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Cost Modeling Enables Strategic Decision Making in the Organization

Jun 15, 2017

Cost modeling empowers an organization to make strategic decisions based on accurate insights. The advanced cost modeling tool promises precision and high-quality decisions as it takes into consideration material costs, labor costs, facility and maintenance costs, production costs and profit margin to manufacture a product or service. It accounts for differences in process, utilization, capacity, geographical location and all the other factors related to manufacturing or production. Cost modeling enables decision makers to make strategic decisions driven by data and insights. But why is cost modeling important? Here’s why.

Cost Modeling – A Decision-Making Tool

Costs play a big role in the success of any organization. If a business can achieve its product performance target along with curbing its procurement cost, it is said to have achieved cost optimization and production efficiency.  Cost modeling helps in determining the process for new product development, benchmarking operations to achieve efficiency, identifying the manufacturing costs incurred by the suppliers and devising a product pricing strategy. More often than not, business entities have little or no information about the cost structure and pricing strategy of the supplier. The cost modeling technique has the following benefits for production function, procurement function, and the management:

  • Cost modeling enables production managers in new product development as they can understand the impact of various costs on the final product
  • Procurement managers can determine the true cost of manufacturing a particular component or part, compare it with the supplier’s quoted price and further develop negotiation strategies to get the best possible price.
  • The top management gains access to accurate and actionable insights that help in taking well informed business decisions. It helps in budget planning, allocation and planning for future as well.

Cost modeling tools should be able to capture the cost elements that have a significant impact on the overall cost of the product. It should be easy to use and understand the workflow at the granular level in order to provide accurate insights. It can help organizations in devising cost reduction strategies, analyze whether a component is overpriced and negotiate terms with the suppliers. It is beneficial for not only large organizations, but can work wonders for the small and medium sized manufacturing businesses as well. At SpendEdge, we provide real time and accurate insights to the organizations that helps them track price trends of input materials and components which enables procurement professionals to procure the desired product at an optimum price and drive cost saving opportunities.

To know more about how cost modeling analysis, cost modeling tools, cost models in procurement, and pricing models can drive profitability and control procurement costs:

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