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Cost Benefit Analysis Assists a Renowned Auto Parts Manufacturer Gauge the Cost Structure of Their Procurement Processes

Category Overview

Lately, the revenues generated by the automotive industry have nearly doubled and is witnessing the entry of numerous car manufacturers across countries such as India, China, and Russia. Additionally, with the rising per capita income and urbanization, the aftermarket sales of the auto parts have increased, and leading businesses are investing in auto parts to improve the efficiency of their products while being cost-effective. As a result, companies operating in the auto parts manufacturing space have started advocating the use of robust cost benefit analysis solutions. Cost benefit analysis solutions help companies operating in the auto parts manufacturing space to reduce expenditures across the supply chain and meet the rising demand of the customers.

With over 13 years of expertise in offering a wide range of sourcing and procurement solutions, SpendEdge’s cost benefit analysis specialists help companies operating in the auto parts manufacturing space to gain a deeper understanding of the cost structure of their sourcing and supply chain activities across the supply chain and business units.

The Procurement Pain Point and Insights Offered

A renowned auto parts manufacturing client with business units spread across several geographies was facing predicaments in identifying the cost elements across the supply chain and assess its impact on the overall cost. request free proposalAdditionally, the client was facing challenges in devising a low-cost mix model to cut down the overall sourcing and procurement costs. Furthermore, they wanted to gain actionable insights into the negotiation levers adopted by suppliers to reduce the lead time for their procurement processes.

To help the auto parts manufacturing client overcome their predicaments and assist them in reducing the lead time for their procurement processes across their business units, SpendEdge tailored an integrated research approach which included primary and secondary research coupled with quantitative and qualitative data collection methodologies.

During the course of this cost benefit analysis engagement, the auto parts manufacturing client was able to gauge the impact of each cost driver on the overall spend and predicted the cost movements across the supply chain. Additionally, the client implemented a low-cost mix model which enabled them to reduce their maverick spends.

Fundamental questions answered in this cost benefit analysis study include

Business Outcome

This engagement helped the auto parts manufacturing client gain more profound and actionable insights into the cost structure of their sourcing and procurement processes and enabled them to devise superior negotiation strategies with suppliers and subsequently reduce the overall costs.

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Logistics Client Leverages Supply Chain Mapping to Identify Cost Saving Opportunities

Category Overview

Logistics firms in today’s challenging environment can leverage supply chain mapping  to present a variety of benefits that affect business continuity, daily operations, sustainability, and compliance. Procurement supply chain mapping provides a means of communication and a decision-making tool to improve cost, quality, and lead-time. Additionally, supply chain maps allow firms to visualize layers of data and provide information that is needed to manage and enhance the business. request free proposalAs a result, many logistics firms with complex supply chains have started opting for supply chain mapping studies to avoid data drowning and improve strategic planning.

The Procurement Pain Point and Insights Offered

A leading logistics firm wanted to assess the drawbacks of their current-state planning procedures. Additionally, the client also wanted to automate and integrate their existing process across the entire enterprise. Furthermore, the client also wanted to create a plan to make transportation more flexible and agile with the help of SpendEdge’s supply chain mapping study.

The supply chain mapping specialists at SpendEdge conducted a comprehensive research methodology that included primary and secondary research coupled with qualitative and quantitative data collection methodologies to cater to the specific category requirements of the client. During the course this study, the client was able to identify the gaps in the primary processes that required attention. The client was recommended a new process and a tool, which allowed them to balance demand and supply, improve route selection based on the lowest transportation cost, and execute decisions through a fully integrated solution. Furthermore, the client could develop a three-phase approach to assist them in the technology changes and implementation process.

Key questions answered in this supply chain mapping study include

supply chain mapping

Business Outcome

The supply chain mapping study helped the client achieve their operational targets, identify key logistics savings opportunity levers, and implement technologies that would make it easier to move those levers. The client could also cut its transportation costs by 10%, saving millions of dollars annually. Additionally, the supply chain mapping study also helped the client integrate product costs into the tool and take its planning capabilities beyond transportation.

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Cost Modeling – An Answer to all the Supply Chain Challenges

Organizations have realized that a competitive edge based on an innovative product or service is short-lived. As businesses strive to create a sustainable competitive advantage in order to increase the revenue and expand its market share, they are increasingly adopting effective supply chain management practices within their organization. Therefore, cost modeling is one such tool that helps an organization in identifying procurement costs, derive actionable insights that enhance the supply chain’s cost performance. Cost modeling is the analysis of costs – direct and indirect – including labor, material, sales and administrative expenses, research and development costs along with the profit margin which helps in determining the actual cost of manufacturing a product. Cost modeling assists the management in identifying the cost drivers and its components thereby providing insights to make strategic procurement decisions. The cost modeling technique can also be termed as a cost estimator that helps the organizations to drive cost saving opportunities and improve supply chain efficiency.

Supply chains have become complex in nature and are vulnerable to both internal and external breakdown caused by various factors. The most dynamic and exposed component of the supply chain is the transportation and logistics function. In order to gain an edge over the competition and overcome the supply chain challenges, business entities must leverage business intelligence, predictive analytics and supply market intelligence. The major challenges that supply chain professionals and chief procurement officers (CPOs) usually face are best cost country sourcing, creating a sustainable supply chain, cost containment, supply chain integration, adopting new technology and supplier management among several others. Organizations can overcome these supply chains risks by leveraging the benefits of cost modeling. How is this possible, you wonder? Here’s how.

Supply Chain Challenges and Cost Modeling

Cost modeling can be highly effective in solving challenges related to transportation and logistics aspect of the supply chain. As you know, it is the most vulnerable and complex link in the procurement process, there are two major challenges a traditional supply chain can solve with the help of cost modeling are as follows,

  • Organizations have the presence of distribution centers all across the globe which results in varied costs of delivering their products to these distribution centers. There is an ambiguity as to why a price variability exists in the cost of transportation. Organizations have little or no insight into the cause for such inefficiency. To overcome these challenges, businesses must adopt cost modeling so as to reduce this variability in transportation cost and optimize their operations.
  • Often organizations fail to adopt a data-driven approach and end up taking important decisions based on intuition. Also, they are unable to plan the budget, forecast future requirements and devise strategies that will improve its bottom-line. Since they fail to quantify the differences in cost and spend, they are unable to make decisions based on facts. Therefore, cost modeling benefits the supply chain in identifying the costs involved with manufacturing and delivering a product at the best possible price that gives them the maximum return.

An organization can overcome and mitigate potential supply chain risks by leveraging cost modeling techniques and integrating it with their procurement function. It also enables the management to seek the best possible price in the market, determine costs beforehand, include suppliers in the design process itself, build a strong supplier relationship management. Most importantly, cost modeling assists in transforming the raw cost and spend data into important cost information that will help the organization to make better-informed decisions based on data and facts. At SpendEdge, we provide detailed procurement and spend insights by analyzing each cost element, determining the factors that impact a product’s pricing strategy across geographical locations and help organizations to procure from the best supplier at an optimized price.

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Supply Market Intelligence Solutions Help a Leading Food and Beverage Company

Category Overview

HR payroll services is a part of HR accounting, which focuses on the calculation and disbursement of payroll checks in compliance with federal and state regulations It also involves filling of employees tax returns based on parameters such as gross pay (includes allowances, rewards, incentives) and net pay (which takes into account factors such as deductions and employees’ contributions) toward social security, Medicare, and unemployment benefits. HR payroll services are categorized into two broad categories – management of payrolls and accounting-related functions. Moreover, the HR payroll services are further segmented by back-end processes, payroll processing, and additional services offered to an organization.

The Procurement Pain Point

A leading food and beverage company was facing challenges negotiating contract terms and conditions with the HR payroll service providers. The client approached SpendEdge to carry out a procurement market intelligence study to understand the sourcing and procurement best practices, tactical cost saving opportunities, and the supply market landscape. Furthermore, the client was seeking a detailed study regarding the benchmarking standards, category risk analysis, and indicative pricing to help them identify the right HR payroll services provider and agree on a contract that would work well for both parties.

Procurement Insights Offered and the Outcome

Our vast database of primary and secondary research resources, highly dedicated and experienced analysts, and critical inputs from industry experts helped the client with a robust supplier base. Furthermore, to get a clear understanding of the global HR payroll services market, we followed a multifold research process including information review, information validation, stakeholder insights, and data analysis. Our supplier market experts evaluated various category-related aspects especially suppliers’ operational and functional capabilities, key market trends, long-term and short-term growth trajectories, and pricing model constraints to offer valuable insights.

Business Impact

This supply market intelligence study offered the food and beverage company a better understanding of the supplier market landscape, supplier selection and evaluation criteria, cost-saving opportunities, and insights that can lead to better optimization of the category spends.

This supply market intelligence study offered the client insights into the supplier market landscape and procurement best practices.

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Cost Modeling Helps a Leading Conglomerate with Better Negotiation of IT Temporary Staffing Services

Category Overview

Temporary or contractual labor refers to a provisional group of workers who work for organizations for short duration on a contractual basis. To meet temporary requirements, such employees can be easily recruited with the help of sophisticated online and mobile platforms.

The Procurement Pain Point

One of the leading conglomerates in Europe was facing challenges with understanding cost structure of leading IT temporary staffing service providers. Key pain points included gaining visibility on supplier cost structure, key cost drivers, and cost saving aspects of procurement. Despite being one of the top players in the industry, the client lacked the expertise and tools to provide the sourcing team with deep insights into price negotiation. With our precise research methodologies and extensive experience in should-cost analysis, we helped the client gain a clear understanding of the cost drivers, along with valuable information on ways to facilitate judicious price negotiations.

Procurement Insights Offered and the Outcome

With our vast database of secondary research resources, highly experienced analysts, and critical inputs from industry experts, we helped the client identify cost drivers and potential cost saving opportunities. We followed an extensive three-step research process encompassing establishment of cost elements mentioned in the annual reports provided by the listed supplier. This was further followed by refined secondary research to understand the percentage break for each specific cost element within the overall cost structure. We also validated the cost model by conducting primary research with industry experts.

Business Impact

This procurement market intelligence study was to offer the client a comprehensive overview of the cost model and key cost drivers such as increase in payroll taxes and complexity of services and reduced dependence on physical offices for service delivery. Furthermore, this study helped the client with procurement best practices, strategic selection of suppliers, cost-saving and cost reduction, and insights that led to optimization of the category spend.

This procurement intelligence study offered the client category assessment, supplier market landscape analysis, and procurement best practices.

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Cost Modeling for Small and Medium Manufacturing Businesses

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.

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The Present and Future of Should Cost Analysis

Should Cost Analysis can be termed in one word as a cost estimator. It is a process of determining what a product should cost based on the cost of the input materials, the cost of production and profit margins. It assists the supply chain professionals to seek a fair and reasonable price from the suppliers and enables strategic sourcing for components and parts. A should cost analysis model helps the procurement and finance function to understand the impact of individual elements on the products pricing strategy and helps them to make well-informed decisions based on supply market intelligence. For the procurement leaders, understanding what determines the cost of a product is the pivot around which the entire procurement function revolves.

The concept of should cost analysis was the brain child of the U.S. Department of Defense who continuously strived to improve the government’s ability to monitor pricing and drive cost savings opportunities. It has become an important part of the government procurement process and has been included in the Federal Acquisition Regulation (FAR). Today, should cost analysis can be applied to a variety of industries such as manufacturing industry, automotive industry, retail and consumer packaged goods (CPG) industry. It helps the management to gain knowledge about the pricing strategies and its effect on their supply chain, helps build a strong supplier relationship management and drive profitability. However, organizations often shy away from leveraging this cost modelling technique as they find it too complex and time consuming.

What do organizations follow to determine the product cost?

Business entities have termed the new age should cost analysis as something beyond their understanding. This is because they are accustomed to traditional product costing methods such as cost structure analysis, activity based costing and strategic sourcing. There is no doubt that these are effective cost analysis methods but there’s a flip side to it. These cost methods are often one-dimensional, rigid, costly and difficult to scale across functions or cost elements, and they do not help in building a strong supplier relationship. As a result, the organizations fail to take into consideration the 360-degree view of the supply market, competitive landscape and trends in the industry.

Future trends in procurement: Should cost analysis

Businesses require tools and methodologies, like should cost analysis, that help them to ascertain the price they should actually pay, squeeze supplier margins to the bare minimum and receive the best possible quotes for sourcing materials and parts. In business, organizations don’t get what they deserve, they get what they negotiate. Similarly, the should cost analysis model will enable the organizations to negotiate well with the suppliers, thereby creating a win-win situation for the buyer as well as supplier. It will facilitate collaborative development, improve the product quality by leveraging supplier insights, mitigate potential supply chain risks and have a bigger shot at driving profitability. As against the traditional costing methods in use, should cost model will help organizations to determine the set up cost to ascertain optimum order quantitates and inventory levels.

Organizations can reap several benefits and create a competitive advantage by integrating should cost analysis in their supply chain processes. At SpendEdge, we help our clients to have a first mover advantage in their specific industry by providing actionable insights to make well informed sourcing and procurement decisions.

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