that can meet your requirements and are flexible and responsive.
The first step in the process is to interview existing vendors to identify those that really want the business. Some of your interview questions should address the "what if" scenarios:
Upon completing the interview process, you can begin selecting the prospective suppliers that are the best fit for consideration as a possible strategic partner.
Click image to enlarge
Next you can review material categories, including those needed to meet production requirements, and other materials, such as toolroom, maintenance, and even office supplies. This will allow you to establish homogenous commodity groups for annual purchase agreements. The next step is to establish the criteria for determining annual buy quantities, such as history, customer order requirements, and sales forecasts.
Figure 1provides a process map of the detailed steps required to complete the material categories for products to be included in the annual buy program all the way through to the preparation of the bid package. It also provides a process map for qualifying vendors to receive the bid packages.
Holding a bidder conference with all of the prospective vendors in attendance gives each vendor an opportunity to see whom they are bidding against. Vendors have a good idea of what they have to do to compete with those in attendance. This heightened competition can help you achieve lower pricing on bids submitted.
The bidder conference also gives you another chance to reiterate vendor performance expectations, such as:
The objective of this purchasing strategy is not only to obtain the lowest cost for materials and supplies, but to develop long-term strategic alliances with the key vendor base. Perhaps one of the most prominent points to be made at the bidder conference is to advise that the lowest total cost bidder wins and will be guaranteed inclusion in the next annual buy, with special consideration, providing expectations are met. This adds an incentive for a bidder to have the lowest cost, as it provides the foundation for a longer-term relationship between you and the seller.
Click image to enlarge
Consolidating the vendor base and substantially reducing the number of purchase orders with purchasing arrangements reduce the work load of the purchasing department. A study was conducted at a company that implemented an annual purchasing initiative to determine the potential savings.
A functional load analysis was developed for the purchasing department to determine the amount of time required for the various tasks performed by its personnel.
Figure 2shows how the purchasing department personnel's time was spent before introducing strategic sourcing methods, such as an annual material buy program. After strategic sourcing and the application of annual purchase agreements, the work load in the department decreased by 60 percent, with a substantial reduction in time required to obtain quotes and issue purchase orders.
This decrease included less time selecting vendors that could meet quality and delivery requirements and less time devoted to quality issues and expediting, as well as other time-consuming elements associated with sales coordination, processing acknowledgment, and sales support. Strategic sourcing allowed more time to be devoted to vendor management activities and monitoring of the annual buying programs.
In addition, using your purchasing leverage through strategic sourcing with annual buy protocols can achieve about 5 percent to 10 percent reduction in material costs for your company.
Finally, streamlined purchasing processes decrease the number of employees required to support purchasing functions, which can save hundreds of thousands of dollars in payroll costs, depending on the size of the department. It also provides management with the option of reassigning resources to activities with higher strategic priorities.