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Would you like to reduce your purchase part costs in 2010?  Can you do so in this economy, while still keeping your purchase part suppliers healthy and without a decrease to your sales volumes? Can your existing ERP software system help remove purchase parts costs out of your existing cost structure?

The answer to all three questions is a hearty yes and you can accomplish this goal in 2010!  Below is a step-by-step process that your organization can implement with your existing distribution software functionality.  This process will help identify and execute purchase part cost reduction opportunities throughout 2010.

Ten Steps for Creating Savings Through Reducing Purchase Part Costs – All With Your Existing ERP Software System

  1. Categorize your suppliers by capability.  Examples of this categorization are weld and machine, medium precision (+/-.005)” and parts up to 24” X 24” X 60”.  Electronically record these categories by utlizing the available fields on your purchase part record (i.e. supplier codes, user defined fields, supplier characteristics) in your existing ERP system.
  2. Categorize your purchase parts (i.e. PN 12AB “weld and machine, medium precision +/- .002” and under 24” cube) using available fields such as product codes, product families, user defined fields, characteristics, etc.
  3. Write an ad hoc report in your ERP software to group your parts by your chosen categorization (matching purchase part categorizations with supplier capabilities).
  4. Using your ERP system, establish reasonable quotation quantities for each purchase part number based on the actual usage for prior year (remove any statistical anomalies i.e. large never to be repeated buys) and adjust this figure by realistic sales forecasts for the coming year.
  5. Develop supplier selection criteria to reduce the number of suppliers, which in effect will increase the amount of business for remaining suppliers (i.e. main supplier is awarded 60% of purchase order value while supplier 2 and 3 are awarded 20% each).
  6. Write a letter explaining how your company is seeking new (and reduced part costs) purchase part quotes from a select and reduced number of capable suppliers. This letter should accompany each request for quote, so the suppliers understand the importance of this activity. In the letter, explain the increase in the amount of business you expect to award will be based in large part on price.  Also state that this is based on you awarding a higher percentage of orders to the vendor and in turn, you expect to see significant cost savings if you award the supplier these parts in the expected quantities over the next year.   Most suppliers will see this as opportunity to sharpen their pencils and aggressively seek material price reductions, quantify reduced production costs due to larger and scheduled production runs which reduce set-up, production and expedite costs and price breaks for larger lot sizes on fixed price secondary operations.
  7. Send the letter, with an annual quotation request for parts they are capable of producing, to the reduced and select group of suppliers for quotations.
  8. Award the purchase orders based on lowest price (assuming delivery and quality are the same across the select group of suppliers).
  9. Write an ad hoc report in your ERP software package, which documents the price variance recorded when the purchased parts are received.  The report should detail part number and supplier combination by part number and supplier combination for each purchase order, detailing prior year purchase price (which may be standard cost) and the new purchase price.  The variance is your savings (or loss).
  10. Summarize the variance column and you’ll total your purchase part savings for year-end.

Now celebrate! It is early in 2010 and you have already achieved success on a New Years resolution.

If you categorize your suppliers and purchase part buy decisions into groups that are of adequate volume for competitive bidding, and award the business to the lowest capable suppliers who can deliver on-time quality purchased parts, then its been my experience that you will realize significant purchase part savings in excess of 5% and keep your remaining suppliers healthy for 2010.

Blog entry written by Michael Kalkman, Senior ERP Project Manager at Panorama Consulting Group.