Understanding Your Results

1. Question: Which of the following methods has your organization tried which you have found to be the most effective means for lowering your cost within one particular metals category?

Many categories of spend for middle market manufacturers or divisions of larger companies can be described as high mix, low volume. There is a tendency to assume that the category complexity (because of the high mix) prohibits firms from taking advantage of more traditional sourcing processes (e.g. competitively bidding out the entire category). Best practice approaches within the metals industry suggest that suppliers of all types are interested in the total dollar spend, despite a high mix.

2. Question: Which sourcing approach most closely resembles how you source your top metals category?

Particularly in buyer markets, any type of real-time market (e.g. pricing) feedback mechanism back to suppliers will yield a greater savings than a method in which real-time feedback is not provided.

3. Question: Which of the following most closely matches your approach to managing the commodity content of your material pricing?

Separating the commodity content from the value-add portion is often the single greatest means of achieving cost reduction. Of course implementing the means to separate out the two can be very challenging particularly for companies with hundreds of parts. Identifying the index to be used and the correlation between the index and the raw material portion of the finished product is also challenging. Finally, this approach requires the close collaboration between the supply base and the buying organization.

4. Question: Which of the following statements most closely describes your hedging strategy for this category?

Not all companies have the opportunity to take advantage of a true hedge. Nevertheless, there are often cost savings opportunities based upon how suppliers and buyers agree that prices will be quoted (e.g. based on the average of the prior three months, current price etc). Essentially buying organizations want to be able to execute short term, mid term and long term purchases based upon underlying commodity trends. These strategies require buying organizations to have some flexibility with their suppliers in terms of how the underlying metal is purchased.

5. Question: How does your supplier(s) price material for this category?

Not in all cases but in most, buyers can save money by purchasing by weight vs. by unit. Since most service centers and distributors purchase by weight, they are often able to hide margin dollars by selling on a per unit basis. It is also easier to hide margin dollars on non-standard cut lengths. Without knowing the weight of the item the buyer may be at the mercy of the supplier.

6. Question: To what extent do you have visibility into the cost make-up of the delivered price?

To the extent that the buying organization can break out a range of prices, at a minimum the following: material, processing/value-add, packaging/logistics the better the negotiating position. Typically buying organizations are not aware of the % of raw material content vs. value-add and blindly accept price increases because they are not able to allocate price increases to the raw material portion only. By requiring suppliers to bid items using some form of cost break-out, the better position the buying organization is in.

7. Question: Which of the following best describes how you selected to purchase from a distributor or a manufacturer?

Often times buying organizations engage in wrong sourcing in essence they purchase materials from the wrong type of company. An example would be a multi-million dollar stainless steel sheet buyer purchasing materials such as stainless sheet from a local fabricator. There are times to go manufacturer direct and other times to purchase through distribution. The key is conducting the analysis.

8. Question: If any scrap is generated from the use of these materials in your production process which of the following best describes your working practice?

Companies often have the ability to gain back lost margin by aggressively benchmarking and selling scrap material (particularly non-ferrous scrap materials). Not only is the management of scrap products good for the environment, it can be a way to improve margins. With the same rigor used by purchasing organizations to source materials, scrap management can yield tangible dollars to the bottom line.

9. Question: If you have a value add portion (premium over the raw commodity price) to the cost of the material or product you buy how would you best describe your contract philosophy?

For companies/industries that are able to pass on price increases to their customers, price escalators/de-escalators can be helpful techniques to manage commodity risk. Buying organizations can also mitigate risk by locking in known costs for a specified period of time. CFO’s tend to like these mechanisms because it takes some price risk out of the equation.

10. Question: Have you ever evaluated the percentage of labor input to the different categories you buy with a view to identifying those categories in which cost compression can be achieved by regularly re-sourcing every 12 months?

One of the greatest opportunities for Low Cost Country Sourcing is to engage in labor arbitrage ¦constantly evaluating global labor rates, skills, capabilities etc to identify product categories that could be a fit for global sourcing. More recently, the opposite is true ” if companies benchmark global labor rates they are able to make more effective total landed cost decisions and potentially move business away from countries whose labor rates are rapidly increasing. By regularly re-examining categories with high labor rates, management can become proficient at best country sourcing.”

If you would like to discuss this quiz and/or other cost savings strategies with a metals sourcing expert at Aptium Global Inc., you are invited to contact us.