A1 Demand reduction

The core elements of demand reduction are as follows:

- Establishing cost awareness and corresponding standards.

- Improving and streamlining approval processes.
- Making increased use of lower-cost substitution products.
- Reducing the frequency of use.
- Limiting the scope of requirements.
- Reducing purchased quantities.
- Eliminating the demand for certain products.

These core elements are most effective when used in tandem, but even the application of just a few
will result in savings.

A2 Compliance management
Non-compliance may be permitted in the following cases, for instance:

- Business needs that can generally not be covered by the scope of products and services of the
selected suppliers.
- Specific (short-term) demand that the selected suppliers are not able to supply at the time in
question.

In order to achieve complete compliance with the contracts and agreements concluded by the
company, a number of conditions must be fulfilled:

- The preferred suppliers selected by purchasing must be clearly communicated within the
company; product users have to know what agreements exist and who the preferred suppliers
are.
- The ordering process must be structured in such a way as to prevent inadvertent non-
compliance. The catalog of products that can be ordered from these suppliers is individually
restricted. This is frequently done in the case of office articles, for example.
- The processes must be user-friendly so that users comply voluntarily and not because the
“bureaucracy” forces them to do so.
- Guideline compliance must be supported by positive (and also negative) incentives, both for the
product user and the purchaser, whose work is naturally oriented to the needs of his/her
internal customer.

Ultimately, it is up to the top-management to set an example by adhering to the rules and by

insisting on compliance.
 A3 Procurement outsourcing
Before the step towards outsourcing purchasing is taken, two core questions must be answered:

- What services are expected?

- What material and service groups are suitable for contracting out to outsourcing partners?

Outsourcing of the purchasing function, or at least parts thereof, is prepared and implemented in
four steps:

- The first step is to evaluate the options for outsourcing.

- The next step is to define the outsourcing model.
- The purchasing process is then placed in the hands of the external provider.
- Ongoing control of the external provider must then be put in place.

Besides a clear definition of the distribution of functions between internal and external services,
another critical success factor for procurement outsourcing is a clear definition of the scope of
services to be performed by the external provider.

A4 Sourcing community
The aims of sourcing communities are closely linked to the size of the companies involved:

- Smaller companies at the same location can make joint purchases of technical articles from one
supplier, or achieve better terms for the supply of operating materials and supplies.
- Medium-sized firms in favorable sourcing regions can share the effort and expense of identifying
and qualifying suppliers.
- Large companies can consolidate their demand for raw materials and have the materials bought
on global markets by experts at the best terms.

In line with these widely differing goals, different types of sourcing communities can be identified:

- Size of the participating companies

- Geographical focus
- Sourcing category focus
- Roles and responsibilities
- Interests and corporate strategies

The success of sourcing communities depends to a large extent on the choice of suitable partners.
The partners should all pursue a similar business philosophy and have similar expectations regarding
the collaboration.
 A5 Bottleneck management
Bottleneck management starts with three short-term measures:

- Establishing targeted program management and focusing resources on problem components.

- Near-term change of supplier (focusing on development and test resources for short-term
approval).
- Dispatching a number of employees to the supplier; obtaining delivery forecasts from the
supplier which can be updated daily; ensuring timely internal communication.

Over the medium term, more incisive measures are possible:

- Substituting parts or eliminating variants.

- Further supplier changes in order to achieve greater diversification.
- New developments and the use of new technologies in order to reduce dependence on old
technology.

The three long-term recommendations for avoiding supply bottlenecks are:

- Building up additional suppliers with capabilities identical to those of current suppliers.

- Identifying suppliers who are not yet on the necessary level but that can be developed further
with measures already in the drawer.
- Dual sourcing (i.e. using at least two suppliers in parallel for critical components).

A6 Vertical integration
The primary objective is to secure availability of short capacities and access to scarce resources. In
special cases, the motivation may also be an anticipated technological competitive advantage or the
ability to gain access to new customer groups. Besides these primary effects, vertical integration may
also provide benefits in connection with transactions, logistics, dealerships etc.

Besides ensuring that the acquisition is commercially justified, one must always keep in mind that
acquiring a supplier also means taking over its customers. It is therefore possible that, in a
roundabout way, the buyer will also become the supplier of its own competitors. If this new state of
affairs causes competitors to stop buying, the newly acquired supplier may be deprived of its
business base.

A7 Core cost analysis

The usual method is to look at the lowest-cost competitor.

The next step is to move towards reality again by asking:

- Which additional features are customers prepared to pay for?
- What measures are necessary for risk management?
- What production processes are actually available?
- What suppliers are available?

Even after these concessions, the cost is usually still 20 to 30 percent below that of current products.
This strategy seriously questions existing structures and calls for completely new ways of thinking.
Thus purchasing, which has particularly close contact with alternative solutions through its contacts
to suppliers, is ideally suited for driving this process.

A8 Invention on demand
The invention on demand model of solving problems comprises four steps:

1. Evaluation of the specific technical problem.

2. Translation of the specific technical problem into a general scientific problem.

3. Search for general scientific solutions.

4. Translation of general scientific solutions into specific technical solutions. The last step in a project
of this kind is to develop the rough concepts further into specific and viable technical solutions

The results of a project of this kind may be utilized in many different ways. Some companies use
them to build critical capabilities internally. Most use the alternative concepts as a lever for
negotiating with their current supplier. Through invention on demand, a company can in some cases
not only solve the problem of patent-protected suppliers, but also replace expensive components
with cheaper ones.