A global manufacturer of residential and commercial door products faced growing bottom line pressure and a looming bust in the home building market. Since wood represented 25% of their cost to do business, this critical raw material was a prime candidate for a broad and strategic new spend management approach.
Open Door To Opportunity In The Wood Category
The wood category director struggled to manage spend strategically because he was regularly forced to work in “emergency” mode. Double-digit price increases, threats of discontinued supply, currency exchange issues, and inconsistent commercial terms dominated his time and attention. The company responded by building a cross-functional team of representatives from its 50 plants and procurement and engineering functions. They evaluated everything from value engineering to improved logistics to quickly reducing their total cost of using wood products.
Their priorities included:
- Standardization across all business units
- Shortening the supply chain
- Documentation of all drawings and specifications
- Implementing a fact-based approach to supplier management
With active guidance from Tenzing, the company executed a rigorous, well-staffed effort to gain control of the wood category.
For one consumer to bring $220M in spend to market in one package with a clear and comprehensive strategy left suppliers stunned.
Achieving supply base diversification was essential.
While roughly 60 to 70 percent of the company’s wood requirements were met by supply partners in South America, Asia presented an emerging opportunity. The team undertook a disciplined Request for Information (RFI) process and made in-person visits to qualified prospective suppliers. This deep, first-hand intelligence would prove to be essential in executing their overall strategy.
The cross-functional project team led a multi-stage negotiation process which included the company’s first-ever reverse auction for a subset of wood products. This component of the effort resulted in approximately $2M in savings due in large part to the investments made in pre-bid intelligence gathering.
The second round began with face-to-face negotiations with each key supplier. The teams messaging was crisp and on point, centering around customized, fact-based proposal feedback. For a company accustomed to reacting to supplier demands for price increases, the change was empowering. Suppliers told the team, ‘You can’t survive without us,’ and they were able to demonstrate with visual aids and data that, in fact, they could. Their knowledge of the market neutralized the suppliers’ negotiating strength.
The final result was an additional $5M in savings plus written contracts that clearly defined measurable performance metrics. Going forward, interruptions in supply would be met with financial ramifications. Suppliers would be held accountable; formalized specifications removed all doubt about what the company expected when they made a purchase. Control had successfully swung back to the buyer.
Speaking frankly about internal and external barriers as well as the range of opportunities that could be harnessed to generate savings and improved supplier relationships
Insisting upon written contracts with clearly defined and measurable performance metrics to ensure equal footing in negotiations and appropriate influence on an ongoing basis
Physically locating the global wood team together where they could effectively deliver year over year savings and improved manufacturing in response to supply market dynamics
Tenzing combined market insight with supporting analysis to transform the wood category, which represented 25% of material costs.