Purchases - Six steps to go beyond the management of prices and become a Strategic Cost Manager

People who buy often resort to a management approach to achieve value for money prices. A typical way to do this is to invite suppliers to bid for your contract with the market competition as a means to ensure the "right" price. This is fine for low-risk markets where there are many providers available and "Perfect" in markets where information is readily available to all.

However, if this is the case and not for items that are strategic for the organization, Price management approaches rarely work. What you need in these circumstances is the strategic management of costs.

Cost management is a strategic approach that involves both you and your suppliers to work together to find solutions to reduce the cost of the products are services they provide using techniques such as value engineering. If you can reduce costs and your supplier then you can reduce the purchase price to you and still make the same amount of profit.

So how do you make using an approach of strategic cost management? Here are some tips: -

1. Identify the products or services that could benefit from this approach. They are usually high, spend high risk positions of delivery. A quick way to find them is to use Pareto analysis, make a list of things you buy in descending order of value of annual spending. Those elements that together add up to about 80% of total spending your high objects. For these items, consider the number of suppliers available on the market. If there are fewer than five, then you are at high risk of supply;

2. Identify the suppliers of those high costs, high-risk elements that are willing to work with you on techniques to reduce costs. You can identify market in mind the provision in the same way they do. If market power is important to them (for example, is a rapidly growing market and have a large market share) and you are important to them an account then you see it as a strategic account and be willing to make the investment in time that the strategic management of cost requires;

3. Use a variety of tools and techniques that can identify opportunities for cost reduction. Typical instruments include value engineering, value analysis, Six Sigma and Lean methodologies;

4. Do not see it as a solo project for your supplier. Often a significant cause of high costs are under control of you, the buying organization - for example, the specification is required or the amount of reports you need;

5. Look at the total cost along the supply chain complete. There may be a great opportunity for reducing costs two or more levels upstream or downstream of you and your immediate suppliers, and

6. Engaging with the rest of your organization. Many of the causes of the costs are beyond your direct control. You will need to use all the changes of management skills to get others in your organization to participate in the exercise cost reduction when it is at the top of their agenda.

If you follow this path to become a manager then you will benefit from strategic cost of senior management will receive the added value that is added. The achievement of cost reduction of 20%, 30% or even more is not uncommon. Your suppliers will benefit because they will be able to make the same profit on lower costs and be more competitive than the competition. A true win-win!...