The challenges in today’s delivery market

One of the biggest procurement challenges facing engineering companies is the ability to re-procure complex mechanical parts and thus save costs in the engineering-procurement sector.

Technical specifications for these components, which are essential to the business, are usually managed by outside suppliers and rarely shared with the customer. They can be the smallest parts of the largest machines. Sometimes design drawings are outdated, of poor quality and worse, the intellectual property of the suppliers. In many cases, they are customized for the job and not to a common specification.

Limited bargaining power

When a large portion of the total procurement expenditure goes to these custom-made (ETO) parts developed exclusively for the customer, it is very difficult for the company to address these costs and try to reduce them.

They are also at a disadvantage when trying to cut costs for these direct components because they are often like small fish in a big pond with very limited bargaining power when dealing with large multinational component manufacturers who have a monopoly in their particular market.

Difficult to replicate

A further complication is that because drawings and specifications have been developed over time by one supplier, it is likely that these specifications and the level of design expertise have increased, making it virtually impossible to replicate them on the open market.

A new way of thinking is needed, one that bypasses a potentially incestuous supply market. The constant movement of engineers and vendors from one supplier to another can negatively affect negotiations because of the high risk of collusion between suppliers, as well as the risk that suppliers themselves are unwilling to participate in competitive events. So what can be done?

Reverse engineering: the key to savings in the engineering-procurement industry

Reverse engineering can be used to drive negotiations with all major manufacturers and achieve significant savings in the engineering-procurement sector. It is crucial to get the agreement of your engineers and the sales and marketing department from the beginning.

Involve them early in the process, and the implementation of a new way of working will go much more smoothly. After this is done, select the most relevant parts in terms of cost and reverse-engineer specifications and operating conditions to put them on the market for bids. This is the most labor-intensive part of the project.

Once the component is chosen, create an internal design specification for that component by bringing together your internal engineers and at least two small original equipment manufacturers (OEMs) with strong technical capabilities. Conduct meetings between these internal engineers and supplier engineers to align the demand with the technical proposal/design response given by the suppliers.

Ownership of design and collaboration

This gives ownership and control of the final design back to the company and circumvents the difficulty of creating a competitive situation because only one supplier has the design.

Moreover, having a small OEM producing the part implies the possibility of capturing the aftermarket business, an attractive proposition for suppliers that derive most of their profits from retrofits (repair kits and spare parts).

This is the famous “Gillette” business model, where the first part is sold at cost (shaver handle and blade) while the subsequent parts (package of replacement blades) are sold at a large margin.

Involvement of major manufacturers in the engineering-procurement sector

Finally, engage major manufacturers (mainly incumbents) and invite them to bid on the customer-specific specifications, demonstrating their willingness to produce the parts internally.

Implementing parts from the small OEM will require significant validation and testing. Therefore, it is worth adopting a short-term strategy of keeping the large established supplier as the “preferred supplier” and gradually incorporating the small OEM once their parts are tested and approved.

A two-tiered savings in the engineering-procurement sector

The strategy described above can be used to incentivize negotiations with all major manufacturers in the engineering-procurement sectorand and achieve significant savings. This is a two-fold saving, as there will also be significant cost savings on the parts manufactured by the small OEM.

If the company decides to add the patented sales, for example those made by the small OEM, to their product offering over the long term, then these savings can be built up over the medium to long term and result in increased sales. By taking care of David, it becomes much easier to get Goliath in line in the engineering-procurement industry.

Saving with Batchforce

If you are looking for ways to make savings in the engineering-procurement industry, consider this innovative David-and-Goliath strategy. It can help your company stay competitive in an ever-changing marketplace.

Batchforce continuously invests in its network, new technologies and innovations to optimize the efficiency and precision of the milling process.

Whether for one-off projects, prototypes or series production, Batchforce strives to provide customers with high-quality stainless steel parts that meet the highest quality standards. The team of experts is ready to advise and support customers in realizing their specific request.