Total cost of ownership models require some brainstorming with other functional areas.

Abdurahman Alatas

Abdurahman Alatas

Procurement | Sustainability | Green business building | McKinsey & Company

Published Oct 27, 2018

If you working in a mature company with years of contract history and millions of savings, have you ever think that if this years i can achieve 10% of discount, can i achieve again next year? am i able to reach or even exceed that savings percentage? especially when you deal with OEM suppliers, how can you ask for a discount every year when the global commodity price and labor price is always increases?

Let's take a step back and think about Procurement savings process. Simple example of cost savings is that if we buy 1000 kg of an apple by 2017 with 10$ price/kg, and in 2018 we can buy 1000 kg of an apple with 9$ price/kg means that you achieve cost saving of 10% of apple price, then in 2019 your benchmark is 9$ and not 10$ for apple price.

With above example, procurement professional usually will be challenged with >10% cost saving from stakeholder, without even thinking of whether the global price of an apple is increases or not. There are some strategy that i want to share on how we deal with that cost savings challenge

1. Global Sourcing with category management implementation : this method is suitable for multinational company with many branches and/or operating area. With category management, company can delegate person to specifically adhere the category of specific commodity (based on company needs), and doing market research on best way to get that product all over the world, also with this method the volume of all area can be combine to achieve better pricing for the company.
2. Design to Cost process : this method is suitable for manufacturing company with their own design and product range, procurement is involved in the first phase of product creation (R&D process) and actively looking for the most efficient raw material / parts of the product (example : instead of using unique fastener for 5 type of product, company uses 1 replaceable fasteners for all 5 product), with this method procurement will be able to get better contract with supplier in terms of price and delivery.
3. Stakeholders brainstorming : if you look at the example given above with purchasing of an apple, have you ever think about whether the company/customer really needs apples instead of other kind of fruit? what if actually the stakeholders need any kind of food that healthy and can be uses as a snack?. With stakeholders brainstorming, procurement will be expected to know what the actual needs of a company instead of only focus on getting the best price from the market.

There are many other ways for cost saving depends on the needs, and most importantly all procurement professional should change the idea of a procurement only as a buying function, instead procurement should be one of the key stakeholder that drives company profit.