US Construction Equipment Industry Overview
The construction equipment industry in the US produces equipment for residential, nonresidential, highway and other infrastructure construction. Demand for industry products is based on the levels of private construction spend and infrastructure projects. However, the US construction equipment industry is highly globalized and susceptible to changes in global economic conditions. In recent years, the industry has been challenged by the appreciating US dollar and exchange-rate dynamics.
Business Challenges Faced
The client, a subsidiary unit of a large construction equipment manufacturer had a distinctive business model than other units. Large equipment subsidiaries of the parent company sold high revenue products with minimal competition, allowing them to bear higher overheads. However, the client sold high volumes of smaller and low priced machines with the lean competition.
During China’s slump and government’s trade war, the client came under high pressure from the parent company to reduce the cost of goods sold (COGS). Since purchased parts constituted most of the client’s COGS, it realized the need to reduce the direct material spend. However, it required delivering a greater amount of value to suppliers without asking for price reductions or hampering supplier relationships.
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Our Research Approach
To address the specific needs of the client, the supplier cost analysis team at SpendEdge adopted a three-phased approach. The first step involved economic costing in which a top-down analysis of supplier prices was carried out by the experts based on the financial statement from suppliers and their industry comparable. Historical trend modeling was performed in the next step to examine the changes in costing inputs such as raw material, energy, overtime vs. historical supplier pricing. Finally, the best cost modeling techniques were identified based on the supplier’s unique products.
With the supplier cost analysis solution, the client created three independent assessments and provided a verified, triangulated cost that can be trusted by suppliers as a solid data point. They gained a detailed understanding of the various components and identified potential suppliers to procure products and services at the right prices.
The comprehensive supplier cost analysis helped the client to analyze over 50 suppliers accounting for $200 million of OEM spend. This helped the client to identify $7 million of extra profit apart from identifying several other cost savings opportunities. Within a short span of time, the client became one of the most profitable divisions in the parent company.
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How to Perform Supplier Cost Analysis?
- Develop a supplier cost analysis template that can cover direct and indirect costs along with the inflation/expansion costs.
- Calculate benefits such as reduced taxes/fees and increased output.
- Collect the discrete cost and benefit numbers to determine the net result on cash flow over time.