Utilizing Predictive Procurement for 10-20% Cost Savings in the Auto Industry

Today’s Automotive Procurement Challenges

Based on my experience, an auto supplier’s total purchases may be as high as 75% of revenue with profit margins only 5% of revenue. For a $100M company, if procurement achieves 2% (or $1.5M) in savings, that uplifts company margin by a whopping 30% (from $5M to $6.5M in this ex.). There has always been tremendous pressure to deliver annual cost savings, but the stakes are even higher today due to:

• Global economic inflation
• Geopolitical turmoil
• Logistics disruptions
• Flat global automobile sales
  • Declining internal combustion engine sales
  • Growing but fragmented EV market (BEV, HEV) with shifting demand in NA due to range, infrastructure, and resale concerns
• Competitively priced BEVs from Chinese automakers
  • Cost advantage prompts high tariffs from the USA, Mexico, and EU to protect domestic markets

3 Automotive Use Cases for Predictive Procurement

To navigate the above challenges, Arkestro offers a strategic advantage by leveraging advanced data analytics and machine learning to deliver strong procurement operating efficiencies and double digit percentage savings, and is being applied by many companies for a wide variety of spend categories.

This proactive approach enables procurement professionals to make informed decisions, ensuring cost efficiency, supply continuity, and competitive positioning in a dynamic automotive industry. Below I’ve highlighted some use cases for Predictive Procurement Orchestration (PPO).

#1: Indirect Procurement

Major automakers and auto suppliers are piloting Arkestro and quickly realizing great savings and quick, significant ROI. Companies leverage the latest supply options, capture historic sourcing results, learn from their best/most experienced buyers, and create strong competition in sourcing events to drive results.   

One such automaker saw 14% savings on an indirect material event run in the platform for various services. There have been other successful events run on maintenance, repair, and operations expenses (MRO), office supplies, and more.

The platform provides clear, real-time pricing feedback to suppliers after each round of quoting and improves supplier satisfaction. Buyers can conduct many more events and increase the percent of spend under ‘active management’ for even more savings.   

#2: Logistics/Freight

PPO works very well to deliver the same buyer efficiencies and savings for logistics. Events can be customized so your logistics experts first optimize logistics routings (shifting less-than-truckload into full truckload, consolidating partial ocean shipments into full container loads, etc.).  

Then the PPO sourcing event proceeds quoting as many suppliers and lanes as required and evaluates suppliers as you wish (weightings are flexible: ex. 50% price, 20% open capacity, 20% scorecard rating, etc.).

In fact, one Arkestro customer identified a 25.9% savings potential on a North America-wide logistics event. The SVP of Supply Chain stated, “All lanes received lower bids than average historical price. Just think about that. That’s HUGE.”

#3: Direct Material

PPO is highly effective for many direct materials, including raw materials, components, and assemblies. However, it may not be applicable for items tied to a published price index or very strategic/new technology parts warranting detailed cross-functional reviews.

PPO for Build-to-Print Parts or Assemblies: If new suppliers need to be qualified, start with a Request for Information (RFI) event to evaluate supplier self-assessments, on-site quality reviews, financial viability, and quality system certifications. Following this, conduct RFQ rounds.

PPO for Supplier-Designed Parts or Assemblies: Similarly, pre-qualify new suppliers with an RFI event, then issue an RFQ or Request for Proposal (RFP) with detailed part performance, packaging specifics, and volume requirements.

With direct materials representing 50-60% of revenue in the automotive industry, companies leverage tools like cross-functional commodity teams, commodity strategies, cost models, value analysis, and lean workshops to manage these costs.  PPO can deliver 10% savings in direct materials versus 15-17% in indirect materials.  A 10% improvement in a $15M per year direct material commodity translates to $1.5M in cash and profit improvement annually!

Conclusion

Companies that take the small risk to be among the first to embrace the power of AI, machine learning and behavior theory with Arkestro, will be the big winners driving best procurement practices throughout the organization. Here are a few quick wins I have seen achieved through the power of Predictive Procurement Orchestration:

🚙 Automakers and auto suppliers implementing Predictive Procurement Orchestration (PPO) can quickly achieve outstanding procurement efficiencies AND double digit % cost savings.

📦 PPO sourcing events can be very quickly run for the vast majority of Indirect Material spend categories with efficiency savings & 15-20% price savings.

🚛 PPO sourcing events can be quickly run for logistics/freight categories, often just after a spend optimization review to define the preferred transportation modes and lanes. Optimized routings achieve nice savings and the subsequent PPO event can deliver further savings of 10% or more.

🚘 PPO sourcing events can be quickly run for direct materials, often including an added RFI event to ensure all suppliers are pre-qualified to meet your financial stability, quality, delivery, technical, risk, environmental requirements, followed by RFQ or a more detailed RFP event.  Savings of 10%+ are possible!

Accelerate your auto supply chain efficiency with Arkestro today! Get in touch with a specialized team of procurement experts to learn how you can achieve amazing cost savings on these spend categories and more.