Does Cost Containment Have 2 C's Or 4?
PurchTips edition #159
By Charles Dominick, SPSM, SPSM2, SPSM3
What Are The 4 C's Of Cost Containment?
If you're looking at the letters in the term "cost containment," you'll only see two "c's." But there are actually four "c's" associated with the practice of cost containment. Use these four techniques to maximize the results from your cost containment initiative.
Consolidation A timeless principle of cost-effective purchasing and supply management is that the more you buy, the less you pay per unit. So you need to consolidate your enterprise-wide spend in a category or combination of categories into a large "market basket" that you will entice suppliers to bid on. Leveraging your volume in this way helps to maximize the cost savings available to you.
Competition Competition between suppliers is a powerful tool for reducing costs. After you have developed your market basket, you should identify a healthy number of suppliers to bid on your requirements, perhaps even using a reverse auction, if appropriate. The less certainty that suppliers have about earning a valuable chunk of business, the more aggressive their pricing will be.
Contracting What gives suppliers a lot of incentive to win your business? A long-term guarantee of a certain volume of business does! If you are able to promise a forecasted quantity to the successful supplier via a contract lasting three or more years, you will likely inspire in suppliers a keen interest in helping you achieve your cost containment goals.
Collaboration Your cost containment work doesn't have to end when the contract is signed. You can collaborate with your supplier to identify waste, inefficiencies, and other opportunities to take cost out of the supply chain in a manner such that both your organization and the supplier can financially benefit. Agree to meet regularly during the term of the contract with the goal to exchange ideas that can result in measurable cost containment activities.
With a large market basket, maximized supplier competition, a contractual guarantee of multi-year volume, and a plan for working with your suppliers, you are well on your way to cost containment success!
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