product consolidation - a technique to reduce costs
The objective of product consolidation is to reduce the overall number of parts and
increase the number of preferred (higher volume/lower cost) parts. In doing so,
one can increase order quantities. This will reduce the part and material
overhead costs. Ordering larger quantities of standard items increases the
economies of scale (higher volume/lower per piece cost).
In addition, one might be able to identify lower cost replacements for some of
the items.
Ask yourself the following questions:
Can you substitute one part for another standard part that fills the same function?Can you substitute one part for a lower cost part that will meet your requirement?What is the minimum list of parts we need to build our products?
Example
Let's look at the following items
|
 |
There are many ways to consolidate these items. Here, we will analyze the following consolidation:
It has been decided to only keep the 25 and 50 page white notebooks.Since the demand for the 800mb blank CD's is higher than for the 750mb CD's and the price cost difference is not very large, only 800mb CD's will be purchased.There are too many colors of pens available, only red and black will be kept.
|
|
The purchasing data now looks like this: |
 |
It can be noticed that as it stands, the total annual spend has increased. However, the annual volumes of the selected items have all increased as shown below.
|
|
|
|
These increases in annual volumes will support negotiations with the respective suppliers to
reduce the cost of the consolidated list of items.
Taking those discounts into account, the purchasing data is now:
|
 |
The total annual spend is now lower than the original spend. This consolidation did reduce the costs. |
|
|
|