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Collaborative & Strategic Supplier Programs are Key to Implementation of Cost Models with Suppliers

by Edward Pretzel, President Collaborative Supply Chains Posted on 2022-07-29

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Implementation of cost models provide tremendous advantages for the customer and for the suppliers.  The companies that are successful in the collaborative implementation of cost models with their suppliers will reap financial and speed to market benefits including the following:

  1. Lower cost structures (5-10% vs. market pricing)
  2. Visibility and transparency into cost drivers (vs. just a price)
  3. Ability to identify waste, continuous improvements and savings opportunities
  4. Ability to pre-source suppliers for early product development collaboration
  5. Fast Sourcing Processes (days vs. weeks or months)
  6. Ability to accelerate DFM (design for manufacturing) with suppliers and the product development organization

 

Most supply chain organizations claim some level of cost modeling of their parts and spend with suppliers, but very few are able to implement their cost models with suppliers while improving their relationships.  Most supplier chain organizations try to implement hyper optimized cost models with their suppliers.  This will generally result in strained relationships and a failure to implement cost models.

The key to success in implementing cost models with suppliers is a well-defined strategic supplier program that provides benefits to both the customer and supplier.  Strategic suppliers programs are intended to address multiple important aspects of the relationship.  Traditional supplier programs usually miss the cost modeling requirements and therefore miss the additional benefits that cost model enables.  The traditional strategic supplier program attributes include the following:

  1. Quality
  2. Culture
  3. Payment Terms
  4. Delivery
  5. Competitiveness

It is important to understand what the supplier’s requirements and desires are for a strategic supplier program and to fulfil those needs.  A more complete and comprehensive strategic supplier program that also adds benefits to the supplier include the following items to the traditional requirements:

  1. Agreed to Cost Model for each of the supplier’s factories
  2. A cost model that is better than average cost model vs other suppliers
  3. Ability to Pre-Source
  4. Requirement for DFM (design for manufacturing) product development support
  5. Fast Sourcing Capability
  6. First access to new product sourcing
  7. Access to resourcing of current business
  8. Ability for the supplier to grow with the customer as a partner

The second key enabler to implementation of cost models with suppliers is a collaborative cost model development and implementation process.  We like to use an open book approach with the supplier, developing the cost model and actual factory financials, accounting and expenses.  In addition we like to use actual plant floor operations to set the cycle time standards and direct labor requirements.  By using the actual costs, we bypass the “quoting market pricing” costing.  The supplier should have the final say and approval of the cost model so the supplier feels they are in control of the cost model. 

Generally, open cost models are the fast path to the lowest cost structures and a future state that is even better after waste reduction is implemented.

Cost Model development and implementation require a professional cost engineer that can manage the key following technical requirements.

  1. Labor Rate Development
  2. Burden Rate Development
  3. SGA Development
  4. Time Standards Development
  5. Raw Material Costing Process
  6. Development of a Costing Tool (usually in MS Excel)

A common question that often is asked, is what about profit, how is profit managed.  The simple answer is the profit will also be standardized.  Sometimes it is a single % of sell price or it can be a more sophisticated stratification of different profit rates depending on risk and product volumes.

In summary, the Best In Class companies are working with their suppliers in a collaborative and proactive manner to integrate the suppliers into the customers product development and supply chain management organizations.  These best in class companies are doing this through the use of strategic supplier programs combined with a collaborative open cost model process.

The best in class product development organizations apply DFM (design for manufacturing) early in the product development process using cost models.  DFM is a process in the product development process where the goal is to find the low cost design by evaluating different designs and manufacturing technologies.  Some common design alternatives include the following:

  • Plastic ($3.25/part) vs metal ($4.44/part)
  • Stamping + welding parts ($15.26/part) vs. single part casting ($14.10/part)
  • Casting & machining ($28/part) vs. machining from block ($37/part)

There are two main ways of costing design alternatives:

  1. Get quotes from suppliers
  2. Cost Modeling

Getting quotes from suppliers is the least efficient way to get costing feedback as it takes weeks.  Supplier’s quotes are also inconsistent in their feedback as market pricing can differ significantly from supplier to supplier. 

Suppliers require mature designs to be able to quote with confidence and those mature design alternatives may not available.  Sometimes design alternatives are only concepts in the mind of the product designer.  We still need a way to cost alternatives, even if the designs are not made.  Cost Modeling can provide the cost estimations without the mature designs.

Cost Modeling is the most efficient way to get costing feedback as usually only takes a few hours or days.  Cost modeling also will be consistent in its costing feedback as it is not subject to market pricing fluctuations. 

Cost modeling does not require a mature design as a cost estimate can be developed with just a discussion with a product engineer and the cost engineer.   Not requiring a mature design, yet still being able to cost a hypothetical design is a huge advantage.  This allows the product engineer to get feedback on design alternatives without actually designing each alternative. 

The best product development organizations also apply DFM together with key strategic suppliers to get feedback from the production experts, the suppliers. 

Best in class companies’ work with their suppliers to develop agreed to cost models with their supplier’s approval.  These pre-approved cost models can be applied to the design alternatives.  Suppliers who have these cost models can also be pre-sourced by supply chain management to work with the product development organization.  This early design collaboration with product development and the supplier is a best practice that is still rare in the business world.

Implementation of supplier pre-approved cost models generally require a strategic supplier program.  Strategic supplier programs are generally administered through supply chain management organizations.

The results of using Cost Models together with suppliers feedback is  the fastest and most productive product development and launch process that beats the competition in speed to market and lower cost designs.  This drives more sales growth, stronger market share, higher quality, lower cost structures and more profit.

Product development organizations are much stronger when they get the feedback and influence of the suppliers that will eventually manufacture the designed products and parts.  Suppliers have the knowledge of how to optimize designs to drive the most important and common improvements including the following:

  1. Raw Material Blank Size Optimization
  2. Raw Material Scrap reduction
  3. Secondary Operations elimination or reduction
  4. Rework elimination or reduction
  5. Cycle Time Reduction
  6. Reduce Tooling Costs and Maintenance

But working with suppliers early on in the product development cycle generally require some type of commitment to the supplier to compensate the supplier for their engineering time and resources.  The commitment comes in the form of an engineering payment or a pre-sourcing of the business to the supplier. 

Pre-sourcing business to a supplier before any quotes or designs have been market tested is a scary scenario for supply chain management organizations.  In pre-sourcing scenarios, supply chain management organizations feel they are trapped with the supplier and will lose their leverage and ability to ensure a low price throughout the product development process and into the launch of the products.

The solution?  An agreed to cost model with key strategic suppliers.  Agreed to cost model must be tested to ensure that it is consistently competitive before an agreed cost model should be implemented.  Agreed to cost models with suppliers ensure that the supplier will consistently be competitive no matter the design iteration.   This is important as the product development process will have engineering changes that will need to be costing using the agreed to cost model.

Agreed to cost models with suppliers enables the pre-sourcing to occur where both parties are protected by the cost model.  The supply chain management organization is essentially now sourcing based on a cost model vs the old business model of a quote (or price). 

Once the agreed to cost model is in place with your key strategic supplier, now the product development organization can work up front with the supplier to optimize the design.  And the supplier can invest engineering resources to help with the product design as the supplier knows that they are the source for the production of the parts.

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