Advanced Procurement: The imporance of Product Costing

Published on 24 February 2021 at 11:00

Cost effective production starts with optimized procurement strategies. 
As Raw materials and purchased parts often take a major part of the total cost, advanced supplier (re)negotiation often is one of the quickest ways of reducing your total cost. Detailed product cost analysis provides a framework to assess different quotations, and lifts supplier negotiation to a scientific level.

It's common practice in procurement: Request quotations of a dozen suppliers, pick the best combination of price and secondary terms, negotiate some additional discount and the deal is closed.
You've contracted the best supplier, and negotiated an even better price! This must be the best possible deal right?

Unfortunately, this often isn't the case.  The additional discount often was factored in the initial quote, and how do you know the lowest quotation was the best possible offer in the first place? Here product costing can help.

Fact-based negotiation

To optimize this process, it is important to first understand how a supplier has constructed his initial offer. Sales, often supported by engineering construct their quotation based on self determined rates for their materials and resources. 
The resulting quotation then consists of:

  • Brief estimation of their production cost
  • their required margins and profit rates
  • a small rate to give away in further negotiation again.

Without any insight in the costs associated with producing your demanded product, your only option is to agree on their estimation, ask for a small discount and accept their offer. However, why not make the same calculation yourself?
Having insight in the should-cost of purchased items yourself can change the conversation from traditional bidding to more substantive topics.

Of course, your initial estimation will not match your supplier's offer. A product's Should-Cost only holds in the ideal case. 
However, discussing the differences in estimations can lead to interesting insights. 
Maybe your supplier has only roughly estimated their costs, and thus can provide you a better offer after a closer look.
More often, costs are largely affected by certain limitations in your design our your suppliers resources. 
Common examples are expensive but redundant  specifications, small specific design imperfections, or simply mismatching order quantities and production capacity.

Discussing these issues saves money and effort for both you and your suppliers. Optimizing your own production costs and sales margins. However, accurate product costing can seem complex at the start. Could you use some guidance in procurement optimization or negotiation preparation, or are you looking for product costing tools? Have a look at Our Services or Contact Us Now

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