Cost Driver Analysis Procurement
First, break the supplier's overall cost structure into key components: direct labor; materials; manufacturing overhead; selling, general and administrative costs; and profit. Is the cost of the facility justifiable? Labor - Improve operational and organizational efficiency and effectiveness, Low cost country sourcing4. As a result, even an inexperienced person can make use of the information. this contact form
More significantly, the difference between the importance ranking and the self-assessed level of skill -- the development gap -- was among the largest as well. (See Exhibit I.) Our experience is Not that you have all this information where do you go with it? Begin with the cost drivers, a buzz word meaning either the greater or more volatile cost elements. Consider In developing segments this company could define all castings as a commodity or separate them into ferrous and non-ferrous materials. If material costs are significantly lower, it probably means that the supplier is more vertically integrated, buying raw materials and performing the basic "transformation processes" in-house rather than simply doing final https://www.oxfordcollegeofprocurementandsupply.com/understanding-the-key-cost-drivers-in-procurement/
Scrap - Efficient production planning, design and re-design for manufacturing6. However, at this stage, the modeling has only illustrated the broader set of issues beyond purchase price. For example, a comparison between a high-labor-cost-country supplier and one with the same facilities but lower labor cost requires knowing only the differences in wage rates between suppliers -- or maybe
Cost Driver Analysis: Increase Visibility to Increase Savings was last modified: 2017-02-09 14:57-07:00 by Stan Garber Comments Off on Cost Driver Analysis: Increase Visibility to Increase Savings analysisCEBCost driversPeter Martinez-FontssourcingSVS LeadersSVSL However, capturing the materials-related costs of down time, warranty and disposal are less obvious and sometimes forgotten. For example, rather than simply estimating the cost of a casting, a far more powerful use occurs when the design engineer understands that increasing wall thickness by 2 millimeters adds an Total Cost Of Ownership Mike Halliday 2016-10-15T15:21:30+00:00 Share This Story, Choose Your Platform!
Heads of procurement occasionally talk about the importance of cost driver analysis, but it's usually in terms of strategic direction — not day-to-day execution. Cost Driver Examples Separate tables could be used for each of a variety of "modes": normal full-truck-load (TL) delivery, less-than-truck-load (LTL) delivery, and expedited air freight. Transportation - Distance, Bulkiness, Complexity6. https://www.scoutrfp.com/2017/02/cost-driver-analysis/ To move further, there needs to be an understanding of the drivers of cost within the suppliers' operations because purchase price is still likely to be the largest component of total
CRITICAL CAPABILITY Based upon our research, modeling total cost is one of the most critical purchasing capabilities. Procurement managersunderstood that employees’ knowledge about costs didn’t stop at what they were 100% certain about. When applying a "Darwinian Rivalry" model (see Exhibit II adapted from "Balanced Purchasing," Strategy & Business, Winter 1996, Issue 2), a company negotiates ruthlessly with suppliers. Reviews and mentions of publications, products, or services do not constitute endorsement or recommendation for purchase.
Cost Driver Examples
Scrap - Batch size, Production method8. Consider a two-pronged approach: Support: Provide staff with tools and direct coaching. Relationship Drivers Few companies have good commodity-coding systems and those that do often find the codes are inconsistently applied. Supply Chain Drivers For example, changing fundamental design choices, such as using plastic instead of casting, has a huge impact on the final design.
Peter Martinez-Fonts, Senior Executive Advisor at CEB Procurement and Operations Practice, led a session on how to deepen visibility into the drivers of cost. weblink This function’s staff note not just information they’re sure of, but two further levels of information: estimates and best guesses (see chart 1). Common across commodities, however, is the importance of modeling the total cost of ownership. Content Saved The item has been saved. Cost Drivers
The cost here could be cut by shopping around, however if quality is a high priority the cost may be justified to maintain high quality. Creating a supportive functional climate doesn't happen overnight. Raw Material - Type of material and size2. http://asmwsoft.net/cost-driver/cost-driver-analysis-definition.html R&D - Outsource R&D, R&D management, strategy and effectiveness7.
Connect with us Simple and easy See a Demo of Scout GET A DEMO Get in touch with Scout CONTACT US Subscribe for Scout News About Us Terms Privacy Schedule A Timothy M. what will have most impact if we reduce it.• Remember, "The most fundamental knowledge for buyers is to know the cost of a purchased product"• Cost breakdown and a good understanding
Supply Chain Management and its Integral Role in Business Today Oxford College of Procurement and Supply Celebrates CIPS Exam success!
June 5th, 2017 What to Develop: A Lean Supply Chain, Agile or Leagile? Understanding what the key cost drivers are and which can be manipulated to reduce cost and/or improve quality will aid the negation process. Such information can be organized into a simple spreadsheet application with input screens for the primary variables. "Cost tables" are created by calculating a range of scenarios using the model and For example, over the years the McDonald's Corporation has worked with suppliers to develop a sophisticated model to optimize chicken costs.
Although these costs can’t be considered as set in stone as physical production costs, they can be used as educated estimates for use in discussions with the supplier regarding productivity. View my complete profile Blog Archive ▼ 2009 (2) ▼ April (2) Procurement Outsourcing Understanding the Cost Drivers Followers Toggle navigation Why Scout Maximize Business Impact Improve Outcomes Launch Quickly If you remove $2/piece in needless logistics or packaging costs, that entire $2 savings can be applied to reducing the price to $98. http://asmwsoft.net/cost-driver/cost-driver-analysis-hospitals.html Triangulate around data to improve accuracy and confidence.
Clearly, such a model should capture obvious cost elements such as transportation and material rejections. Furthermore, alternative indirect sources of information help in triangulation. Few purchasing decisions should be made based solely on the price of the purchased product. You are ethically bound to keep the information confidential anyway so memorialize the agreement in writing. In some instances, if the supplier suspects that you could make the part, you may
Such a model provides a competitive advantage for McDonald's. The output of such analysis is a simple look-up table that allows even an inexperienced buyer (or better still, designer) to estimate the cost of a part using only three variables: For more about Strategy&, see www.strategyand.pwc.com. Procurement teams will often feel they have more questions than answers, in contrast to the support and information that’s available for top-tier buys.
BUILDING COST MODELS To develop cost models systematically across a purchasing function, Booz-Allen employs a top-down methodology using the five principles described above. Want to join the next SVSL event?