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The Numero Uno Purchasing Best Practice – Cost Modeling

Jun 22, 2017

Top supply chain professionals have ranked cost modeling as one of the critical purchasing skills that managers must have in order to understand what constitutes the cost and thereby drive saving opportunities. Cost modeling can be defined as a process of analyzing costs and profit margins so as to determine the actual cost of manufacturing a product or service. These costs include labor costs, material costs, production costs, and research and development costs among others. Organziations across the globe are striving to adopt strategic decision making based on a structured data-driven approach and as a result cost modeling tools are gaining momemtum. It is considered as a cost estimator that enables businesses to identify cost savings opportunities and thereby drive profitability.

Cost Modeling and its Impact on Purchasing skills

We often hear purchase managers say, “In the market you don’t get what you deserve, you get what you negotiate”. That is why cost modeling is the numero uno purchasing best practice that enhances negotiation skills of sourcing and procurement managers in order to solicit the best possible price from the suppliers. Cost modeling helps purchase managers in following a balanced purchasing strategy, procuring materials from suppliers at a much lesser price and facilitate coordination between them and the suppliers. It enables them to develop realistic and accurate collaborative models by leveraging supplier insights which prove beneficial for all the parties involved.

Cost modeling has the following three benefits at every level of decision making

  • At the strategic level, it helps companies in taking decisions regarding whether to make or buy a product. For instance, the company could produce a part or component in house or understand the shipping economics of outsourcing a product to a low cost country.
  • At a tactical level, cost modeling helps purchase managers to decide between two suppliers supplying the same product.
  • It helps management to determine the set up costs and the optimal order levels at the executional level which helps organizations to eliminate waste, free up working capital and plan the budget.

Organizations must adopt cost modeling in order to enhance their purchasing skills as it helps the managers to get a better understanding of every cost involved in the process right from formulating a strategy, designing and price negotiations. Businesses are adapting and integrating cost modeling with their existing systems to bridge the gap between suppliers and buyers. These cost modeling tools give quick results, accurate insights and help in making informed decisions.

At SpendEdge, we offer a wide range of solutions that help organizations to gain actionable insights at the granular level, identify the cost drivers and cost elements based on credible data sources, and drive strategic decision making based on a data-driven approach. This helps the clients to reduce costs and drive profitability in the organizations.

To know more about cost modeling tools, pricing model, cost modelling techniques and its impact on procurement

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