Different boxes were holding the same product
XYZCo buys corrugated boxes to use for shipping its products from 8 facilities located throughout the US. Over the years through acquisitions and local operating autonomy, procurement prescribed the same box design resulting in a proliferation of box specifications. XYZCo’s engineers routinely tested the boxes to ensure they met minimum compression strength standards (which seemed high according to procurement). Facing cost control pressure and an upcoming competitive tender, XYZCo knew there was an opportunity somewhere to reduce costs.
Synaptic Decisions was asked to help come up with a better way to buy boxes and save money.
Understand key value drivers
Our approach was to:
- Develop a box cost model to understand the key value drivers in manufacturing a box and determine what features to seek price discovery
- Analyze XYZCo's box demand to determine appropriate commitment levels to offer in the tender
- Design a 2 phase menu to send to qualified bidders
- Analyze each phase of the tender and coach the procurement team on specific negotiation strategies
- Determine optimal choice of vendors and contract features that achieve the lowest overall cost
Insights & Recommendation
What are we really buying?
80% of the boxes purchased require the same dimension and compression strength, but are built with different paper and corrugate. We asked the procurement team to think outside the box with the following question, "What is XYZCo really buying?" They agreed that they were not buying boxes, but rather containment with required compression strength. Defining parameters for box design and highly technical and outside procurement’s expertise. So what is the least costly box to make with a prescribed dimension and range of compression strength? Well, let’s ask the bidders to be innovative in a competitive tender. Here were the results:
When we varied the compression strength, the bidder’s cost of the box ($ per square foot) varied significantly, but on a linear basis. This would suggest that the bidders had a good sense of where their competition would price the existing requirement, but by changing the way requirements were prescribed they were forced to reveal their true price.
XYZCo achieved 18% annual savings on its box purchases. The procurement team was also armed with great data to better collaborate with the Engineering and Operations Groups on the cost of prescribed requirements.