1.What Is Process-Based Cost Reduction? 

Process-based cost reduction means reviewing the entire end-to-end supply chain to identify steps that can be eliminated, merged, reorganized, or simplified. It's all about streamlining. 

 There are two key ideas: value stream optimization and IT standardization. Put simply, ask yourself: Do we even need to do this step at all? 

In a typical process optimization project, the goal is to cut around 50% of the steps. Once you trim the fat, efficiency often improves immediately.

 If a step can't be removed, see if it can be merged with another. If merging isn’t possible, consider reordering the sequence. If the order is fixed, then simplify what happens within each step. 

 Among all process types, serial workflows are the least efficient, they work like a baton relay. For example, when purchasing components, the request might go to engineering to confirm specs, then to procurement for quotes, and finally to finance for approval. 

This kind of back-and-forth is a time sink. A better approach is to run things in parallel. The same request can be sent to engineering for specs, procurement for initial quotes, and finance for a pre-budget review, all at the same time. This is the core idea behind process-based cost reduction.

2. What Are Indirect Materials? 

In procurement, materials are generally classified as either direct or indirect. Direct materials — commonly referred to as BOM items — are components that go directly into the final product, like chips, resistors, capacitors, or display driver ICs in a smartphone. 

The key to managing BOM items is sourcing: if you choose the right supplier, the rest becomes easy. Once, a customer mistakenly ordered 0603-packaged 104 capacitors instead of the correct 0805 package. 

But because we were deeply familiar with their BOM, we caught the mistake and delivered the right parts anyway.

 In cost-reduction efforts, however, the real headache is often indirect materials, also known as MRO (Maintenance, Repair, and Operations). 

These include spare parts for production equipment (e.g., SMT nozzles, thermocouples for reflow ovens).

3. The 5 Pain Points of Indirect Procurement 

1. Too many SKUs, too much variety 

MRO parts are often reactive purchases. You never know what you'll need today — a blown fuse (250V/5A), a DC power jack (5.5mm×2.1mm), or a high-precision Zener diode (1N4744A). The list is endless and unpredictable, with little standardization, making sourcing messy and time-consuming. 

 2. No clear priority 

You can't prioritize by value or by department. At one plant we worked with, there were two requests: one for a nozzle (KXFX-001) on an SMT line — critical, as the line would shut down without it — and another for a USB Type-C test jig requested by R&D. 

The buyer processed the test jig first, not realizing the nozzle delay caused a 3-hour production halt and a major complaint from operations. 

 3. Vague specifications 

Internal customers often submit unclear requests — maybe a photo or a used part, sometimes just a vague note. One request simply read: Power module, see aging test rack. But the factory had 10 different racks, and there were no voltage specs — was it 220V to 12V or 24V? 

The buyer had to follow up repeatedly or connect the requester directly with the vendor — essentially playing a guessing game. 

 What's worse, even with such poor input, the internal customer often has the final say during inspection: the power module has too much ripple  or the nozzle is off by 0.1mm ,  it doesn't fit. Often, the issue isn't with the product, but with the unclear request in the first place. 

 4. Poor usage tracking 

Many urgent items are never used after they arrive. They sit in the warehouse, turning into excess inventory , and the blame falls on procurement. One electronics factory in California had this exact issue. 

The production VP urgently approved 100 capacitors, but after the job was done, 60 remained unused. At year-end, these were labeled as excess, and procurement was penalized. 

The buyer protested: “You and the VP signed off on it.” The CEO replied: “Sure, I signed it — but you're the buyer.” After that, the buyer confirmed every order twice, only to be criticized for lacking initiative. 

5. Small team, heavy workload 

Buyers in electronics companies are constantly buried in requests. Price often becomes a secondary concern. 

When you're fielding orders from dozens of departments ,  SMT fuses from production, probes from maintenance, ESD trays from the warehouse, you just want to avoid complaints. 

Buyers often resort to trusted vendors with ready stock, even if it costs more, simply to avoid delays.    

Conclusion: Why Indirect Sourcing Holds Greater Cost-Saving Potential 

The pain points above show that indirect procurement offers more room for cost savings than direct materials. 

Managing MRO isn't about picking the right vendor ,  it's about managing the entire process. 

The Solution 

 Demand management – Clearly define specifications and necessity right at the source. 

 Procurement strategy – Use frameworks like centralized buying and blanket POs for high-frequency items. 

 Process optimization – Digitize workflows and streamline approvals to reduce manual effort. 

 Fix these three areas, and indirect procurement becomes not just manageable — but a major source of cost savings.