A Better Procurement Model

A leading steel manufacturer in Asia wanted to establish a more sustainable path to profitability. During a 12-month transformation effort, it targeted three areas for profitability improvement: sales and marketing, working capital and planning, and procurement. In particular, the project focused on aggressive end-to-end cost reductions and ensuring the security of raw materials. The result? A savings of approximately $50 million per year.

The steel manufacturer worked with BCG to plan and execute its transformation. The team began with a comprehensive review of how raw materials were sourced, used, and managed across two manufacturing plants. The results showed inconsistent practices and a number of opportunities to optimize operations and reduce costs.

For example, each plant was using a different procurement model, one of which was several years out of date. Gaps were also found in raw material planning practices, and cost input models for selecting materials and suppliers were discovered to be inaccurate. More specifically, BCG’s review revealed that neither a fixed raw material recipe nor a fixed bill of materials matched the company’s procurement needs. What the client actually needed were more robust processes and planning in order to create a procurement model that better reflected dynamic market trends.

Better Model, Lower Costs

The new procurement model employs Value-in-Use cost inputs that enable the business to more effectively determine the most cost-optimal combination of raw materials. The model takes into account the frequent changes in raw material prices encountered by the company, as well as the availability of substitutable materials.  

The new model achieved a 2% to 4% reduction in raw material and operating costs across both manufacturing plants. This equated to a savings of approximately $50 million per year.

While the company faced its own unique procurement challenges, there are some important lessons that can applied to almost any industry:

  • Routinely and systematically review any existing procurement model for improvement.
  • Regularly review the planning process and recipe or blend of raw materials.
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