Strategies to decrease procurement costs – not just a price focus

In a talk by Mr Haaije van der Brug, Procurement Manager for Shell in Russia, on October 18, 2011, he described the 40/40/20 practice at Shell. The claim is that cost savings are generated only 20 % of the time through price reductions, but 40 % of the time through adjustment of specifications and 40 % of the time through demand management.  He describes an example involving Shell’s use of standby ships in Sakhalin (Russia). While the cost of the ships were stable and thus difficult to decrease, their fuel use cost $ 5 million annually. This fuel use was driven by the ships circling the island constantly throughout the year. Adjusting their routes to anchor when weather was good enabled cost savings of between $ 0.5 and $ 1 million, without affecting performance. His contention was that one should expect 3 to 5 % cost savings year-on-year through continued focus on such processes.  Do you agree that effective supply chain management i.e., adjustment of demand and specifications for supply significantly dominate prices in improving cost of goods sold ? Should suppliers be incented to discover such savings for appropriate rewards or is the continued right to supply sufficient incentive ? Could there be unintended side effects (such as potential future holdup) from continued specification adjustments to decrease costs from existing suppliers ?

 

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About aviyer2010

Professor
This entry was posted in Collaboration, Global Contexts, Operations Management, Supply Chain Issues and tagged , , , , , , , , . Bookmark the permalink.

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