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Cost Modeling – An Answer to all the Supply Chain Challenges

Jun 14, 2017

Organizations have realized that a competitive edge based on an innovative product or service is short-lived. As businesses strive to create a sustainable competitive advantage in order to increase the revenue and expand its market share, they are increasingly adopting effective supply chain management practices within their organization. Therefore, cost modeling is one such tool that helps an organization in identifying procurement costs, derive actionable insights that enhance the supply chain’s cost performance. Cost modeling is the analysis of costs – direct and indirect – including labor, material, sales and administrative expenses, research and development costs along with the profit margin which helps in determining the actual cost of manufacturing a product. Cost modeling assists the management in identifying the cost drivers and its components thereby providing insights to make strategic procurement decisions. The cost modeling technique can also be termed as a cost estimator that helps the organizations to drive cost saving opportunities and improve supply chain efficiency.

Supply chains have become complex in nature and are vulnerable to both internal and external breakdown caused by various factors. The most dynamic and exposed component of the supply chain is the transportation and logistics function. In order to gain an edge over the competition and overcome the supply chain challenges, business entities must leverage business intelligence, predictive analytics and supply market intelligence. The major challenges that supply chain professionals and chief procurement officers (CPOs) usually face are best cost country sourcing, creating a sustainable supply chain, cost containment, supply chain integration, adopting new technology and supplier management among several others. Organizations can overcome these supply chains risks by leveraging the benefits of cost modeling. How is this possible, you wonder? Here’s how.

Supply Chain Challenges and Cost Modeling

Cost modeling can be highly effective in solving challenges related to transportation and logistics aspect of the supply chain. As you know, it is the most vulnerable and complex link in the procurement process, there are two major challenges a traditional supply chain can solve with the help of cost modeling are as follows,

  • Organizations have the presence of distribution centers all across the globe which results in varied costs of delivering their products to these distribution centers. There is an ambiguity as to why a price variability exists in the cost of transportation. Organizations have little or no insight into the cause for such inefficiency. To overcome these challenges, businesses must adopt cost modeling so as to reduce this variability in transportation cost and optimize their operations.
  • Often organizations fail to adopt a data-driven approach and end up taking important decisions based on intuition. Also, they are unable to plan the budget, forecast future requirements and devise strategies that will improve its bottom-line. Since they fail to quantify the differences in cost and spend, they are unable to make decisions based on facts. Therefore, cost modeling benefits the supply chain in identifying the costs involved with manufacturing and delivering a product at the best possible price that gives them the maximum return.

An organization can overcome and mitigate potential supply chain risks by leveraging cost modeling techniques and integrating it with their procurement function. It also enables the management to seek the best possible price in the market, determine costs beforehand, include suppliers in the design process itself, build a strong supplier relationship management. Most importantly, cost modeling assists in transforming the raw cost and spend data into important cost information that will help the organization to make better-informed decisions based on data and facts. At SpendEdge, we provide detailed procurement and spend insights by analyzing each cost element, determining the factors that impact a product’s pricing strategy across geographical locations and help organizations to procure from the best supplier at an optimized price.

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