gathering information may be. Furthermore, care must always be taken to safe-guard the objectivity and reliability of the information sources. Product evaluations in the Internet may come from anyone, even from competitors. And, last but not least, the used data should be as up to date as possible. If market conditions are prone to changing quickly, new data must be acquired at suitable intervals.
7.1.4 Areas of Application
Market analysis and monitoring are inevitably part of the strategic purchaser’s day-to-day routine. Only by a sound knowledge of the market conditions can purchasers optimally connect the internal requirements to the external framework conditions. Procurement market research is especially necessary within the scope of supplier identification and selection. Only on the basis of procurement market, research purchasers will get the needed information for selecting from a great number of suppliers the optimum and most reliable ones for their demands.
In the context of purchase negotiations, procurement market research is a constituent part of the necessary preparation. The provision of market data helps evaluating one’s negotiating power. Furthermore, procurement market research provides choices of action by identifying competitors that can be used for one’s arguments in the negotiation.
The strategic and planning process is another area extensively supported by procurement market research. Especially with regard to long-term purchasing decisions, there is no other way than to gather facts, figures, and data at first on which the possible procurement options can be based.
By editing and filing the results of market research, these can be used cross-departmentally. In this way, these data will not only provide decision-making aid to the Purchasing, but other divisions such as the sales, development, or production departments will be given valuable hints for their planning. Thus, procurement market research is a powerful instrument of Strategic Purchasing that can be used company wide.
review and achieve the optimum conditions for conceiving ideas. The Purchasing is an active member of the team and a driving force when it comes to considerations related to the value analysis that aim at optimising the economic efficiency of products and processes. Another task of the Purchasing is to involve suppliers in the value analysis process and to tap into the know-how of the suppliers.
The essential approach of value analyses consists in assessing products and functions separately. The function is regarded as the purpose or the customer benefit, whereas the product is the way in which the function is being realised. At first, the separation of function and product is limited to original customer benefits, e.g. drawing lines in the case of a ballpoint pen or transporting goods from A to B in the case of logistic processes. Common questions for identifying the original function of an object are, amongst others:
• What does the object do and for what reason?
• To what purpose is this object needed?
• What is this object about essentially?
A detailed catalogue of question is presented in the following “Hint from Experience” chapter. In the next step, the functions of the given product are analysed with respect to their necessity. A ballpoint pen e.g. may lie well in one’s hand, may write without blurs, and may be characterised by high-quality design.
These functions must then be checked with regard to their relevance to the customer benefit. If the respective function is imperative for generating the customer benefit, it is classified a main function (in this case, writing without blurs). If the function is helpful for generating the customer benefit, it is classified an auxiliary function (good to handle). Functions that do not fit in either of these two categories are unnecessary functions that do not meet the market demands. Such unnecessary functions produce costs that are not rewarded by the market. For that reason, they should be eliminated in the further course of the examination, and alternative solutions should be developed. The following “Practical Tip” will show in detail how this can be done.
Practical Tip: Value Analysis
Unfortunately, the construction of a product is still the key element when it comes to cost avoidance or cost reduction. Design-to-cost is the pertinent catch-phrase in this context. But, unfortunately, the words are often not followed up with deeds. For this reason, it is all the more important that the Strategic Purchasing becomes involved at best during the innovation stage of the product creation process and at the latest during the development stage. To close the stable door after the horse has bolted—in other words, when a situation has occurred in which the waste has been built in the product ready for series production—the only, rather painful and thorny way will be to optimise the costs retroactively. All too often the solution is sought in optimising the manufacturing costs in one’s company—in many cases with little success. As
the purchasing division is responsible for the lion’s share of the pool of costs (depending on the respective industry, up to more than 50% of the added value), it is advised to primarily act here. Conventional purchasing, however, is no longer sufficient for effectively supporting the sustainment or increase of the company value. Modern Strategic Purchasing not only has to be a persistent driving force in this process, but it must also command an increasing degree of technical competence and management skills if the often neglected potentials of the price and value analysis (the so-called product value management) shall be fully exploited.
And there are many reasons why a targeted price and value analysis should be initiated. Drastic cost reductions may be required due to market conditions, or the corporate management may push for an increase in profit. In such cases, it is always more commendable, and also very appreciated by the corporate management, if strategists in their proactive, targeted search discover suitable candidates (such as A parts, parts with long lifespans, or parts developed under high time pressure) in their purchasing portfolio and take the initiative on their own.
In addition to the often used instruments of the price analysis, value analyses strive for systematically finding more cost-effective solutions with regard to the necessary functions of the object in question, eliminating the unnecessary functions of the product, or even for enhancing the functional range of the product if by this enhancement the commercial profit can be increased. After the object to be exam-ined has been defexam-ined, the following procedure concerning a price and value analysis workshop has proven effective.
1. At first, a team consisting of representatives of several divisions is formed. If the added value of the product is predominantly bought in, the Purchasing should insist on chairing and managing the project. Only from a leading position, Purchasing can fully act as the driving force and additionally improve the standing of Strategic Purchasing. In any case, the following divisions should also be involved: At first, controlling. Controllers undertake the controlling of the project and apply their in-depth understanding of the costs to a target price analysis. The sound technical knowledge of design engineers will especially be needed at the value analysis stage (if possible, not only the author of the original design should be involved); detailed knowledge of processes will be contributed by the production scheduler in the context of the value stream analysis. In addition to the strategic purchaser, the key supplier (or key suppliers) should also be involved at least temporarily when it comes to optimising the bought-in parts and their supply chain.
Value stream analysis is a microeconomic instrument that is used for improv-ing process flows in production and also for optimisimprov-ing services. Value stream analysis is also called value stream mapping (VSM). Its aim is to record the current efficiency of the added value and to clearly represent the results with the aid of symbols and colours. In doing so, everything is reviewed from the customers’ point of view; for in the end, the customers determine the demands on the production and consequently on each single production process.
By such an analysis, the value-adding as well as the not-value-adding pro-cesses are being identified. In the following design approach, an improved value stream is designed by minimising and, if possible, eliminating non-value-adding activities and unnecessary wait times. In the context of the services management, the particular wait times between the value-adding segments are minimised.
This method has been developed in Japan. Eliminating waste (of time) is a keystone of the Toyota Production System (TPS). The Japanese word for waste is muda; therefore, the procedure of waste elimination is called muda elimination.
Prior to the kick-off meeting, the project head and the controller identify the key data (parts and costs history, partial price comparison, assessment of cost drivers with the aid of an ABC analysis, and target price analysis) and prepare a presentation that shall clearly outline the motive, necessity, and chances of the project. If the object in question is an OEM product or if the added value of the product is predominantly bought in, the calculation of the supplier is also roughly assessed by this method—a nice side effect. OEMs (Original Equipment Manufacturers) are defined as manufacturers of components or products that do not market these products on their own. With excellent results I often deployed trainees for this necessary but time-consuming work; the trainees (especially the career-minded ones) enthusiastically attended to the whole process and profited enormously with regard to their training and their professional career.
2. Based on the actual designs, the suppliers are confronted with the assessed knowledge about the benchmark prices and consequently the realistic potentials to start negotiations with target prices (Fig.7.1).
Purchase part price analysis
= Cost driver analysis +
optimization of procurement
Technical de-refinement
= Product optimization
Continuous improvement process
= Process optimization
added value waste
supplier transport transport
presupplier DC
production costs
added value waste
Fig. 7.1 Product and process optimisation along the value chain
The results realised in this way will, however, often be much higher than the economic costing values. For this reason, new ways of cost reduction must be found. Now it is up to the complete value analysis team including the suppliers.
The following list of questions is a good guideline and repository of ideas for detecting wastes with regard to the functions and the customer benefit. Addi-tional to purchasing price analyses, the value stream and the added value analyses are further sources of hidden potentials.
• Is the function necessary for the majority of the customers?
• Can functions be achieved by other parts?
• How can functional flaws be removed?
• Are particular attributes overdesigned?
• Which tolerances can be widened without compromising the functionality?
• Can materials be replaced by cheaper ones?
• Which materials could ease the manufacturing process?
• Can particular parts be replaced by standard parts or be made of standard parts?
• Will changes in the structural design reduce the material or handling costs?
• Will it be possible to make the part with another manufacturing process or with other means of production?
• Will it be possible to omit or shorten particular processes?
• Will in-house be more benefiting than external procurement?
• Is the prescribed surface treatment really necessary?
• Is another surface treatment acceptable?
• Will waste be diminished by changes of the construction, by changes in the manufacturing process, or by harmonisation of the raw part to the manufacturing dimensions?
• Are there others uses for the waste?
• May a particular part be made from the waste of another one?
• Will it be cheaper, if a part is composed of several single parts?
• Will costs be saved by changing packaging or mode of transportation?
3. After an extensive brainstorming process, the identified potentials are assessed and the respective cost improvements added up in best- and worst-case scenarios. The whole process runs into a realisation concept with priorities, time lines, and assigned responsibilities.
4. Realisation. Now the designed external and internal measures must be tracked by the project management with regard to their quick and effective implementation.
The team and the customer must be informed on the progresses regularly—so do good and talk about it!
How the procedure works in practice, I will now describe by means of an example from my time in the automotive industry. My then employer supplied seat systems and car gearshifts to several car manufacturers as a first-tier supplier (Fig.7.2). As a very young, fledgling technician for machine tools I was made responsible for the project
after only 2 months of employment with the company. This was a difficult task for the result of a first calculation and the fixed selling price were worlds apart. A two-digit percentage quotation was missing only to break even. My then employer experienced severe economic difficulties at that time, and so the price dictate of the renowned purchaser had to be accepted according to the slogan: “We will get it done.” I did not see this situation at that time as a burden but as a challenge and a chance; as the product was just at the beginning of a 4-year life cycle, all was not yet lost. I was given a free hand (which boosted my motivation enormously), and so I started with conducting the ABC analysis. Apart from several processes that badly needed optimisation, quickly a dominant A part became apparent: a shifting tube that was mounted in several car types as a platform product.
In the second step, in close cooperation with the purchasing division a global enquiry for this part was started (including, amongst others, suppliers from Germany, Italy, and China); in this enquiry, we requested that the submission of a tender should also include the figures of the separate price components (Fig.7.3).
With an annual volume of 950,000 parts, this order was very attractive for the providers, and so I received all data needed for a parts-related price comparison.
Although the global enquiry brought the desired results with regard to the compo-nent prices as well as with regard to the tooling costs, the project team decided to begin final negotiations with the German provider due to its quality level and the physical proximity to that supplier.
The price comparison of the separate parts proved very helpful in the negotiation as it demonstrated, at least in theory, the possibility of massive price and cost improvements. With negotiating skills and that information, the price per unit could be reduced from 5.67 EUR to 4.93 EUR and the tooling costs from 68,000 EUR to 43,000 EUR (see Fig.7.4).
Fig. 7.2 Object of the value analysis: switching tube
But, sadly enough, the result was not sufficient for the project going into the black.
In close concert with the supplier, and our customer as well, within 1 year we succeeded in reducing the price of the shifting tube to 4.30 EUR with the aid of value analysis measures, and we could at the same time also considerably reduce the weight of this component (a comparison of the shifting tube before and after the value analysis measures is given in Figs. 7.5 and 7.6). Especially for automotive manufacturers, weight reduction is a very important customer benefit that—in contrast to the situation at that time—will nowadays be financially rewarded by customers from that industry.
part / work step Supplier A Germany
Supplier B China
Supplier C Italy
target
Ball 90235664 0.03 € 0.01 € 0.04 € 0.01 €
tube 90465459 0.95 € 0.98 € 0.99 € 0.95 €
Sheet 90465 677 0.45 € 0.32 € 0.15 € 0.15 €
Ring 90222227 0.15 € 0.14 € 0.18 € 0.14 €
Zink plang 0.60 € 0.40 € 0.75 € 0.40 €
Knurling 0.50 € 0.08 € 0.45 € 0.08 €
Reducing 0.15 € 0.10 € 0.16 € 0.10 €
Bending I 0.30 € 0.10 € 0.32 € 0.10 €
Bending II 0.28 € 0.09 € 0.26 € 0.09 €
Welding Tube 0.26 € 0.12 € 0.31 € 0.12 €
Welding Ring 0.35 € 0.17 € 0.40 € 0.17 €
Milling 0.20 € 0.01 € 0.25 € 0.01 €
Packaging 0.12 € 0.06 € 0.14 € 0.06 €
Transport 0.09 € 0.98 € 0.40 € 0.09 €
Profit & Contribuon 1.24 € 0.80 € 1.30 € 0.80 €
Complete price 5.67€ 4.63 € 6.10 € 3.27 €
Tooling 68,000.00 € 16,000.00 € 56,000.00 € 16,000.00 €
Fig. 7.4 Results of the parts-related price comparison Supplier A
Germany
Supplier B China
Supplier C Italy
5.67 Euro 4.63 Euro 6.10 Euro
tooling
68,000 Euro tooling tooling
56,000 Euro
Fig. 7.3 Global price comparison
The resulting savings of 1.54 MM EUR greatly contributed to the profitability of the system. And I had found my lifelong love of Purchasing, as I had learnt that Purchasing is a powerful leverage that is becoming ever more important.
Conclusion Price and value analyses are an efficient instrument if significant cost reductions must be achieved. And never forget to involve the suppliers with their great optimising know-how!
Fig. 7.5 Switching tube before value analysis
Fig. 7.6 Switching tube after value analysis