5% cost reduction every year is only 3% at some point – flat-rate cost reduction programs work once, maybe even twice. Identifying and eliminating cost drivers always works with an eye on innovation and market developments.

Many buyers are currently faced with the task of breaking down the department’s goals into their product groups and implementing the required cost reduction targets. This is one of the core tasks of every procurement department, but it is always difficult in view of the daily business, the dependence on suppliers, security of supply and risk management. Especially if you have been responsible for a commodity group for a long time, then the question of how becomes increasingly difficult. If you consider a cost level of 100, 5% is also 5% cost reduction. But if you have already reached a cost level of 85% over the years, through annual negotiations and tenders, 5% is only 4.3% cost reduction. And due to an unchanged overall situation, every additional percentage point becomes even more difficult to achieve.

And the perception of having already questioned everything together with the supplier, of having achieved all cost targets, leads to a defensive attitude towards new targets. With obvious effects on motivation.

Agile Supply Chain Management offers solutions

But how can procurement break through this funnel of ever decreasing cost reductions? In buyer’s markets through competition, through constant tenders and through best price awards. In supplier markets and for sensitive procurement objects by bundling, by optimizing the supply chain or by long contract periods. If these levers are exhausted, even if you have been working with suppliers for years, the approaches become less. And then the following applies: every additional percentage point of cost reduction hurt, costs time and effort and is difficult to implement. How can agile supply chain management help here?

Based on the words and terms chosen, one of the main reasons for the funnel of diminishing savings can already be identified here: exhausted, difficult to implement. The classic purchasing-supplier relationship is based on mutual pressure, intransparency and personal advantage. Based on game theory, both sides try to make their corridor as wide as possible by excessive demands for price increases (sales) and price reductions (purchasing). Neither side would admit to a good result for both sides, compared to their own peer group they always get the maximum out of it.

However, this status of the procurement supplier relationship prevents the achievement of optimal costs in the supply chain. Costs are incurred in every supply chain, whether through materials, processing, administration or logistics. All participants in the supply chain can only achieve an optimal price by considering all cost influencing factors and evaluating them. Agile supply chain management has proven successful in achieving this. Agile Supply Chain Management is based on the same basic rules as Agile Project Management: Achieve small goals, work together to achieve them, and even terminate unsuccessful approaches. Important methods are SCRUM, Design Thinking and Kanban.

The agile manifesto

Although the Agile Manifesto is already several years old and primarily refers to software development, the values and principles it contains are still up to date and can therefore also be applied to the procurement supplier relationship.

• The satisfaction of the customers (both sides) is our top priority.
• The rapidly changing conditions within a project must always be considered and adapted in favor of the customer.
• services or to the product, updates are delivered in shorter regular time spans, the project work is carried out in milestones.
• The close cooperation between procurement and suppliers must take place on a daily basis.
• The teams always receive the necessary tools for their work and remain motivated to deliver consistently good results.
• Regular face-to-face meetings for quick success.
• A finished functioning product (e.g. an innovation or even a contract) is the benchmark for success.
• Through agile processes, cost optimization should be sustainable.
• Increasing agility by focusing on technical excellence and appropriate design.
• Keeping work processes as simple as possible.
• Self-organization and the development of own structures should be the focus for the teams.
• Regularly review and improve teamwork.

Agile supply chain management applied in a procurement supplier relationship leads very quickly to success in cost management. By setting up separate teams for the various cost drivers and ensuring the exchange of information through comprehensive communication, starting points for avoiding costs within the supply chain quickly become clear.

But it also requires an open exchange and constructive cooperation between both sides. The respective management teams are to be defined as customers. The objective is to secure the supply chain with optimal yield and security for all parties involved. Through joint consideration and short-term reaction (e.g. as a test) the right cost levers can be identified in a short time. But only if both sides adhere to the rules of the agile manifesto and are accordingly ready for the necessary transparency and joint responsibility.

An agile example from procurement

A very good example of this is the optimal inventory along the supply chain with high delivery capability. If there is mutual mistrust, a forecasting process will certainly generate added value, but neither side will really rely on this tool. Procurement will always keep the numbers positively up to ensure supply. Regardless of the forecast, orders will still be triggered (for security) and every change in quantity will be recorded daily (reason for complaint). In such a model, a forecast is nice. Nothing more.

If, for example, I use a daily SCRUM round for quantity planning in the context of an agile supply chain management and therefore do not use individual orders (daily joint planning applies), both sides have a much better reason to actively work towards this model. If there are any deviations, both sides will quickly recognize this and recognize it early.

Through a confrontational purchasing supplier relationship, cost targets are achieved up to a stop line, which can still be reached through negotiation skills. If costs in the supply chain are to be eliminated, both sides must work together based on the Agile Manifesto. In this case, the costs can also fall below the lower stop line. With advantages for both sides.

 

Oliver Kreienbrink

Managing Director, ADCONIA GmbH