Category management helps $4B manufacturer achieve additional, double digit savings 12-24 months after initial 10% savings from sourcing
Situation:
Initial sourcing efforts for this $4B manufacturer had yielded significant savings – averaging over 10% for their indirect categories. However, economic pressures and the need to free up working capital to support a planned acquisition had created aggressive continuous cost-reduction goals. The company needed to produce an additional 5% savings on $35 million across 17 indirect categories in the 24 months after initial contract sourcing.
Solution:
Working with ICG Commerce, the company launched a year-on-year cost improvement program through a structured total cost of ownership (TCO) analysis project. Cost reduction strategies included product substitution, negotiation of additional OEM price support, supplier rationalization, increased supplier volume, and demand management. To optimize all of the cost components of each category's TCO, ICG Commerce documented the detailed service-level requirements and specifications for the targeted categories. Once the team had a good understanding of the cost components and cost-reduction opportunities, they applied the most appropriate strategies. In parallel with the TCO analysis effort, the team also began a formal supplier performance management initiative. Key performance metrics were defined and performance data gathered and reported regularly on standardized supplier scorecards. Lastly, to ensure all of the effort focused on sourcing and additional cost-reduction initiatives actually made it to the bottom line, the team developed a coordinated price-change process to monitor and enforce supplier-contracted pricing.
Results:
Through their focused category management, the team was able to exceed their goal and deliver double-digit, sustainable savings 12–24 months after sourcing. Realized savings increased 15% over the prior year, and the focus on savings and contract adoption also produced a 23% improvement in contract compliance.
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