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How Manufacturers Can Use Internet-Based Sourcing And Procurement Of Production Materials To Cut Costs And Speed Product To Market

Author(s):

Chris James
Chris James, Vice President of Marketing, Digital Market, Inc., www.digitalmarket.com, Sunnyvale, CA 94086, 408-720-7422, cjames@digitalmarket.com

84th Annual International Conference Proceedings - 1999 

Abstract. Manufacturing profitability depends on two things - money and time. To beat the competition, manufacturers have to squeeze cost and cycle time out of thousands of components and suppliers.

By combining the speed of the Internet with decision-support, workflow, and data management software, manufacturers can achieve significantly faster cycle times, more accurate part and supplier data, and lower material costs - and significant bottom line growth.

Growing Top-Line Revenue by Cutting Time-to-Market. In New Product Introduction, there is no stronger revenue predictor than being early to market. As the pace of technological innovation has accelerated, every week of product availability - especially if you have beat the competition to market - adds 1-2% to total product sales.

Shrinking product cycle times have put pressure on every step of the manufacturing process, and procurement cycles are under the most intense pressure of all. According to a recent white paper written by The Aberdeen Group, sourcing and procurement can consume as much as 5 months of the new product introduction cycle. 1

When Digital Market analyzed the time and tasks in the sourcing and procurement cycle of one of the largest, most efficient electronics manufacturers, we arrived at the following chart:

Process Time Required
Identifying Qualified Suppliers 5 weeks
RFP/RFQ Development 1 week
RFP/RFQ Dissemination and Response 4 weeks
RFQ Change Creation,
Dissemination, and Response
1 week
RFP/RFQ Response Analysis,
Costing, and Supplier Selection
2 weeks
Total Time Required 13 weeks

If we break these processes down further into their component tasks, we discover that much of this time is spend in repetitive, time consuming data gathering and error-introducing data entry. Think of the hours of work required to compile a complex RFQ into a spreadsheet. Break this spreadsheet down by supplier lines carried. Fax or email it off to different suppliers. Re-fax or mail changes, wait for responses, gather the faxed or emailed responses, re-enter the response data into some sort of decision support tool, analyze the response data for price, availability and functionality, make the sourcing decisions, negotiate contracts, and generate the purchase order.

Installation of a comprehensive, buyer-centric Internet-based sourcing and procurement system can reduce the time required for these tasks to minutes. Key components of such a system are:

  • Data Mart - must aggregate material, supplier, and usage information
  • Decision Support - for optimal supplier and material selection, leveraging purchasing power
  • E-Commerce Engine - must send quotes, orders, forecasts, schedules, and contracts to all your suppliers over the Internet
  • Complete Supplier Participation - all suppliers with Internet access must be able to participate at no cost
  • Global Reach and Scalability - must support multiple sites, hundreds of suppliers, thousands of parts.

After installation of Internet-based sourcing and procurement software, the electronics manufacturer again audited its sourcing and procurement processes, and discovered the following savings:

Sourcing and Procurement Cycle Time Cut by 2/3

Process Previous Time Required After Installation of
Internet-based Sourcing
Identifying Qualified
Suppliers
5 weeks 2 weeks
Managing/Communicating
Preferred Supplier List
didn't exist 1 day
RFP/RFQ Development 1 week 1 day
RFP/RFQ Dissemination
and Response
4 weeks 1 day
RFQ Change Creation,
Dissemination, and Response
1 week 1 day
RFP/RFQ Response Analysis,
Costing, and Supplier
Selection
2 weeks 1 day
Time Required 13 weeks 4 weeks

Growing Margins by Cutting Direct Materials Costs. Internet-based procurement of direct materials produces cost savings through two key mechanisms; reducing the costs of acquiring the materials, and reducing the purchase price of the materials themselves.

A study conducted by Arthur Anderson and the National Electronics Distributors Association in 1997 found that the typical electronics manufacturer spends an additional 36% of the component price in actually acquiring the component. These costs are incurred in such activities as Reporting, P.O. Changes, Expediting / Tracking, P.O. Placement, RFQ Evaluation, RFQ Processing, Part Validation, AVL Management, MRP Generation (MIS), and Staff / Administration costs.

Customer studies performed by Digital Market show that manufacturers using automated, Internet-based sourcing and procurement can reduce these costs of acquisition by a minimum of 38%, cutting the cost of acquisition from 26% to 16% - a direct contribution to a manufacturers bottom line.

Digital Market studies also show that manufacturers can typically reduce the cost of production materials themselves by 3-5% when using automated, Internet-based sourcing and procurement. These savings derive from the following factors:

  • Aggregation of purchases across plants and product lines allows better economies of scale.
  • Closer collaboration with supply chain improves "design for manufacturability".
  • Automating quoting/ordering processes fosters more competitive bidding environment; the more suppliers bid, the lower component costs.
  • Supplier performance reports allow smarter buying decisions.
  • Contract management support increases both the % of parts under contract and the frequency of contract renegotiation.

Conclusion. By speeding new products to market, Internet-based sourcing and procurement of production materials can increase manufacturers' sales revenue; and by cutting both the costs of acquiring production materials and the costs of production materials themselves, Internet-based sourcing and procurement of production materials can significantly improve a manufacturing firm's bottom line.

Reference:

Production Material Sourcing: In search of Automation, December, 1998, The Aberdeen Group, Boston, MA


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