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Valcon helps improve bottomline performance of an auto-electrical
parts manufacturer by ~5% reduction in procurement costs
Valcon Management Consultants .
FL No 608A .
6th Floor .
Spencer Plaza .
768/769 .
Anna Salai .
Chennai 600002 .
www.valcon.in
Business challenges
A leading manufacturer for auto-electrical parts, having the largest
auto and farm equipment OEMs as customers, was facing pressures on
the bottom line due to increasing raw material costs as well as drop in
profitability due to drop in market demand and intense competition.
The company initiated internal cost reduction programs to maintain
profitability but they were yielding limited results. As annual procurement
accountedforalmost60%oftheturnover,anyreductionintheprocurement
costs had a significant impact on the bottom-line performance. Valcon
was invited to assist them in the area of procurement cost reduction
and deliver benefits by identifying and implementing improvement
opportunities.
How Valcon took the client further
Valcon conducted a scoping study and identified the opportunities to
reduce the annual spend by ~5%-6% over 6 months.
Valcon also worked with the client to achieve cost reduction in
purchase of raw materials, job work, imported and bought out items
across categories such as:
Based on the Procurement Cost Reduction model, specific levers
were applied to high value benefit categories. Under each applied
lever, projects were created and potential savings opportunities were
quantified. Project teams were formed for implementation and project
execution were prioritised based on value identified.
 Copper
 Aluminum
 Steel
 Packaging
How Valcon helped
Valcon adopted a two-phased approach to achieve procurement cost
reduction:
 Savings identification
 Spend analysis
 Baselining
 Kick-off workshop
 Target setting
 Team formation
 Prioritisation of high value high
impact projects
 Detailed supply and demand
analyses
 Procurement Strategy
 Goal alignment
 Project execution
Value discovery
Valcon used its holistic framework to identify and evaluate
opportunities across various procurement categories.
In order to identify opportunities, annual spend and procurement
practices were reviewed along with the procurement function and
the senior management of the organisation. Over the spend base of
INR 118 Crores, projects covering more than INR 70 Crores of spend
were identified under ~56 projects with a potential to save more than
Figure1: Valcons procurement cost reduction model	
Figure2: Spend waterfall chart
INR 3 Crores within 3 months. Further categorisation of procurement
spend was done into specific benefit categories based on
 Commodity
 Type of input/product
 Cost attributes
which enabled identification and prioritisation of improvement areas.
Value realisation
In order to realise the value identified through different levers, it was
essential to have structured approach to implementation of the projects.
The various activities done as part of the project implementation ensure
systemic improvement monitoring as well as long-term sustenance.
Value discovery Value realisation
Price evaluation
 Extracting maximum value from material buying
 Setting up optimal processes for procurement
Consumption evaluation
 Evaluation of material
consumption
Procurement
cost reduction
Volume concentration
 Consolidation of volumes
across timelines and
other parameters
Specification improvement
 Identifying the optimal specifications and
material for economical buying
Relationship restructuring
 Identifying the best relation-
ship models for procurement
Sourcing model evaluation
 Adoption of best sourcing
models
Cu-Strip
0%
2%
4%
6%
8%
10%
12%
14%
16%
Digits on top of bars indicate
number of projects
26
6
5
7
3
26
3 23
6 4
Al-Ingot
Steel-
Lamination
Import-
Polepiece
Cu-Wire
Steel-Sheet
metalbody
Import-
Commutator
Import-
Carbonbrush
Steel-
Bearing
Import-
Sleeve
Al-Bracket
Steel-Shaft
Others-
Packaging
Valcon Management Consultants .
FL No 608A .
6th Floor .
Spencer Plaza .
768/769 .
Anna Salai .
Chennai 600002 .
www.valcon.in
Some project instances are given below:
Valcons approach
Valcon has an elaborate five step approach to identify, analyse and
execute opportunities in procurement cost reduction:
Supply
analysis
Implemen-
tation and
follow-up
Sourcing
strategy
development
Supplier
selection
Demand
analysis
Analysis Strategy Execution
54321
The various activities done as part of the project implementation
ensure systemic improvement monitoring as well as long-term
sustenance.
Throughout the five step sourcing wave, Valcon works with the client
Benefit category Project Identified saving Description Change implemented
Aluminum bracket Eliminating consumption variance in
casting brackets
4% of total aluminium ingots buying
value
 Earlier, the drawing weights of
castings were not defined
 BOM weight (measured during
the first physical weight sampling)
was taken for reference for
material issue to vendor and
product costing
Appropriation of BOM weights
according to drawing weights through
countermeasures
 Dies repairs
 Alternate suppliers
 Process improvement
Steel lamination Yield improvement through
manufacturing process change
4% of total steel lamination buying
value
 Earlier, the lamination plates were
manufactured with single square
packing tool which resulted in
yield of approximately 50%.
 New die with double cavity
developed to improve yield to 53%
Copper Best price evaluation for copper strips
and wires
1% of total copper buying value Identifying the best price of copper
strips through
 Industry benchmarking
 Sourcing from alternate supplier,
 Buying model evaluation
 Zero based costing of fabrication
process.
 Negotiations with current
suppliers
 Development of alternate sources
to reduce total buying value of
copper strips and wires
Packaging Specification optimisation of
packaging material
15% savings identified on total
cartons buying value and 3% savings
on corrugated boxes
 Specification optimisation
potential was identified through a
value-analysis exercise
 The specification optimisation
precipitated into material savings
 Existing suppliers were called for
idea generation, new samples
were tested and approved
team to analyse major categories, factors affecting the demand and
supply market forces and the constraints.
Structured initiatives and methodologies such as:
 Strategic sourcing
 Tactical buying
 Global sourcing
 E-sourcing
 Share of business allocation
 Alternate material usage
 Supplier relationships management
 BOM optimisation
 Structured supplier negotiations, etc.
add value to the clients practices and knowledge.
Summary
Valcon has strong credentials in implementing procurement cost
reduction programs across industries such as automotive and auto-
ancillaries, engineering & EPC, and consumer goods. Valcons
engagements have yielded a minimum cost reduction of 5%-8% of the
annual spend base for its clients and, in some cases, even higher.
Valcon uses it robust framework and approach and these
engagements are executed by highly experienced consultants with
deep understanding of industry and product categories as also of
the techniques of cost reduction. This ensures a quick realisation
of benefits by client organisation as also high returns on investment
made for the engagement.
Prioritisation of
high value projects
3
Benefit linkage to
profit & loss account
8
Sustenance measures
implementation
Online benefit tracker
Linkage to KPIs for
organisation alignment
Time bound
projects completion
Benefit sign-off
with finance
Procurement
cost reduction
program
implementation

More Related Content

Procurement cost reduction for auto electrical player

  • 1. Valcon helps improve bottomline performance of an auto-electrical parts manufacturer by ~5% reduction in procurement costs Valcon Management Consultants . FL No 608A . 6th Floor . Spencer Plaza . 768/769 . Anna Salai . Chennai 600002 . www.valcon.in Business challenges A leading manufacturer for auto-electrical parts, having the largest auto and farm equipment OEMs as customers, was facing pressures on the bottom line due to increasing raw material costs as well as drop in profitability due to drop in market demand and intense competition. The company initiated internal cost reduction programs to maintain profitability but they were yielding limited results. As annual procurement accountedforalmost60%oftheturnover,anyreductionintheprocurement costs had a significant impact on the bottom-line performance. Valcon was invited to assist them in the area of procurement cost reduction and deliver benefits by identifying and implementing improvement opportunities. How Valcon took the client further Valcon conducted a scoping study and identified the opportunities to reduce the annual spend by ~5%-6% over 6 months. Valcon also worked with the client to achieve cost reduction in purchase of raw materials, job work, imported and bought out items across categories such as: Based on the Procurement Cost Reduction model, specific levers were applied to high value benefit categories. Under each applied lever, projects were created and potential savings opportunities were quantified. Project teams were formed for implementation and project execution were prioritised based on value identified. Copper Aluminum Steel Packaging How Valcon helped Valcon adopted a two-phased approach to achieve procurement cost reduction: Savings identification Spend analysis Baselining Kick-off workshop Target setting Team formation Prioritisation of high value high impact projects Detailed supply and demand analyses Procurement Strategy Goal alignment Project execution Value discovery Valcon used its holistic framework to identify and evaluate opportunities across various procurement categories. In order to identify opportunities, annual spend and procurement practices were reviewed along with the procurement function and the senior management of the organisation. Over the spend base of INR 118 Crores, projects covering more than INR 70 Crores of spend were identified under ~56 projects with a potential to save more than Figure1: Valcons procurement cost reduction model Figure2: Spend waterfall chart INR 3 Crores within 3 months. Further categorisation of procurement spend was done into specific benefit categories based on Commodity Type of input/product Cost attributes which enabled identification and prioritisation of improvement areas. Value realisation In order to realise the value identified through different levers, it was essential to have structured approach to implementation of the projects. The various activities done as part of the project implementation ensure systemic improvement monitoring as well as long-term sustenance. Value discovery Value realisation Price evaluation Extracting maximum value from material buying Setting up optimal processes for procurement Consumption evaluation Evaluation of material consumption Procurement cost reduction Volume concentration Consolidation of volumes across timelines and other parameters Specification improvement Identifying the optimal specifications and material for economical buying Relationship restructuring Identifying the best relation- ship models for procurement Sourcing model evaluation Adoption of best sourcing models Cu-Strip 0% 2% 4% 6% 8% 10% 12% 14% 16% Digits on top of bars indicate number of projects 26 6 5 7 3 26 3 23 6 4 Al-Ingot Steel- Lamination Import- Polepiece Cu-Wire Steel-Sheet metalbody Import- Commutator Import- Carbonbrush Steel- Bearing Import- Sleeve Al-Bracket Steel-Shaft Others- Packaging
  • 2. Valcon Management Consultants . FL No 608A . 6th Floor . Spencer Plaza . 768/769 . Anna Salai . Chennai 600002 . www.valcon.in Some project instances are given below: Valcons approach Valcon has an elaborate five step approach to identify, analyse and execute opportunities in procurement cost reduction: Supply analysis Implemen- tation and follow-up Sourcing strategy development Supplier selection Demand analysis Analysis Strategy Execution 54321 The various activities done as part of the project implementation ensure systemic improvement monitoring as well as long-term sustenance. Throughout the five step sourcing wave, Valcon works with the client Benefit category Project Identified saving Description Change implemented Aluminum bracket Eliminating consumption variance in casting brackets 4% of total aluminium ingots buying value Earlier, the drawing weights of castings were not defined BOM weight (measured during the first physical weight sampling) was taken for reference for material issue to vendor and product costing Appropriation of BOM weights according to drawing weights through countermeasures Dies repairs Alternate suppliers Process improvement Steel lamination Yield improvement through manufacturing process change 4% of total steel lamination buying value Earlier, the lamination plates were manufactured with single square packing tool which resulted in yield of approximately 50%. New die with double cavity developed to improve yield to 53% Copper Best price evaluation for copper strips and wires 1% of total copper buying value Identifying the best price of copper strips through Industry benchmarking Sourcing from alternate supplier, Buying model evaluation Zero based costing of fabrication process. Negotiations with current suppliers Development of alternate sources to reduce total buying value of copper strips and wires Packaging Specification optimisation of packaging material 15% savings identified on total cartons buying value and 3% savings on corrugated boxes Specification optimisation potential was identified through a value-analysis exercise The specification optimisation precipitated into material savings Existing suppliers were called for idea generation, new samples were tested and approved team to analyse major categories, factors affecting the demand and supply market forces and the constraints. Structured initiatives and methodologies such as: Strategic sourcing Tactical buying Global sourcing E-sourcing Share of business allocation Alternate material usage Supplier relationships management BOM optimisation Structured supplier negotiations, etc. add value to the clients practices and knowledge. Summary Valcon has strong credentials in implementing procurement cost reduction programs across industries such as automotive and auto- ancillaries, engineering & EPC, and consumer goods. Valcons engagements have yielded a minimum cost reduction of 5%-8% of the annual spend base for its clients and, in some cases, even higher. Valcon uses it robust framework and approach and these engagements are executed by highly experienced consultants with deep understanding of industry and product categories as also of the techniques of cost reduction. This ensures a quick realisation of benefits by client organisation as also high returns on investment made for the engagement. Prioritisation of high value projects 3 Benefit linkage to profit & loss account 8 Sustenance measures implementation Online benefit tracker Linkage to KPIs for organisation alignment Time bound projects completion Benefit sign-off with finance Procurement cost reduction program implementation