Many companies try to cut costs by putting pressure on their suppliers. Many of my clients have customers that demand 3% to 5% annual cost reductions but don’t provide any ideas or support for doing so. In an article in the Wall Street Journal (GM Cuts Costs for the Long Haul, October 14, 2013, p. B1), General Motors managers suggest that putting cost pressures on suppliers without working with those suppliers to help achieve the cost reductions will be a losing proposition.
Working with suppliers to achieve cost reduction can yield both technological advancements and financial savings. The technological advancements often come by having both company and supplier engineers work together on product designs to more effectively use materials and manufacturing methods to reduce product costs. This gives the supplier the opportunity to share new technologies that the customer wouldn’t otherwise be exposed to.
By working with suppliers and motivating them by sharing savings, companies can attain surprisingly large cost savings, often far exceeding the 3% to 5% targets. In GM’s case, they worked with suppliers to co-locate plants resulting in substantial reductions in logistics and inventory costs while improving quality. Supplier partnerships can provide these surprisingly positive results.
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