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Supply chain organisation is the only way to realise material cost savings says business development manager at Colmworth Electronics, Kevin Belgrove
Business developmentmanager at Colmworth Electronics, Kevin Belgrove is a firmbeliever in consignment stock
Material costs are based on supply and demand and reflect the price that themarket will bear. Savings in this area therefore have to come from
continuous improvement by way of cost down savings. This is not the same as price reduction.
Some key ways to achieve a supplier cost reduction curve are to
reduce the total number ofmaterial suppliers and to reduce procurement transaction costs with annualised agreements and scheduling. Themore you can convert your purchasing function into a true supply chain organisation, the greater the saving.
Inventory is not an asset, so by dramatically reducing inventory
quickly, and by setting safety stock levels, order points and lot sizes, your business can benefit fromthe relationship between lead times and inventory investment. This capital creation is loved by accountants.
Of course, purchasing plays an important role in any
manufacturing industry and savings can be achieved during the procurement process in a number of ways. Suppliers can also contribute by suggesting cost reduction ideas, and while component price is key, service costs constitute amajor part of the component value. It is the supply chain service cost, for example, that kills themargin in items such as resistors and capacitors at 0.003p each.
The procurement department now has a prime role in contributing savings. Obviously themajor expense for any
4 | August 2011
manufacturer is buying rawmaterial, but driving prices down all the time leaves no profit in the business for the supplier. This is not always the best way to go because the next time you go to that supplier, theymay not be there.
As part of that supply chain we find it’s not just about
component price. The true cost includes a number of hidden costs, such as raisingmultiple purchase orders, administration costs, booking in and out time and inspection. Even in themodern world of tight controls, some of the biggest hidden indirect costs include incorrect deliveries, shortages, product returns and line itemdelays.
Vendormanaged inventory (VMI) is one way to tackle the
problem. Allowing suppliers to assume your inventory, with visibility into both your own inventory and the production schedule, will almost always reduce your inventory and improve the supply chain.
Establishing close partnerships with vendors is highly
recommended, resulting in cost saving collaboration and savings that can be passed on. In return for this kind of arrangement, suppliers are assured of the business and supply chain partners can then buy in bulk and employ opportunity buying schemes to maximise low pricing.
Using and identifying cost trade-offs in logistics is essential and
purchasers need to examine the true costs, supply chain relationships and VMI demands. I believe consignment stock managed well is a win, win situation for the customer. There’s no better way to have all the stock you need on site, with no lead time issues and no cost to you until the parts are used.
www.colmworthelectronics.co.uk www.electronics-sourcing.co.uk
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