One of the most pressing issues facing businesses today is high inflation. Consumers are experiencing significant increases in their food bills at restaurants and in the grocery store. As a result, food manufacturers are caught in the crosshairs, deciding whether to institute further price increases.
By leveraging the three strategic sourcing strategies below, both food manufacturers and companies in non-food industries can identify and execute initiatives to reduce costs and increase value.
Strategic Sourcing Approach 1: Total Value of Ownership
Many procurement professionals understand Total Cost of Ownership (TCO), which captures all costs related to buying and operating an asset. While TCO focuses solely on cost, Total Value of Ownership (TVO) incorporates impacts to revenue from using an asset, integrating changes to sales price and/or sales volumes.
A food manufacturing client was purchasing an agricultural raw material for its manufacturing facility, to be converted into a finished good. The food manufacturer procured such large quantities of this raw material that its weekly demand couldn’t be satisfied by one supplier. My client lacked a rigorous, structured, and data-driven approach to optimize its weekly raw material purchasing behavior across suppliers. Therefore, I created a TVO model to improve the weekly raw material procurement process. The TVO model optimized profitability based on three key criteria: price, yield, and contract volumes.
Based on expected raw material prices, historic yields, weekly contract volume requirements, and weekly demand, the TVO model determined the optimal purchasing behavior every week. With a single click of a button each week, the purchasing manager would generate the profit-maximizing quantity of raw materials to purchase from each supplier. I also developed instruction manuals and provided coaching to the team on how to use the model. As a result of using this TVO model for raw material procurement, the client generated millions of dollars in savings.
Strategic Sourcing Approach 2: Benchmarking in Supplier Negotiations
Benchmarking can be used to compare the total delivered cost to procure a good or service from different suppliers as well as the “Should Cost.” Subcomponents of the goods or services can be further benchmarked to identify specific elements for which to negotiate more competitive pricing.
A food manufacturing client’s category manager requested assistance with the contract renewal of an incumbent supplier providing protein-related finished goods. The supplier shared a comprehensive overview of its proposed new pricing for the finished goods that included a detailed cost breakdown. Consequently, I conducted a deep-dive cost benchmarking initiative focused on three specific cost areas: feed, ingredients, and supplier markup. I researched several credible cost benchmarks in these three cost areas, which indicated that the supplier could be more competitive on its pricing. Leveraging these sound cost benchmarks in negotiations with the supplier’s CEO, I saved my client several hundred thousand dollars annually when finalizing the new contract, via reductions in the agreed total delivered price of the finished goods.
Strategic Sourcing Approach 3: Product Specification Optimization
Specification optimization is the process of identifying the appropriate set of characteristics for a product or good in order to deliver the highest value product to the end user while minimizing cost.
Another client was buying a raw material with a custom specification for several years, as an input used in its manufacturing facility. The aim of the custom specification was to increase finished-good yield; however, this specification was extremely expensive. Subsequently, I built a comprehensive quantitative model that captured the revenue, cost, and profitability of three different specifications for the raw material, subject to manufacturing constraints. After I aligned the model’s assumptions with key procurement and manufacturing stakeholders, the model highlighted a potential multimillion-dollar profit opportunity to switch to a different specification.
I collaborated with project management, finance, procurement, operations, and quality stakeholders to establish a product trial of the new specification. One of the key findings of the product trial was the discovery that not only did the new raw material specification cost less; the new specification also had a higher finished-good yield than the current specification. Consequently, the client switched specifications, which led to millions of dollars in incremental annual profit.
Client Results
Companies in non-food industries also benefit from the three strategic sourcing strategies. Leveraging cost benchmarks has proven indispensable to generating $10 million-plus in savings for transportation, mining, and health-care clients. Specification optimization has also been used by former clients in the metals, airline, and animal health industries to save millions of dollars by changing specifications for procured goods and services.
Regardless of industry, companies must ensure suitable internal procurement resources to deliver on these complex sourcing opportunities. Alternatively, companies may utilize strategic sourcing experts to upskill their procurement staff and maximize profitability.
Brad Maltz W07, president of Brad Maltz Consulting Inc., is a strategic sourcing expert and has generated more than $100 million in annual savings for domestic and international clients across several industries, including food manufacturing.
