The next step is to reduce unit prices for indirect supplies. Companies can eliminate off-contract buying, drive down purchase prices with reverse auctions and substitute for lower-cost items like printers. It's always important to balance short-term and long-term considerations. Squeezing quick cash out of an important supplier generally isnt worth it if it will come back to haunt you.

Only after shrinking demand and unit prices for indirect costs should companies take on the bigger challenge of pursuing per-unit cost reductions for direct supplies.

Getting on Firm Footing:

A downturn is the time to consider whether you are sourcing from the right suppliers to support your strategy. Leading companies will pick long-term winners by assessing total cost of ownership, instead of only invoice price. Taking a total cost of ownership approach can help companies rationalise suppliers and also makes it easier to identify opportunities where both suppliers and purchasers can jointly save.

Winning companies also look at how the purchase fits into a bigger scheme of things. For example, because it is charged fines for delayed projects, one construction company takes into account product delivery times. Depending on their business strategy, other companies consider factors like R&D capabilities and ability to innovate, quality of management, industry position and willingness to collaborate across critical fronts.

We find that companies involve purchasing too late in the game in the product development process, and fail to consider the cost impact of their design decisions. Take the case of a cardboard box maker that waited until after it had selected a supplier to call in the purchasing department to negotiate the contract. Had purchasing decisions been considered at the design stage, the company could have considered using two colours instead of three, and a less expensive printing process. Typically, around 60 percent of purchasing costs is committed at the design stage.

To keep the benefits coming, leading companies ensure that there is a clear owner for each key decision, and that decisions are made swiftly, at the right level, and with the right inputs. They install a higher caliber of purchasing talent to track performance. That will help the company keep purchasing costs from creeping up long after the economic turmoil subsides.

Written by Sampathkumar Sudarshan who is a partner with Bain & Company, India and Carlos Niezen who is Bain partner in Mexico City

Originally published in "The Economic Times" dated June 5, 2009