Cost Modeling for Purchasing - A Fundamental Skill
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Purchasing Teams that effectively use cost modeling to support supplier selection and negotiation can drive significantly better cost results and improve supplier performance. Chief Procurement Officers should set standards and priorities for cost modeling and include it is as part of the training and development of the organization. Ability to effectively develop and use cost models to obtain results is a key skill for purchasing professionals to develop.
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Cost Modeling for Purchasing - A Fundamental Skill
- 1. A F U N D A M E N T A L S K I L L F O R S E N I O R B U Y E R S Cost Modeling For Purchasing Purchasing Teams that effectively use cost modeling to support supplier selection and negotiation can drive significantly better cost results and improve supplier performance. Bill Kohnen Purchasing Fundamentals CPO Series 2014
- 2. Cost Models For Purchasing Developing Cost Models is a fundamental professional purchasing skill Category Supplier Specific Item Specific Effective cost models are needed for all approaches to Purchasing Adversarial, Strategic , Collaborative. Best practice suggests that providing training to make cost modeling a core skill for Category Managers and Senior Buyers, with support as needed from a small number of “experts,” ultimately produces better and more sustainable results than creating a large centralized purchasing cost group. Bill Kohnen Purchasing Fundamentals CPO Series 2014
- 3. Cost Models For Purchasing Purchasing cost models do not need to be as complex and drill as far down into detail as traditional Cost Accounting models Simple is better – focus on most important elements and drivers that you can actually get quality information for. Dive into the marketplace to gather information Visits to multiple suppliers factories Industry trade events and seminars Formal and informal discussion with suppliers Lots of free information on web Look for people with long industry experience in a category that may have been downsized but still have deep knowledge. Pay them something but could real value. Use formal consultants as a last, high priced, resort. Bill Kohnen Purchasing Fundamentals CPO Series 2014
- 4. Most Basic Elements of a Cost Model Describes Price Today Materials Labor Overhead Bill Kohnen Purchasing Fundamentals CPO Series 2014
- 5. Cost Drivers Broad Categories (Examples) Adding Cost Drivers enables “what if” and more Strategic Analysis Technology Operations Location Quality Service Level Competitive Landscape Logistics Capabilities Energy Between categories specific drivers would change For Example Energy: Data Center concern is access to free cooling options Semiconductor Fab concern would be reliable uninterrupted power
- 6. Steps to Create Models 1. Conduct companywide spend analysis and identify categories of spend. Typically grouping by supplier industry or technology is best. 2. Establish you total cost for each category including shipping, maintenance, service, training etc. 3. Build category models with cost drivers – take advantage of free publically available information or only for very critical categories consider paying for an industry report 4. Apply models for step 3 to your current and potential suppliers 5. Build most detailed specific service or product models for your most critical items Bill Kohnen Purchasing Fundaments CPO Series 2014
- 7. Where to prioritize Cost Reduction as the Goal Focus on the high cost categories where you currently do not have many options. Engaging Suppliers to drive your growth and/or reduce risk as the Goal Look at how each category of spend can add value to your most strategic business units and focus on those categories
- 8. Samples CPOs should establish basic format and process to facilitate training and easier sharing of information within organization Samples presented as charts which might be final product for presentation Basic work of models takes place on relatively simple excel spreadsheets Taken out of context and without good input even the most perfect conceptual cost model is of little value. Therefore, strive to keep things as simple as they can be.
- 9. High Level Sample Category Models Overhead Materials Labor Overhead Materials Labor Semiconductors Contract Assembly Cost Drivers Age of Fab Process Capability Location Energy Yields Utilizati0n Cost Drivers Location Workforce Capability Supply Chain Mgmt. Management Bill Kohnen Purchasing Fundamentals CPO Series 2014
- 10. Supplier Comparison Models Overhead Materials Labor Overhead Materials Labor Supplier A Supplier B Supplier A has 4 x Overhead of B but still lower cost. Suggests present technology and operations advantage. Cost 100 0 Bill Kohnen Purchasing Fundamentals CPO Series 2014
- 11. Sample Detailed Item Model Semiconductor Power Integrated Circuit Overhead Materials Labor Overhead Materials Labor Ultra Low Power IC 28nm Bulk Planar process Cost Drivers Age of Fab Process Capability Bulk Planar Location Energy Yields Utilizati0n Ultra Low Power IC 28nm FinFet process Ultra Low Power IC 28nm FDSOI process Overhead Materials Labor
- 12. Summary Senior Level Purchasing Professionals should take it upon themselves to know the basics of cost modeling Chief Procurement Officers should set standards and priorities for cost modeling and include it is as part of the training and development of the organization. Purchasing Teams that effectively use cost modeling to support supplier selection and negotiation can drive significantly better cost results and improve supplier performance. Bill Kohnen Purchasing Fundamentals CPO Series 2014