Bidding was described as "bare-knuckled," with low bids coming from qualified suppliers in India and elsewhere. UTC purchased $7 million worth of goods that day; savings totaled 25 percent. In one lot, an incumbent supplier was forced to reduce its price by more than 50 percent from its previous contract to retain the business.
These and other auction services are opening new worldwide markets to SMEs that have competitive costs and capabilities. Once they have become qualified suppliers, only a PC and a modem are required to participate. However, Internet bidding can dramatically reduce the profit margins of SMEs that have not properly positioned themselves in terms of cost, product differentiation, or added value. Because few SMEs have sufficient margins to withstand such competition, it is essential for their survival that they prepare in advance for such eventualities.
Opportunities for internal cost reductions include direct labor, materials, scrap, and rework. Other opportunities can be found through creative reductions in overhead. The Boeing Company, for example, reports saving hundreds of millions of dollars by moving its system of spare parts sales and aircraft maintenance manuals to the Internet. Techniques, such as just-in-time manufacturing, activity-based costing (ABC), vendor-managed inventory, and lean manufacturing, can be used effectively to reduce non-value-added costs.
SMEs may find ABC especially helpful. Traditional accounting systems accumulate costs, such as engineering and material handling, into overhead accounts, which are then allocated to products based on the amount of direct labor each product requires. This approach is useful when there are long manufacturing runs and direct labor is a large part of total costs. However, traditional accounting systems are less useful for firms with substantial investments in information, product design, and agile manufacturing technologies. ABC assigns job costs based on the actual use of resources, enabling firms to price their products appropriately, determine in which markets they can compete effectively, make better capital allocation decisions, and calculate the incremental costs associated with potential courses of action.
The implementation of ABC requires the following steps:
creation of a conceptual outline of the firm's cost-flow patterns
development of a day-to-day activity-based cost accounting system that collects the costs associated with each product or process
construction of a computer-based cost accumulation model that simulates the activity-based cost flows