Supplier Costing

Goal

Achieve cost reduction by reducing the prices you pay to suppliers

Strategy

Use data-driven discussion to base negotiation on true manufacturing costs

Supplier Costing is a cost management strategy for reducing the price paid for a part. Quite frequently, management will establish cost reduction goals and demand sufficient price reductions from the supplier. These arbitrary price reductions can leave profit on the table because they are not based on a thorough understanding of the true manufacturing costs involved. They can also weaken the supply chain and risk putting price competitive suppliers out of business. A much more fruitful approach is to compare supplier price quotes against an independent estimate of the true manufacturing cost. The discussions that take place after this comparison is made should have the objective of understanding any differences.

supplier-costing

The important difference between price and cost information

  • A frequent mistake that many organizations make when trying to generate their own cost estimates is that they rely at least partially on historical price information
  • The problem with historical pricing is that it usually doesn’t accurately portray the cost to the supplier of making new parts
  • A lack of accuracy causes you to misdirect your negotiation efforts towards areas where little realistic opportunity for savings may exist
  • Additionally, you will fail to highlight hidden opportunities where the supplier is charging you far more than what the part actually costs to make
  • Any reliance on price information needs to be removed from your analysis, so that the only variable you are truly negotiating is profit

Negotiating with suppliers using DFM Concurrent Costing

  • DFM Concurrent Costing is an ideal tool for negotiating with suppliers because it allows you to generate accurate cost estimates in real-time
  • By focusing on only the factors that truly drive cost, an organization can quickly understand whether a supplier quote is reasonable
  • The responses provided by the software are in a language that suppliers easily recognize, so there is no dispute as to how the estimates were generated
  • This allows for a fair and transparent Supplier Costing process to occur and a truly sustainable supply-chain to be developed

Summary

Usually one person (manufacturing, engineering, or purchasing)

Single product or project

Typical Savings of 20%

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