By Michael Womack
Like many manufacturers, you may feel you are paying fair prices to your suppliers. Maybe you have a strong procurement team, great relationships with your vendors and suppliers, and your team spot-checks prices. Your finance staff may do a great job of tracking data and reporting trends and anomalies. But how do you really know if you are getting the best possible price?
Maybe you review your health insurance every year because it can represent a significant portion of your operating expenses, and it often fluctuates from year to year. While it’s true that there are few ways in which most manufacturers can save $1 million a year, there may be a million ways to save $1. Savings opportunities are always available. However, you won’t realize the full extent of these potential savings unless you take the time to assess and explore your options.
Consider a cost containment initiative
A cost containment initiative is great practice for supply chain and operational resiliency, and it can be done through your local MEP Center at minimal cost and effort. For example, the New Jersey MEP (NJMEP) offers a cost containment program that takes about 8-10 weeks and covers up to 35 areas of direct and indirect costs. The program requires very little of a manufacturer’s time and produces an average savings of $252,000 annually.
The initiative can cover supplier pricing, non-core expenses, and possibly group savings. A cost containment initiative:
- Leverages procurement expertise and introduces clients to new suppliers.
- Starts with incumbent suppliers, and historically most savings come from negotiating better prices and longer terms with existing suppliers.
- Uses a trusted third party, which not only brings a fresh perspective to pricing, but the third party does the heavy lifting and can play the bad guy in negotiations.
- Uses a gain sharing payment model for services rendered.
With a gain sharing payment model, the realized savings are shared between the manufacturer and the third-party cost containment partner. It costs the manufacturer nothing to get started.
Why a manufacturer might seek out a cost containment review
Manufacturers often sign up for a cost containment review for one or more of these common reasons:
- Reduce overhead. These companies are committed to reducing overhead expenses. They may believe they are paying more than they need to or wish to rein in spending, especially given the supply chain issues and economic inflation of recent years.
- Find best prices and suppliers. They don’t have time or staff to search out the best prices and vet possible new suppliers.
- Consolidate buying power. They have multiple locations with local purchasing and seek help consolidating their buying power.
- Price creep. Several years into a working relationship, the supplier may increase prices. Loyalty and pricing do not always align.
You should be conducting a detailed internal review of your spending every few years. You have benchmarks and can recognize patterns and areas of concern. A cost containment review helps you look at these concerns in an organized way.
Overcoming internal objections and concerns
A pricing audit or financial review can create anxiety within any organization. As often happens with an outside review, the procurement staff may become defensive about their work and fear the initiative will take up too much of their time.
Communication with internal stakeholders is critical for the success of a cost containment initiative. The reality is that most manufacturers do not have expertise in every facet of their buying – such as alternative suppliers, pricing trends, access to group buying, and more. You need your staff strategically aligned with your goals. You also need to listen to them and alleviate their fears and concerns. It’s not about them; it’s about the prices.
Other concerns may be present internally. Many manufacturers worry that an aggressive approach to renegotiating prices will damage their relationships with longtime vendors who have stuck by them through the pandemic and other challenges. Pricing also may not be the most important factor in a supplier relationship – you do not want to jeopardize delivery time or product quality if a lower price might lead a partner to cut corners to maintain their margins.
How a cost containment initiative works
A cost containment third party uses buying power, subject matter expertise, and a structured, disciplined approach to dealing with vendors. In the NJMEP offering, the third-party partner conducts a multi-step process over 8-10 weeks to get new pricing structures into place. A manufacturer can expect to see savings in about two months.
The process is:
- Preliminary savings analysis: After gathering the prior 12 months of spending with each supplier, the third party performs an analysis to estimate savings.
- Scope review and authorization: Based on the estimate, the manufacturer agrees to a scope of work.
- Onsite invoice analysis: Accounts payable provides the third party access to supplier invoices for baseline pricing.
- Supplier negotiations: The third party negotiates with incumbent suppliers for lower pricing structures and seeks out alternatives when appropriate.
- Status updates: Regular check ins throughout on progress and successes.
- Implementation: The manufacturer instructs the third party to implement savings proposals.
- Review of compliance: Audits every two months will measure savings.
The NJMEP offering covers up to 35 categories of direct and indirect costs. The approach works for almost every cost category – a similar process can address anything from transportation costs to office supplies. However, a different model is used for utilities and raw materials, which are commodity based.
The renegotiation is often a win for existing suppliers. It can result in a lower price for an extended term, which affords the vendor longer-term security. And as mentioned above, the gain sharing approach motivates the third party to negotiate the best possible deal for the manufacturer.
Wins will come from many areas of the company
Savings will come in many different areas, including freight, payroll processing, equipment and maintenance, warehouse supplies, insurance, copiers and printers, janitorial, utilities and waste removal. Here are several examples:
- Freight: Whether you are paying for a truckload or less than a truckload, rates are very negotiable, partly because baseline tariffs and discount tiers can be so different. Negotiating X percent off of baseline A may be very different from Y percent off baseline B.
- Telecom: Many companies don’t have staffing to stay on top of cell phone usage for their staffers and conduct rate comparisons.
- Office supplies: You may have a pricing agreement with a vendor, but that probably is not a binding contract.
- Waste removal: Waste removal has many variables and offers a window into how the negotiations can work. The waste removal company may prefer coming to a facility twice a week to empty containers. But renting a compactor or adjusting the settings on an existing compactor, might allow for once-a-week pick up.
About The Author
Michael Womack is the Marketing and Communications for the New Jersey Manufacturing Extension Partnership (NJMEP).
He began his career in 2015 as a Social Media Manager for an advertising agency with a client base of manufacturers and logistics companies across the United States. Later, he worked for a manufacturer in New Jersey in the marketing department until his current role at NJMEP. Passionate about education and manufacturing, Michael works to shine a light on today’s advanced manufacturing industry, breaking down the stigma associated with the industry and working to ensure U.S. manufacturers bridge the skills gap to maintain global competitiveness.