Sourcing, the way to lower costs for direct material

Companies are using More Strategies to Lower Costs for Direct Materials. e-Sourcing is a key one. Article published in April 12, 2006 (SmartPros – USA)

Companies are looking beyond supplier negotiations and price breaks by developing enterprise-wide sourcing processes and low-cost country sourcing strategies to reduce what they pay for direct materials.

Until recently, the strategies companies used to reduce those costs were simply negotiating with suppliers and mandating price concessions. Survey data from AberdeenGroup indicates that developing an enterprise-wide sourcing process is the top priority for a direct materials sourcing strategy. The other top strategies are initiating or increasing low-cost country sourcing and establishing cross-functional teamwork.

The research found that leading companies have, on average, 86 percent of their spend under management in a strategic sourcing process. This is compared to the industry average of 49 percent. Historically, for each dollar of spend under management, a company can save anywhere from five percent to 20 percent. To achieve direct materials sourcing objectives, companies bring in sourcing teams much earlier in their product development processes, and are planning to increase low-cost country sourcing, according to the survey findings.

Another interesting finding, according to the survey, is the acceptance (by more than 40 percent of respondents) of technology in aiding direct materials sourcing strategies. Over the next two years, the most popular technologies in which companies are investing are:

* Product lifecycle management (PLM),

* Optimization-based analytics, and

* Web-based negotiation or sourcing automation.

Some respondents report using technology developed in-house for such functions as spend analysis and supplier performance. But these technologies are being phased out in favor of commercial applications due to lack of scalability, as deployments become increasingly global. A copy of the report is available at

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