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How to Achieve Cost Savings in the Manufacturing Industry Through Efficient Procurement Processes

Oct 31, 2017

A big chunk of expenses in the manufacturing industry is consumed by machinery and materials cost. CFO’s are often concerned aboutSE_Demo2 such sourcing costs in order to improve financial outcomes. Such narrowed vision often leaves procurement process in an organization mostly ignored. In a competitive era where every penny counts, ignoring such procurement costs would not be such a wise option.

Why are Procurement Costs Often Ignored in Manufacturing Industry?

One of the biggest reason procurement costs are often ignored in the manufacturing industry is because financial executives often look at spend categories individually, such as machinery and plant, raw materials, utilities, overheads, and MRO. When seen at an individual level these categories rarely produce eye-popping numbers. It is only when related categories are added together, hundred to millions of dollars in savings can be realized.

Focus on Cost Savings

In any manufacturing industry, machinery, equipment, and facilities costs occupy a significant part of the overall cost which is usually followed by the cost of raw materials. A proven measure to increase cost savings is by increasing the inventory turns by minimizing stock levels thereby reducing the inventory carrying cost. Implementing just-in-time deliveries and vendor managed inventory programs alongside creating efficient and accurate demand and production forecast, the procurement process in an organization can help increase inventory turns. The subsequent savings in cost can come through optimizing a number of SKU’s, improvement in materials quality, building strong supplier relationships, and promoting innovation.

Tracking Cost-Savings

Savings can only exist if there is proper cost tracking. A CFO needs to monitor the spending patterns of each business unit as well as the P&L through a spend portfolio management program. Once the spend initiatives are on track, purchasing departments should continuously monitor the spend portfolio plan, savings forecast, spends through e-procurement, procurement outsourcing, spot-buys, tail spends, and maverick spends.

Implementing a savings plan is not a onetime thing. Procurement organization constantly needs to look out for ways to improve their operations by optimizing their operating and procurement process. The procurement teams should also work together to create synergies and increase transparency between various departments of the organization.

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