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Home : Articles : eSourcing : Sourcing

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SOURCING

Saving money is always at the forefront of every business decision but when it comes to purchasing and sourcing, there are a number ways to cut costs that are often neglected or which do not use to their full advantage. Companies who fail to see these possibilities could be standing in the way of significant savings that would dramatically improve their bottom line. Many of the ways that are available to cut costs vary depending on the business. For example, manufacturing companies may want to first start finding savings by talking to the suppliers of their raw materials. Since these represent a larger portion of their purchases, these areas often offer the greatest potential cost savings benefits. When buyers sit down with vendors, they can often negotiate an arrangement that will be more cost-effective. Other companies may find their great potential savings opportunities revolve around their MRO purchases.

In order to identify potential savings opportunities in this area, companies need to take a straight look at their current operations to determine areas that need improvement. Rejected parts or excessive downtime are two of the most common problems for many companies and both of these areas can significantly add to the cost of operations. To solve the problem, companies should call in their suppliers, provide them with the necessary information, and ask them to come up with suggestions.

These suggestions will usually come in the form of valued-added services from the suppliers. These extra services can sometimes then become the backbone of the supplier selection process. Many companies make the mistake of choosing vendors strictly on the basis of the quoted price; however, the lowest stated cost does not always spell the best deal for the business. Instead of focusing strictly on price, buyers need to evaluate suppliers additionally on their willingness to provide these value-added services.

Another way for companies to save money over the long term is by tracking the performance of their suppliers. Once relationships with select vendors have been formed, the company needs to begin assessing their overall job performance because poor performance translates into additional costs for the buyer. Some analysts suggest evaluating vendor performance in terms of Total Cost of Ownership (TCO). Essentially, this means that the company looks at one event that the supplier is responsible for and uses that as an indicator of their overall performance. For example, if a vendor is scheduled to provide a delivery of raw materials in two weeks but misses the target date by a full week, then that delay would need to be figured into the costs of doing business with that vendor. Most companies do not currently use the TCO model for judging vendor performance and instead base their decisions solely on quoted costs. These companies generally find out in the long run that a low price does not always equal adequate performance.

While all of these cost saving measures may sound good on paper, many companies may find suppliers reluctant to cooperate. One reason suppliers are often hesitant to get involved in these value-added ideas is that to achieve their objectives they require cooperation from within the company itself. If a vendor is asked to make a process within the plant more efficient but workers within the plant are interfering with their ability to make that happen, then this reflects badly on the vendor who doesn't live up to his or her end of the bargain. Companies need to reassure suppliers that they will have total cooperation from all levels of management and staff to accomplish their tasks. The individuals in charge of purchasing should also maintain an open line of communication with the suppliers throughout the process so that they can be alerted immediately if conflicts do arise.

Companies often overlook the value-added services that many vendors offer simply because their savings are harder to quantify. By using the TCO model and getting suppliers more actively involved in the creative process, however, companies can see definite improvements in their bottom line.

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