After the extraordinary circumstances of 2021, Procurement professionals face more challenges than ever to realize their cost reduction objectives. In the backdrop of steep increases in material and labor costs, high transportation and costs, as well as continuing tariffs on materials imported from China, Procurement professionals find themselves with limited avenues to generate cost savings. So, what are the best cost reduction strategies in this inflationary economy?
Watch Commodity Price Trends and Time Negotiations Accordingly
Pricing for several key commodities have started to stabilize and some have even started trending downwards. It is important for Procurement professionals to actively monitor these trends, and time any supplier negotiations once a significant reduction is seen or expected. It is important to note that typically for engineered products, raw material price changes usually lag the commodity prices by a few weeks or months. Also, the actual impact of raw material price change depends on the raw material cost component of a specific product. The St. Louis Federal Reserve publishes excellent data on commodity price trends as well as other key economic indicators. In addition, World Bank regularly publishes projections for multi-year commodity price trends.
Explore Alternate Cost Reduction Strategies
One of the biggest challenges to cost reductions in the current environment, is reluctance from suppliers to entertain one, since they are still reeling from the recent volatility in raw material prices and are understandably pessimistic in their projections of where the prices are headed. Shorter Duration Price Commitments (such as quarterly pricing) are a great way to make suppliers more comfortable with offering reductions, as it allows them ability to monitor and adjust prices in future. Rebates, which are usually tied to achieving certain business revenue / spend levels in a specific time frame, are also an attractive alternative to offering price reductions up front, especially if suppliers are projecting a reduction in materials and labor pricing in future. Moreover, since several manufacturers are carrying larger amounts of inventory than ever before, cash-flow has become an important issue, and Extended Payment Terms are also an often over-looked, yet worthwhile element of a cost improvement program.
Many organizational processes and metrics are not designed to properly account for cost reductions from these alternate strategies. However, with appropriate changes to way performance is measured, these alternative strategies can be made more attractive for buyers to pursue.
Low Cost Country Sourcing is Still a Viable Strategy
While increased freight costs and Section 301 tariffs on China imports have offered a significant cost advantage to US manufacturers in recent times, increased cost of raw materials and labor, as well as labor and capacity shortages have continued to erode this advantage. Low cost regions, such as Asia, still offer an attractive and viable option for cost reduction. Especially countries like India, Indonesia, Vietnam, Malaysia, Thailand and Taiwan are great alternatives to offset some of the geo-political risks and costs associated with sourcing from China. Stratum Sourcing specializes in helping manufacturers source more effectively from these regions.