Case Study: Supply Chain Management/Supplier Development
The following Case Study overviews the results of nearly eight years of work assisting a global client with supply-chain management and supplier development, in service of increased customer-supplier transparency and significantly reduced product costs:
A major European-based, worldwide manufacturer of consumer electronics products.
Fiercely competitive market pricing by the Japanese and other rival consumer electronics manufacturers places extreme pressure on margins. To combat relentless, yearly price erosions of as much as 20 – 25%, company must continuously seek ways to reduce key product component cost as a means of maintaining competitive market pricing and profit margins.
Company embarks on a component-by-component, team-based, analytical approach, using the services of Gagnon Associates. Over a period of more than eight years, cross-functional, joint customer-supplier teams working with Gagnon Associates consulting support identify significant cost-reduction opportunities across all components, e.g., transformers, connectors, speakers, etc.
Representative example: to reduce the cost of Line Output Transformers (LOTs), an expensive and critical TV picture-tube component, company assembles a team composed of some of its own experts and representatives from its most preferred LOT supplier. Team includes company representatives from the Netherlands, the Far East and key representatives from supplier headquarters in Italy. Functions represented include: purchasing, design, electrical and mechanical development, product management, quality assurance, marketing and sales. Challenge: reduce integral cost of this supplier’s 1/3 share of the $25 million spent yearly on LOTs by at least 10%, roughly the equivalent of $800 thousand.
Following a process designed and managed by Gagnon Associates consultants,
and working over a period of several days, customer/supplier team: a) establishes a common knowledge base by sharing perspectives on relationship history and joint work practices, b) reviews data on LOT design, development and production processes and costs, c) identifies/analyzes opportunities to reduce cost of development and production of LOTs, and d) develops and commits to cost-reduction recommendations and joint implementation plans.
With key supplier input, team uncovers strategy for more cost-effectively matching LOT capability with desired TV set functionality. Applicable across all TV set ranges but one, concept results in hundreds of thousands of dollars in savings. In addition, team resolves to explore a lower-cost sourcing alternative for raw material and to augment effectiveness of the supplier’s purchasing capability. Resulting cost reductions total $2.069 million, more than double the initial target. In addition, applicability of the identified strategies across LOTs purchased from all other suppliers promises to yield as much as $5 million in total cost reduction.
On the session’s final day, at an open forum designed and moderated by consultants from Gagnon Associates, a group composed of customer and supplier managers approves all cost-reduction plans, thus accelerating the implementation process.