Cost Cutting Across the Supply Chain

There is a school of thought that seems to argue that buyers and sellers can work in tandem in order to cut costs and increase innovation. With the increasing emphasis on ever-improving returns on capital investment and consumer demands for lower prices, every company is on a crusade to control costs, especially within the supply chain. For instance, purchasing departments within the automotive industry are under tremendous pressure to strive for a 4 to 6 percent annual reduction in their costs.

Under such circumstances, the purchasing department of a typical OEM negotiates a price lower than the the market-based benchmark. Buyers then solicit bids from their suppliers for every new program and subsequently award the contract to the supplier (whether new or existing) that agrees to deliver the requisite part at the lowest price.

Surely enough, bidding out every individual program drives down the manufacturing costs substantially. The bidding process also forces inefficient suppliers to learn why they lose out on contracts and to either make changes to their operations or risk being shunted out of business.

Producers are under constant pressure to improve process technologies, to implement lean manufacturing and to shift their manufacturing operations to countries with low costs of labor, thereby driving their costs of production lower.

Keep watching this space for more on this.