Optimizing costs with strategic sourcing builds cost advantage for major Chinese bus manufacturer
A leading Chinese bus manufacturer in both local and international markets wanted to improve their competitive position by optimizing their cost structure of supplied parts.
The company realized that they had not monitored and updated their supplier base regularly and that significant potential savings were possible in this field. They contracted ARC Consulting to do a category benchmark project for four of their key components, to assist in the renegotiating contracts with existing suppliers and/or to find new suppliers for the target parts.
In an effort to improve its cost structure, the customer started an evaluation of its production operation process and identified that their supplier base for some key parts had not been continuously monitored and updated. Further analysis revealed that there were 4 key codes that presented the highest potential for savings. After an extensive research and analysis by ARC Consulting, potential savings of approximately 1.6 Million RMB were identified for 3 of the 4 targeted part numbers.
To realize the potential savings, ARC Consulting recommended the client to renegotiate prices with existing suppliers and expand their supplier base with new strategic partners.
The category benchmark project was done in 3 main steps:
- Step 1: Build a universal database of potential suppliers
- Step 2: Apply a first filter to qualify them: using phone interviews to reduce the number to 20 suppliers
- Step 3: Perform an in-depth analysis of each of the suppliers based on defined parameters to identify a list of finalists.
An initial group of 225 automotive upholstery and mold injection manufacturers were identified and this group was narrowed down to 20 based on the following criteria:
The group of 20 suppliers was then evaluated further against the following criteria to define the 6 finalists:
Finally, for each of the 4 target components at each of the 6 finalists, a supplier profile was created and a benchmark criterion was calculated for comparison. The criterion was set to estimate the purchasing cost for each component (production cost= unit cost x annual purchase volume x contract duration in years). For each supplier, the profile included a “Pros and Cons analysis” and a spider diagram evaluating them on company size, finance capability, production capability, R&D capability, and management capability.
To further support the understanding of the cost structures and decision-making, a cost analysis was done to identify the key drivers and each supplier was evaluated against them.
The recommended implementation plan was divided into short, medium and long-term actions:
- Short-term: ARC Consulting identified 2 parts with existing molds that could be re-negotiated with the current suppliers to deliver a processing savings of approximately 1.3 Million RMB.
- Mid-term: Expand the company’s approved vendor list to include mold suppliers who can offer more competitive pricing for mold making. And request the company’s assembly partners to source from the approved mold suppliers.
- Long-term: Continuously evaluate new potential suppliers. The significant savings already identified for 2 of the parts is an indication that the cost structure was not optimal and that there should be other areas of improvement for the customer. To do this, it is suggested that the client monitor the market conditions on a regular basis. As part of this project, two of the 6 finalists were recommended as strong candidates to be considered as new additions to their supplier network.
ARC Consulting assisted the company in evaluating over 225 different assembly manufacturers on their capabilities, experience, knowledge and location, with only 6 considered to be capable finalists at the end of the process.
The project successfully identified approximately 1.6 Million RMB in savings for the company. This savings would be the result of selecting the right partners and a better understanding of the key cost components (processing costs and mold costs) to be negotiated.
Some key learnings from the project were that standardizing the quotation method can facilitate the comparison between suppliers and also that when requesting quotations from suppliers, they should require them to submit complete 3D drawings in order to verify the mold costs.
With the support of ARC Consulting, the plan proposed was implemented smoothly and the estimated savings of 1.3 Million RMB were realized making this project a big success.