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The Value of Costing with Suppliers in a Strategic Relationship

by Jim Corbeil Posted on 2022-07-07

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Author:  Jim Corbeil has been a Supply Chain Management Executive in the Automotive Industry for the last 15 years.  Jim advises companies on how to transform their supply chain into a collaborative and transparent advantage in today’s market. jcorbeil@procurement1llc.com

Date:  January 2021

Everyone wants to have an “advantage” during negotiations.  Every purchasing professional wishes they knew what the real cost to manufacture a component is.  When you know what something should cost, you can use this information to negotiate a lower price.

There are many ways to do develop that advantage including sending out a bunch of RFQ’s to known suppliers and let the competitive market sort it out.  Asking for a cost breakdown from the suppliers and trying to cherry pick the best of the best to determine a price.  And finally, buyers could perform a should cost model exercise that is based on hypothetical benchmark data that drives a fact driven negotiation vs. an emotional negotiation.  Let’s explore these options.

  1. RFQ known suppliers: 

When buyers send RFQ’s to known suppliers who have excelled in their performance metrics, they are already assuming that the lowest price will win the job.The question mature purchasing organizations should be asking themselves is:Is that the right cost I should be paying?The issue with this approach is that the purchasing organization has already established an “acceptable” value for similar components through their procurement history.Suppliers know that.They will quote to the level that won them the business before.In summary, you are potentially leaving money on the table with this approach.

 

  1. Cherry Picking Cost Breakdowns

Asking for cost breakdowns from suppliers and trying to cherry pick the best of the best is frustrating to the supplier and a relationship killer.Trying to get a southeast Asia labor rate for a north American supplier is impossible, but there is ample of evidence this is what happens.It ruins credibility, it shows the supplier you really don’t know how things are made or costed and it breaks down trust.I would suggest that you never take this approach with a supplier.

 

  1. Clean Sheet Cost Modeling

Obtaining the right cost can be done two ways with one being far more successful than the other.First, the buyer can develop a “clean sheet” where they use benchmark data for material, manufacturing cycle times, regional labor cost, overhead and profit.This is a sound approach, but getting to the results you want will take longer due to the data being yours vs. the suppliers.Assumptions are critical and suppliers can question those assumptions quite easily, again hurting credibility.

 

  1. Collaborative Cost Modeling

The second approach is a collaborative approach where the supplier and the buyer work together to develop the real costs it takes to manufacture a part in the intended country/factory.This requires a mature, trusting relationship (a future article subject) to be effective.Supplier and buyer work together to model a supplier’s facility for a particular component.The data is the supplier’s data and there is no significant issue taken by the supplier.In fact, in many cases we have seen, the supplier learns something about waste in their system they did not know was happening.Incredible amounts of credibility and time are gained with this approach, but an investment (time) in the relationship is required to get to this point.Costs are validated as the design fluctuates without having to RFQ one or more suppliers (again) to validate cost.It creates a win/win scenario where the supplier who is working with you on a new business award will reap the benefits if the buyer’s company wins the program.

So, in the next article, we will discuss why suppliers are hesitant to undertake cost models and how to build the trust to fuel optimized cost and company growth.   

If you would like to learn more details on how to implement the end to end approach for high levels of success, please contact Procurement 1 LLC.

 

Future articles (more will be identified as we go).

  1. Why a strong/mature relationship founded in trust is the key to collaborative cost modeling.
  2. What does a collaborative cost model unlock for the two companies?
    1. Speed to award, validity of the numbers, change management efficiency gains, what if scenarios for design to cost engineering approach, identification of opportunity areas for cost reduction.
  3. Why are suppliers threatened by should cost models?  How to transcend to trust and growth.
  4. Creating an environment to deliver a win/win for both companies.
  5. The impact of a collaborative cost model on new project engineering.

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