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Cost Modeling for Small and Medium Manufacturing Businesses

Jun 12, 2017

Cost modelling involves the analysis of the production costs, labor costs, material costs and the profit margin so as to determine the true cost of a product or service. It helps organizations understand the suppliers pricing strategy and to also be able to determine the actual price they should pay for a particular component or part. Cost modeling is a common activity in large organizations and has found wide acceptance all over the globe. Organizations are now driving business decisions based on insights derived from a large amount of data available through several credible sources. However, the small and medium manufacturing enterprises are still to catch on this new trend in the market. This is largely due to the  lack of technological infrastructure as well as the expertise to perform a complex and challenging task like cost modeling by these organizations.

An organization cannot create a competitive advantage based on product innovation alone. In order to gain an edge and maintain the leadership position in the market, businesses have to focus on a robust supply chain management strategy. For this, the organization has to leverage cost modelling tools to identify the costs involved in procuring raw materials from various suppliers in order to receive top quality materials at the best possible price. Cost modelling helps the organization to facilitate cost savings and drive profitability throughout the supply chain.

Why Should Small and Medium Manufacturing Businesses use Cost Modelling Software?

For a small and medium manufacturing businesses (SMBs), cost modeling helps improve its trend forecasting ability if coupled with predictive analytics. You ask how? Here’s how. Manufacturing and product development entails converting raw materials into a finished product. This means the organizations have to source and procure raw materials, process them to add value to it and distribute the final product. The costs for each activity involved in the source-to-customer process are not constant, instead the keep varying from time to time. These SMBs need to forecast different SKUs, costs sales volumes and revenues, and derive insights from the information available which is a difficult task as it requires additional knowledge and cost modeling skills.

SMBs produce commodities known as intermediate goods that are used to produce finished products. The cost of these intermediate goods determines the cost of the final product. The typical customer for these intermediate goods are large organizations or original equipment manufacturers (OEMs) for instance an automotive company or a transportation company. For a SMB to survive in the market and make profits, it should be aware of its actual input costs and the effect it has on the finished product. Therefore, cost modelling enables SMBs to identify these costs, determine its impact on the final cost and helps SMBs establish accurate input costs. Hence, monitoring the process of such commodities, identifying the factors that impact the total cost and eventually the profit margins is vital for the company.

A small and medium manufacturing business should integrate a cost based approach and base its pricing strategy on the insights derived from an effective cost modeling tool. At SpendEdge, we help organizations with real-time and accurate price tracking of input materials and commodities, provide supplier cost analysis to gain a detailed understanding of each component to enable procurement professionals to source the right products at the best price and thereby drive cost savings.

To know more about cost modelling cost models in procurement, cost modeling tools, and cost modeling software:

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