How much are we lowering our material costs this year?

In a time of rising costs and inflation, my company has set a goal for me to reduce material costs by 7% — which feels nearly impossible. On top of that, I’ve inherited a situation where previous cost-saving reports were overly optimistic, and now I need to re-bid 85% of our material costs for the year with suppliers who have never held their pricing.

Question: How is everyone else managing material costs this year? Are you seeing any opportunities for real savings?

AIMDRIVE-AI Solution:

This could look impossible at first, especially in the current environment where many factors outside our control drive material price inflation. But even with rising prices, there are still ways to find cost reductions — if you’re willing to challenge the status quo. A few angles to explore: In a time of rising costs and inflation, my company has set a goal for me to reduce material costs by 7% — which feels nearly impossible. On top of that, I’ve inherited a situation where previous cost-saving reports were overly optimistic, and now I need to re-bid 85% of our material costs for the year with suppliers who have never held their pricing.

· The total cost incurred on a material by your supplier is the product of two variables: the material price paid and the material quantity purchased. Start by developing clarity around these two variables: what are their components and current values and how do they compare to benchmarks? Look for industry benchmarks as well as benchmarks your supplier may have from other work they do with your company or with other customers. Any significant deviation from these benchmarks warrants asking what are we doing differently that causes this cost disadvantage?

· Understanding the underlying factors that affect the value of these variables: If there is no obvious gap compared to benchmarks, then identify and list all the possible factors that influence the material price paid and the material quantity purchased. Reviewing these factors will usually help you ask the right questions and challenge your supplier on what could be done differently to achieve a lower price or purchase less. It may point to options that you are in control of as a customer.

Use AIMDRIVE-AI (Free) to perform this type of analysis. Once you look at a Should Cost click on the material cost drivers to reveal the underlying factors that influence them.