Top 4 Advantages of Cost Modeling

Organizations often shy away at the mention of cost modeling. Most of them find it highly complex and time consuming. Managers are accustomed to make decisions based on instincts and intuitions which more often not wreaks havoc. Owing to globalization, companies have started to realize the benefits of a data driven approach and strategic decision making based on actionable insights. More and more organizations are taking recourse to cost modeling tools and techniques in order to streamline their decision making processes. Cost modeling can be defined as an advanced statistical model that offers accurate cost related insights which benefits the organization and aids in determining the true cost of manufacturing a product or service. Cost advantages in procurement are benefits gained through strategic sourcing, negotiation, and supplier management practices that result in lower purchase prices, reduced total cost of ownership, and improved profitability for the organization. One significant advantage of cost in procurement is the potential for cost savings. By effectively managing procurement processes, organizations can negotiate favorable terms with suppliers, obtain competitive pricing, and identify cost-effective alternatives. This can result in reduced expenses and increased profitability.

Cost modeling takes into consideration of the various costs incurred by the organization related to material, labor, production, administration, sales, and research and development. It also takes into account the profit margin while determining the manufacturing cost of the product. These insights help the buyer to comprehend the cost components of a suppliers pricing strategy and thereby drive cost savings opportunities for the organization. Organizations have a cost modeling phobia as many feel that it is beyond their understanding. We, at SpendEdge, give you the top four benefits of cost modeling that management professionals can leverage in order to drive profitability in the organization.

1. Enhances Your Negotiation Skills

Cost modeling is regarded as the numero uno purchasing best practice any procurement professional must possess in order to seal the deal at the best possible price with the suppliers. Cost modeling assists procurement professionals to augment their negotiation skills enabling the buyers to negotiate their terms and conditions. It facilitates the buyers to acquire the materials or services at a fair price and squeeze supplier profit margins.

2. Enables Cost Reduction and Drives Profitability

Cost modeling enables the management professionals to identify the cost components, cost drivers and the causal factors. It facilitates elimination of unnecessary costs and identifies maverick spending. Cost modeling helps in identifying overpriced components and materials with higher profit margins, thereby enabling the procurement professionals to procure the materials at the right price, thereby positively impacting the organizations bottom line and driving profitability in the organization.

3. Improves Supplier Relationship Management

Cost modeling facilitates the organization in improving its supplier relationship management. It enables the top management professionals to identify the right suppliers, strategically source the materials and goods at the optimum price. It also allows coordination between the organization and the supplier by including them in the design stage itself and leveraging the benefits of suppliers market insights. Cost modeling creates long term relationships and builds trust among both the buyer and the supplier.

4. Facilitates Strategic Decision Making Based on Insights

Any organization can gain a competitive edge by optimizing its costs, achieving its product performance target and cost targets simultaneously. Through cost modeling, top management professionals gain insights that help them to make strategic decisions with regards to budget planning, budget allocation, future planning and new product development. Cost modeling enables them to understand the supply market, supplier pricing strategy and devise a roadmap for the future.

At SpendEdge, we offer granular insights about the buying activities, supplier pricing strategy, supplier benchmarking and trends and forecasts in the industry. This helps the organizations to leverage insights and devise strategies to identify cost saving opportunities and mitigate potential future risks.

To know more about the benefits of cost modeling