I was recently involved in a sourcing activity to replace a direct ingredient at a food company. The item was known to be expensive but its specialised high flow properties allowed the ingredient to be used in ambient conditions. The lower cost, standard product could not be used without investment in heated storage tanks that would be required to maintain the product in a liquid state.
Suppliers work hard to differentiate their goods; it allows them to minimise competition and charge premium prices. One type of differentiation is to develop products that confer a manufacturing advantage for the buying company – so called “functional ingredients”, usually backed up by knowledgeable and responsive Technical Sales Managers keen to deepen their differentiation. The result is that these ingredients may, over time, develop a special status and their brand names sometimes creep into specifications and bills of materials.
Typically, these functional ingredients are not the highest profile raw materials and they have a knack of hiding away in the middle rank of spend reports – not quite important enough to be looked at this year. The danger is that a combination of supplier conditioning linked to exclusivity and stakeholder reluctance to trial alternatives can make these ingredients appear to be more “special” than they really are. One way to shed light on potential opportunities, and to explain the position to stakeholders, is to use the Supply & Demand Analysis Tool to identify the relative strengths of buyer power and supplier power.
The tool was applied to the opening example and quickly demonstrated that the functional ingredient was being treated as Proprietary when it was actually Generic . An almost identical product with the same high flow properties could be sourced from an alternative supplier and their first quotation delivered a 35% cost reduction. Although absolute spend on the ingredient was not chunky the benefit of moving from premium price to market price provided a significant saving.
To be clear, functional ingredients are used because they increase manufacturing yields, improve quality or simplify handling, and the higher prices that they command will often provide the best overall value. However, there is no excuse for not reviewing these spend categories to determine if suitable alternatives are available.
If you’d like to know more about our views on managing functional ingredients, of if you have a different approach, or you’d like to understand more about the Supply and Demand Analysis tool please get in touch with Allison Ford-Langstaff, Transformation Director.
by Paul Lee