Is regaining control of raw material costs in your extended supply chain part of your product cost reduction strategy?
To learn why it should be, please view our 8 minute video by clicking on the Click to Play Button to the right, or continue reading below, or email us your questions right now at info@supplydynamics.com.
Supply chain costs matter. They matter a lot. While much has been done at most OEMs to reduce cost on the “value added” side of the Total Product Cost equation, relatively little has been done to lean out the raw material supply chain. When you consider that raw materials and various component parts (fasteners, electronic components, etc. ) contribute between 30 to 60% of the cost of an OEM’s final product, that inattention can cost the OEM dearly. That’s where we can help.
In fact, most OEMs have no idea what their outside part manufacturers are paying for the materials that go into the parts that they purchase. Nor do they fully understand what forecasted (let alone actual) raw material demand is across their extended supply chains. That visibility was lost when OEMs began aggressively outsourcing finished parts to outside part manufacturers – many of them located half way around the world.
Outsourcing has also led to fragmentation of raw material volumes. This has had a number of negative consequences.
- It has led to generally higher material prices for the OEMs and their outside part manufacturers due to smaller quantity purchases.
- It has resulted in poorer service levels from the Mills and/or Distributors furnishing those common materials.
Rather than serving one customer, the Mills and Distributors now deal with dozens (if not hundreds) of independent buyers purchasing the same or similar materials, only in smaller quantities and in hundreds of different sizes. This makes it nearly impossible for a Mill or Distributor to anticipate demand and has led (in addition to everything else just mentioned) to high levels of speculative inventory, longer lead-times, and poorer service levels.
By abdicating responsibility for the procurement of common materials to outside part manufacturers many OEMs inadvertently created supply chain problems they have been unable to solve. Some OEMs have tried to remedy this situation by either consigning material to outside part manufacturers or by putting in place “right to buy contracts” where OEM sub-tier suppliers are allowed to purchase common materials from an OEM designated source at an OEM negotiated price. The problem with these approaches is that they are either hugely expensive or grossly ineffective. Due to the nearly universal inability of OEMs to enforce “right to buy contracts” over time or keep bills of material up-to-date and accurate, “right-to-buy” contracts have effectively become the bane of the material distribution industry. The good news is that it doesn’t have to be that way.
Material Demand Aggregation provides the OEM with all of the tools necessary to leverage common material demand cross its supply chain, irrespective of whether parts are manufactured in-house or by outside part manufacturers. That kind of leverage is then used to obtain the kind of quantity-based material pricing and preferential treatment that any good Mill or Distributor will offer its best customers. It also unleashes powerful reporting capabilities that keep the Mill or Distributor in the loop and make possible the standardization or even hedging of common materials.
As the name implies, Material Demand Aggregation involves aggregating the demand for common materials across an OEM’s extended supply chain. It is a superior approach to both “right to buy contracts” and OEM material consignment because it delivers the benefits of both without tying up cash or alienating sources of supply. More importantly, it provides the OEM’s designated mill or distribution source with the kind of real-time information that enables them to operate more efficiently and be more responsive to changes in OEM finished part demand.
To have us answer your specific questions, please email us right now at info@supplydynamics.com.
