Stocking programs. Many suppliers will stock items at their location or expense, knowing you will take the items at some point. They like the arrangement because they can reduce costs by buying in volume, and they are virtually guaranteed they will sell the item. I worked with an organization that has a very large and mobile workforce. Each vehicle requires timely preventive maintenance.
We negotiated with the local auto parts store to hold all the filters, belts, fluids, and small consumable items for the vehicles in stock. When the time came to perform an oil change, the local supplier kitted all the necessary items and delivered them to the shop. There was no need for the organization to buy, store, and maintain hundreds of filters, belts, and motor oil.
Vendor managed inventory (VMI)/Consignment: I am an advocate of VMI, or consignment, programs. Essentially, they shift the responsibility to the suppliers, rather than taking valuable resources away from me. The main difference between the two is ownership. With VMI, you own the inventory once placed in your possession. With consignment, the supplier owns it until you use it.
Service agreements. I always found negotiating service-contract agreements to be uncomfortable for both parties. Sometimes, the provider thought they were doing the most wonderful job, while we thought they were nuts. Sometimes, the situation was the other way around. I learned firsthand to stay away from long-term agreements. If things aren't going well, a shorter-term contract is easier to terminate. If things are going well, a renewal is easy to execute.
The reason for entering into service agreements rests on two items: expertise and resources. I used outside services because either I did not have the internal skill set to execute a task, or I didn't have the resources to manage it. In the case of service agreements, the old saying, "You get what you pay for" is a reality. Make sure you have a solid agreement in place, where both parties clearly understand the services, expectations, accountability, and repercussions of failure. When considering service contracts, first look at tasks that in-house staff can perform, rather than contracting it out.
These strategies are just a few managers can consider to reduce procurement costs and assure the lowest acquisition cost. Negotiating the price is still an option, but it is not the means to the end. I have seen some clever and imaginative ideas to reduce costs, but procurement has the largest piece of the pie. Remember, partnering with suppliers produces a larger return than beating them with the price tag.
Andrew Gager is a principal consultant with Life Cycle Engineering. He has more than 28 years of manufacturing and facilities experience, ranging from warehousing operations to plant management. He is a registered CMRP, CPIM and Six Sigma Green Belt, and he is formally trained in change-management principles.
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