According to top management professionals, cost modeling is the numero uno purchasing best practice. Cost modeling enables purchase managers to determine the actual cost of manufacturing a product and understand the underlying cost components and cost drivers. By leveraging cost modeling, the procurement and purchase managers gain the upper hand in devising negotiation strategies and helps them to identify understand the costs involved from a supplier’s perspective. Bottom line of the story: cost modeling helps procurement professionals to boost their negotiation skills, thereby driving profitability for the business.
Cost modeling is the analysis of the costs involved in manufacturing a product or service and determining its optimum cost of production so as to earn a fixed profit margin. It takes into consideration material costs, production costs, labor costs, research and development costs, sales and administrative expenses and profit margin so as to arrive at the actual cost. Cost modeling tool enables the buyer to fathom what exactly goes into manufacturing a product, understanding suppliers pricing strategy and drive cost savings opportunities for the organization. It also facilitates collaboration between the supplier as well as the buyer which not only helps them in optimizing costs but also enables material design improvements and provides supplier insights. But how can cost modeling boost managements negotiation skills enhance negotiation strategies, you ask? Here’s how.
“You Get What You Ask for” – Cost Modeling
Top procurement managers have ranked negotiation skills as one of the important skills a procurement professional must possess. It is an essential trait that enables the buyer to negotiate or bargain the prices of supplies and materials with the suppliers. Negotiation is a process to find a common ground between two or more parties i.e. buyers and suppliers, in order to reach an agreement or achieve a settlement on common grounds that is beneficial to all the parties involved. An effective cost modeling tool enables organizations to comprehend the supplier’s pricing strategy and identify the factors that drive final product pricing such as raw materials, labor, production process, logistics and much more.
Cost modeling helps buyers to seal the deal with the suppliers at the best possible price and squeeze profit margins. This helps them to negotiate the supplier’s terms and conditions and challenge his cost model. Often, the suppliers are compelled to back up the material prices with real cost data which helps the procurement professionals to understand the true manufacturing costs of the product. It enhances negotiation skills and thereby creating opportunities to drive cost savings and profitability. It helps in spend management, identifying each cost component of the product and determining the most expensive components or parts that demand management’s attention.
At SpendEdge, we offer cost modeling and procurement intelligence solutions to organization that help them in reducing costs, drive profitability and create a sustainable competitive advantage based on actionable insights.
