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How to Use Cost Modeling Can Improve the Sales and Quoting Process

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

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LOSING SI THE RESULT of HIGH PRICES, LONG LEAD TIMES TO QUOTE

The biggest challenges for sales organizations that are constantly quoting to their customers for new business are prices that are too high and long lead times for quotes.  Both high costs and long quoting time lines generate low customer satisfaction scores.  Low customer satisfaction scores leads to lower sales and lower profits.

The sales teams lead the quotation process, but requires input from engineering, supply chain management, finance and operations.  Putting quotes together requires input from all functions of the company.  Each separate organization has to put together their portion of the costs.  

I often hear the sales organization make reference that, “It’s like we re-invent the wheel every time we quote a new package.  Every time, each organization starts a new costing process.  It’s a chaotic and inconsistent process that results in high cost structures and long lead times.  Ultimately we do not win business on a consistent basis”.  It is obvious that there is a lack of standardization for the costing process.  The result is a chaotic process that has inherent long lead times and a process of educated guesses.

The root cause of the chaos is a lack of standardization.  Standardization comes in the form of Cost Modeling.

The quoting process starts with the engineering organization.  Engineering has to define the product, develop the BOM (bill of materials) and specifications.  Often engineering has little time to build a design and will be conservative with their designs.  Conservative designs are not optimized and generally leads to over engineering and higher cost designs.

After engineering defines the product, the other organizations take the handoff from engineering and begin their costing responsibilities.

Time is not on the side of the other organizations (engineering, supply chain management, operations, finance).  Often there is intense pressure to provide costing information back to the sales organization in just a few days so sales can have enough time to review all of the costing information and prepare the quote to the customer. 

Typically you only have a few days to put together all of the costing for:

  • The BOM (bill of materials)
  • Operations and assembly costs
  • Freight Costs
  • Packaging Costs
  • Ware housing Costs
  • Tooling amortizations
  • Capital equipment amortizations
  • Engineering and development amortizations

What will the result be when you only have a few days?  The simple answer is an educated conservative guess that leads to high costs and prices. 

Whenever someone is forced to perform a time pressured, educated guess, people are going to be conservative and estimate on the higher end of the guessing range.  Nobody wants to be accused later of under costing a product.  This includes the suppliers in the supply chain, often they are responsible to provide quotes for the BOM within just a few days and will also quote conservative with higher prices.

With each organization over designing and over costing, you have a 95% chance of losing the bid because your costs and prices are too high.  The win rate for this type of process is low, in the 1-5%.  This mean for every 100 quotes that you provide your customers, you will win about 5 bids and not win 95 of the bids.  That’s a lot of work to win such little business.

WE CAN LOWER COSTS AND GO FASTER THROUGH STANDARDIZATION using COST MODELS

However we can have lower cost structures and go much faster with our costing if we standardize using cost models for each of the important costing functions.  Standardization is the most important part of the cost modeling process.  The standardization can quickly adapt to different designs, sizes, material types and specifications.  Standardization will lead to consistently competitive cost structures and fast costing processes.  The results of standardization is increased sales win rates and shorter lead times. 

We can build cost models for each of the following costing requirements.

  1. BOM (bill of materials) – We can work with suppliers to build cost models that can estimate the costs and prices of parts within minutes.
  2. Operations and Assembly – We can work with the operations organization to standardize operations and the costs that are associated with the operations.  Most often the key to success is the standardization of the operations and cycle times to build and assemble products. 
  3. Tooling – We can work with tooling suppliers to build cost models that can estimate the costs and prices of tooling within minutes and then build a simple costing tool that can estimate the amortized cost per part.
  4. Amortization of Capital Expenditures (manufacturing equipment) – We can build costing tools that can estimate the cost of new manufacturing equipment and an amortization schedule to spread the cost on a cost per part basis.
  5. Amortization of Engineering and Development costs – We can build a costing tool that can estimate the engineering, development and testing time (engineering time) to support a new product.  Then we would apply a $/hr. engineering rate to the engineering hours and then spread this across the production with an amortization to get a cost per part.

Cost Modeling will improve the following:

  • Improve competitiveness lower costs by taking out the educated guessing and conservativeness that is the result of the guessing.
  • Improve the speed for costing
  • Improve the confidence of the costing
  • Enable continuous improvement to the costing process by improving the standardization of the cost drivers.

Standardization and the use of cost models will help increase the WIN rate % and reduce the lead times to submit quotations.

 

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