Maximizing long-term 'cost savings' (= value)

“Show me the money” has become the battle cry during the past couple of years for consumer packaged goods companies that outsource contract packaging and manufacturing operations.

“Show me the money” has become the battle cry during the past couple of years for consumer packaged goods companies that outsource contract packaging and manufacturing operations. It is not surprising that branded marketing companies heightened focus on reducing costs of outsourcing as the economy has contracted and consumers have become more value conscious.

As a result, there seems to have been a flurry of “RF”s (request for) during the past 18-24 months (RFI, RFP, RFQ, RFS). And, perhaps not surprisingly, companies are reporting significant reductions in costs of sourcing as a result. The question is, are they really “saving” the dollars reported?

First, let’s recognize that each product/brand/project/relationship is unique and different. As a result, sometimes there isn’t an apples-to-apples comparison. However, in this article we’ll make some broad generalizations based on current industry practice. To assess the need to send out a bid, below are suggested key questions that should be considered:

• Supplier segmentation. As suppliers are evaluated, how are they segmented? By price? Technology? Geography? Breadth of services? Supplier segmentation might be the most important consideration in outsourcing services. This activity separates suppliers that generate value from those that don’t. If the net result of your supplier-segmentation effort doesn’t yield a clear understanding of relative value, then perhaps additional criteria should be considered. Otherwise, the potential exists to discard an existing supplier who can potentially deliver far more value in the short and long term than others.

• Motivation. As branded marketers consider putting businesses out for bid, what is the primary motivating factor? Is it always done every ‘X’ number of years? When a lofty savings goal is established? When the organization has new leadership? Business bids have a clear role in the industry. However, motivations aren’t always as they should be. If current suppliers are not meeting clearly communicated and measured expectations, or it is a new business, then it is a worthwhile use of time and company resources. If not, an “RF” may be one step forward and two steps backward when fully considering the costs of the RF process, business transition, and time to get new suppliers fully integrated into internal processes.

• Required breadth and level of service. What level of capability and service is required from suppliers? Has the potential for cost avoidance been considered? In other words, is there certainty that goals cannot be achieved with the incumbent supplier? If the answer is yes, then an RF is a solution. If there isn’t certainty, then perhaps every effort should be made to thoroughly evaluate whether the current supplier could reach your goals.

There are many examples of an “RF” being fielded and an incumbent supplier replaced only to find that the “new and improved” supplier, while offering a lower price, cannot fully meet long-term customer requirements. In the worst examples, the ability to commercialize new products on time and other key considerations (like quality) are sacrificed to get a lower price. If all remediation, start-up, and integration costs are considered, the switch may even be a money-losing proposition.

Business relationships often are compared to personal relationships. As in personal relationships, long-term value is built over time between two partners who are wiling to work toward a mutually beneficial relationship. That means they are interested in understanding each other’s needs and opportunities and helping the other partner maximize potential. This is exceptionally difficult to achieve if one has a new partner every three years.

The key to long-term value creation is choosing partners who demonstrate:

• Shared values.

• Mutual interest.

• A desire to understand your needs and capabilities.

• The ability, resources, and interest to grow with you.

• Commitment to work collaboratively to create value for both parties.

By doing so, partners build trust, and in the process reach an open and transparent relationship. This is where the greatest value and cost savings can be achieved over any given time horizon for both parties. Just like in personal relationships, choose your partners wisely now, otherwise you may find the true gems are already taken. 

The author, Lisa Shambro, is the director of the Foundation for Strategic Sourcing. With this issue, we welcome F4SS as a regular contributor on matters of cost containment relating to contract-packaging services.

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