The Business Challenge
A leading steel company, that exhibited a great deal of growth in recent years by acquiring other steel organizations, was facing problems that were common to enterprises that employ mergers and acquisitions as a growth strategy. The acquired companies lacked common item codes and offered tremendous scope for streamlining processes. This compelled the company to collaborate with SpendEdge and achieve better cost savings in indirect and MRO spend. The target set by the company to reduce sourcing costs was 15% since for organizations like them, this reduction constitutes a considerable sum.
Apart from this, the company was looking forward to improving their overall efficiency, maximizing their financial performance, and driving product innovation by implementing a competitive global strategic sourcing process. The key objectives they were looking to achieve through strategic sourcing were:
- Control spend data by having an organized system in place for their parts information to avoid any hidden charges.
- Determine the cost structure of suppliers, have a strong sense of the market situation and implement strategic purchasing.
- Optimize cost savings by reducing reliance on tier 1 suppliers(direct suppliers).
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The experts at SpendEdge obtained detailed market intelligence information on the supply market and supplier landscapes from different plants and suppliers. They tracked activities and innovations to help the client understand best sourcing and category management practices and develop robust strategic sourcing process. The information gained, therefore, enabled them to deploy the right sourcing strategy and negotiate more favorable terms with suppliers, taking advantage of the client’s significant economies of scale.
Deployment of strategic sourcing strategies led to the creation of cost optimization models for key categories that helped the client to identify sellers that quote width adders in intervals. Parts with widths close to a larger interval category can be sourced less expensively if the coil width is increased to the breakpoint. This helped the client to increase savings potential by smartly using the excess material for offal utilization.
SpendEdge’s strategic sourcing strategy further allowed the client to manage risks such as resale programs and hedging. This ensured secure supply at better managed costs for the client. Such resale programs offered better savings by attracting suppliers that offer favorable pricing. The strategic sourcing strategy filled up the capacity in the value chain and enabled the client to negotiate lower pricing for value add processing through the intermediate steel processors.
The strategic sourcing strategies evaluated options of buying from different suppliers or from different plants from the same supplier for the client. This helped the client to re-allocate the processing to a low-cost producer in the value chain.
Streamlined the Procurement Process
In a span of one year, the strategic sourcing process developed by experts at SpendEdge streamlined the procurement efforts of the client. This enabled them to save between 15 and 20% depending upon the category and accounted for an annual savings of $17 million a year. The number of suppliers reduced significantly, which streamlined numerous operations while reducing costs for the client. Also, it helped in developing mutually beneficial strategic alliances with individual suppliers.
Enabled the Usage of Mini-Mills
The strategic sourcing solutions rendered further helped the client to shift volume to suppliers in other countries and import that steel at low enough prices to stay competitive despite higher transportation costs. They gained detailed insights to increase the usage of mini-mills to create more leverage in the steel purchasing process. Mini-mills offered competitive pricing as transportation costs are low and profit margins considerably high.
What is Strategic Sourcing and Why is it Important?
Strategic sourcing is an organized and collaborative approach adopted by organizations that formalizes the way information is gathered and used for strategic purchasing. It leverages targeted spend across locations with selected suppliers that are best suited to creating knowledge and value in the customer-supplier interface.
Strategic sourcing enables organizations to take advantage of innumerable benefits while focusing on their core competencies. It mitigates risk, enhances the quality of goods and services, ensures timely delivery of goods and services, reduces costs, and improves supplier relationship. The key reasons for adopting strategic sourcing best practices are:
- Quality of Supplies: Strategic sourcing strengthens relationships with suppliers and ensures timely supplies of materials. It results in quality improvements and streamlines the procurement process
- Cost Reduction: Strategic sourcing solutions help companies to negotiate lower unit prices for high-volume purchases, thus, maintaining a competitive pricing of their products. Also, strategic sourcing strategies allow management to focus on core activities.
- Risk Management: With a strategic sourcing process, companies can proactively identify and resolve problems pertaining to suppliers. This can reduce supply chain disruptions considerably.