Cost Avoidance in Rising Markets…Can It Be Done?

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Sourcing Strategies

You don’t need to finish the rest of the article to know that we are going to say it can be done. But if you are interested in how, well, now you might have to spend a minute here. I thought it would be fun to share with you a few of the ideas I have heard companies plan/discuss these past few weeks and months to achieve some cost avoidance, given so many rising metals markets. (Some of these are quite creative, I might add)

One idea that a company is noodling with involves implementing a rebate scheme for its suppliers. This works well if there is disparate spend across many companies which adds up to a lot of dollars (read multi-millions) and the supply base is fragmented, such as machine tool shops. It requires a great degree of coordination (and effective negotiation) but if the metals involved are somewhat standard with not a lot of variation, it can be done. The other benefit of a rebate scheme is that it is easy to track the benefit (i.e. a check with the rebate amount) whereas other initiatives often become cumbersome because of the difficulty in establishing an effective baseline. In short though, this option may be a non-starter for an awful lot of firms.

I have heard of another larger firm implementing “metal grade rationalization” by having their engineering teams evaluate alternative alloys in an effort to further consolidate spend and suppliers (thereby creating additional leverage). Certainly this is something that can best be taken advantage of by larger firms but the notion of standardizing parts and SKU’s often goes a long way in cost reduction efforts.

A couple of months ago we discussed here how companies who are purchasing items that do not involve one time set-up fees or tooling costs (or the tooling costs are nominal as a percentage of the total cost) could take advantage of global price abritrage opportunities, particularly if they are able to qualify a few suppliers.

The other middle market strategy we are seeing firms deploy is a smaller version of a make vs. buy analysis. Only we call it sheet vs. coil analysis. Depending on the amount of material consumed, there appears to be some threshold in company size whereby purchasing metal via coils (and also buying a coil slitter) instead of sheet becomes more feasible. Undoubtedly there are many other cost reduction/cost avoidance strategies firms have deployed from engineering design changes to material substitutions.

But one market strategy we don’t see discussed too often is how firms negotiate pricing with their suppliers, and in particular, how they do so in rising commodity markets. It is our contention that if sourcing professionals had better access to pricing information, some of the cost increases could be mitigated. It’s a theory we are testing and we’d love to get your point of view. Take our 4 question survey. On March 31, we’ll publish the results of the survey and offer up additional strategies for dealing with rising metals markets!

Take the survey!

–Lisa Reisman

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