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How to Use Cost Modeling to drive Effective Data Driven Negotiations

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




Cost modeling transitions the negotiation from a price based leverage approach to a data driven, fact based discussion focused on waste identification and continuous improvement opportunities.  The transition to using cost modeling has strong financial results. 

Market price, leverage based negotiations typically result in 0-3% improvements.  Data driven, fact based cost model negotiations combined with leverage typically result in 3-10% improvements.  Cost Model results are generally 300% stronger than price based, leverage only negotiations.

In these times of inflation, we have to recognize inflation.  If you try to ignore a supplier’s request for a price increase due to inflation, the supplier will eventually stop shipping you parts.  This will hurt the relationship between the 2 parties.

Moving negotiations from a strategy of leverage discussions to a discussion based cost drivers and waste reduction is a significant catalyst to effective negotiations while maintaining good relationships.  In effect we are transitioning the negotiation to recognize inflation but to also recognize waste reduction and continuous improvement opportunities.  Cost Models are the tool that facilitate this transition.

Common waste reduction opportunities identified by Cost Models includes the following:

  • Cycle time improvements
  • Lot run size optimization
  • Use of automation to reduce direct labor and # of operators
  • Raw material blank optimization
  • Raw material scrap credit
  • Lot run size optimization

It is common for suppliers to avoid providing costing information to their customers.  Suppliers often prefer their customers to be ignorant of the cost drivers and only focus on the price and the relationship.  This strategy will generally keep prices higher.

It is important for the customer to move the focus of the negotiations back onto the facts and cost model data.

If your larger incumbent suppliers continue to avoid the transition from market price management to a cost model waste reduction process, you will likely need to start to look for different and better suppliers. 

Suppliers are defined by their personality of their management and owners.  Suppliers that have owner and management that have both parties interest at hand, will support the use of cost modeling. 

Best in class supply chain management organizations use strategic supplier programs to implement cost modeling.  Long term strategic suppliers will support the identification and reduction of waste and cost modeling to help with this process.  Long term strategic suppliers will enable STRONG FINANCIAL PERFORMANCE to be made by both sides.

The transition to cost model management will also improve your ability to identify waste in the product development process, designs and specification, and your operations.  The impact of having visibility into cost drivers and waste is a positive impact across all areas of your business.

The best performing companies all use Cost Modeling to manage their supply chains.  The use of cost models is considered a best practice.