Procurement’s role in lowering product development costs

Procurement professionals are constantly looking for ways to lower product development costs, reduce maverick spend and SKUs, increase contract compliance and inventory turns and lower working capital. At the same time, companies have increased outsourcing of not only components, but also subassemblies and subsystems, and design in many cases as well.

Many large manufacturing companies have become more of final assemblers, prompting significant increases in outsourced material and services, which leading technology analysts have estimated to be as high as 85 to 90 percent in multiple industries.

This increased dependence on suppliers has created a need to employ supply chain best practices throughout the product lifecycle. Its most profound impact however, is at the beginning of the lifecycle during the product development process. Studies have shown that companies practicing early supplier involvement can reduce their product development costs by 18 percent and their time-to-market cycle between 10 and 20 percent.

Fundamental to the product development process is working with the right suppliers up front and sharing supplier information with the design community so the best performing, lowest risk suppliers are used. Procurement evaluates suppliers not just on their capabilities and price. Additional factors come into play, such as financial stability, geographic location, cybersecurity, quality, on-time delivery, social and environmental responsibility and adherence to regulatory requirements.

Fostering the reuse of standard parts within the enterprise has an exponential impact on procurement, as it increases contract compliance and inventory turns and lowers working capital. Creating digital catalogs of standard parts makes is easy for design engineers to search for items such as fasteners, electronic components or motors based upon their physical attributes or even by their geometric shape, and then incorporate them into the product design. Digital catalogs can include purchased parts as well as components or subassemblies that may be provided by feeder plants. Leading industry experts have suggested that many manufacturers currently maintain bloated inventories, and that the use of digital catalogs can reduce inventories by as much as 52 percent. It’s also estimated that engineers spend one third of their time on non-value work and that the largest contributor of non-value time is trying to find information. If the information they need is in a digital catalog, they can spend more time designing products and bringing them to the market faster.

Procurement’s role in product development costs and processes

One key to product development is procurement’s role in the request for quote process. The digitalization of this process enables the ability to intertwine it with other product development processes, such as new product introduction and engineering change management. Sourcing cycle times are significantly reduced by virtue of:

•  Electronic linking of technical product data (prints, 3D models, specifications, test procedures) with commercial data (quantities, contract terms and conditions, freight terms) to generate complete bid packages


• The submission of supplier bids through a web interface, enabling the sourcing manager’s use of standard reports to facilitate bid analysis


• Electronic workflow providing a paperless sourcing approval process

A study done by a marine engine manufacturer employing the above best practices yielded a reduction in sourcing cycle time of 15 to 20 percent, and up to 3 percent reduction in new product introduction costs.

Procurement professionals employ the use of cost knowledge management, or “should cost modeling,” to estimate the cost of a sourced item with accuracy. Frequently, a new product is a variant of an existing product, so much of the parts, labor, overhead and tool costs are similar.

A cost knowledge management tool is a repository of such costs, providing the ability to model what a product will cost. Digitalization has enabled a cost and value engineering approach at early stages of the development process by providing cost transparency for products and tools. This approach enables a quantifiable decision base to cost-optimized products, essentially providing a digital twin of product and tool costs to enable an accurate representation of planned and simulated costs. This increases the speed and accuracy of Request for Quote responses which helps companies to win more business.  A recent academic study indicated the best performing companies in the study were 17 percent more likely to employ cost engineering during the front end of development. 

Tracking product development costs across the organization

Procurement’s role in the product development process must always be considered in the context of the entire enterprise because it facilitates coordination across domains and geographically dispersed resources. Therefore, program planning & project execution play a big role in coordinating the timely and successful execution of the development of any new product.

The ability to assign work across functional areas and track milestones in a single environment provides enterprise-wide visibility, enabling leaders to anticipate and avoid problems rather than reacting after the fact, ultimately shortening time to market. Procurement’s participation in this process includes sourcing management of such activities as the generation of requests for quote, bids received, make vs. buy decisions and the selection of sources of supply. Downstream procurement activities would include the placing of orders for tooling, and ultimately orders for production.

The globalization of markets and rapid advancement of technology requires companies to innovate for competitive advantage, as manufacturers face shorter product lifecycles and drive to compress time to market. Integrating supply chain best practices into the product development process enables companies to streamline global sourcing processes, protect intellectual property, reduce risk and reduce errors – resulting in lower product development costs and shorter time to market.

About the Author
Steven Heutlinger is a Siemens PLM Software Solutions Consultant, with expertise in supplier integration solutions. He has been in the PLM industry for more than 15 years.