Cost modeling is not a rocket science. It is the analysis of all the direct and indirect costs including labor and material, sales and administrative expenses, investments in research and development, and the profit margins in order to determine the true cost of manufacturing a product or service. Business entities focus on innovating products and service which can easily be imitated by others. For any organization to create a sustainable competitive advantage, it is essential to optimize the procurement and manufacturing costs. Therefore, to determine the factors that drive organizational success, businesses must leverage cost modeling tools that could provide actionable insights to improve the cost performance and identify the cost drivers.
As a result of globalization, supply chains have become complex and highly vulnerable to external factors. Category managers face a multitude of issues such as cost containment, cost estimation, low-cost country sourcing, supply chain integration and sustainability issues among others. Cost modeling not only helps in identifying the cost drivers and cost components but also in taking procurement decisions.
What are the Benefits of Cost Modeling?
To facilitate cost savings and improve efficiency, organizations need to take a cost-based approach. Cost modeling helps organizations to make strategic business decisions such as whether to manufacture a particular component in-house or outsource it to a third-party supplier. This means that if the organization knows what a particular component or material costs, they would be able to determine the price they are willing to pay for it and understand the supplier pricing strategies in a better way. A cost-based approach for an effective supply chain management has multifold benefits as follows,
- Cost modeling enables business entities to work with few but top-rated suppliers at the best possible prices in the market.
- Determining the costs of the components beforehand enables procurement to source suppliers and collaborating with them in the design process, thereby ensuring product improvement and a continuous cost reduction.
- This helps build a robust supplier relationship management as the benefits of a cost-based approach can be reaped by the supplier as well.
Supply chain professionals are well aware of the benefits of adopting cost modeling and predictive modeling tools in their organizations but shy away because they think it is a complex and tedious process. Cost models can help in transforming the cost data into important cost information that could help supply chain management professionals to make better-informed decisions. At SpendEdge, we provide actionable insights on procurement and other spending activities by analyzing various cost and pricing models and determine the factors that drive prices for different products across several regions thereby helping enterprises to identify suppliers offering the best price.