Simple purchasing processes are a matter of the past. Today, procurement departments operate in global structures throughout the company and beyond to identify a competitive supplier base. New products, unknown manufacturing processes, increasing production relocations require know-how in the production processes from the procurement teams.
More and more companies involve their suppliers and purchasing specifically in product development in order to build up knowledge and take the cost aspect into account in the early phase of product development. Transparent product costs including benchmarks are necessary to identify potential savings with the supplier and to determine target costs.
In our view, there are seven simple steps that procurement organizations can take to make their strategic procurement process (value sourcing) a success and increase their share of value creation.
How it starts: A request for a new component comes from product development. For purchasing organizations, the supplier selection process begins with various questions: Are there such products on the market? Which of my suppliers has designed similar products and could be considered for production? What were previous prices? How do I come to my calculation?
Target costs can be established in two ways:
The data basis is crucial. It is important that underlying data are valid and withstand the comparison to the real supplier situation. It is simply a matter of being up to date, especially in areas that are subject to high fluctuations such as material prices, in some cases wages, and machine investments. Purchasing teams can ensure that changing framework conditions are considered in the accompanying review of target costs.
Companies looking for ways to optimize costs should focus on alternative manufacturing processes. For statements that are as reliable as possible, cost models are generally used that allow a realistic approximation of actual manufacturing times. They incorporate current developments in manufacturing technology and allow alternatives to be considered on a fact basis. Even in cases where the specific technology is not available in-house, there is no know-how and no empirical values. This allows the purchasing department to discuss and develop options together with the supplier that can lead to a significant optimization of costs and investments over the lifetime of a product.
Cost evaluation is optimized when there are more and more standards in cost accounting. Digitally available cost models, for example, support standardized costing in situations where complex manufacturing processes are to be evaluated company-wide by several procurement units.
Setting up a planning or production process requires being able to compare various scenarios and suppliers under different premises. This must be done in a standardized manner so that factually correct conclusions can be drawn. With a costing methodology that is valid throughout the company, companies ensure that every costing is carried out in the same way for every scenario, irrespective of the supplier, the estimator, the time, and the location. Without costing standards, it is almost impossible to achieve reliable results in cost comparisons. In such a case, opportunities are missed to identify and address real potential for cost reduction.
Different approaches such as top-down target costing or bottom-up target costing can be used for target price calculation.
Both approaches are gaining in importance for purchasing and cost engineering since they are responsible for between 60 and 85 percent of the value added of a product depending on the sector of industry. The earlier the procurement department is included in the process, the higher the probability that the mutually defined targets will be reached.
Usually there will be discrepancies between the defined cost targets and the offers received from the supply chain. Such variances can be caused at all points in the supply chain, such as during in-house production or at the supplier's subcontractor.
During the product development process, these gaps can be addressed with suitable measures and ideally be closed. There may be a wide range of measures in both technical and commercial contexts that can be used to achieve the objectives.
The structured and traceable approach to the collection, evaluation, implementation, and monitoring of cost reduction measures is a key feature for purchasing departments and the entire cost engineering team. Additional cost analyses and simulations with degrees of hardness can be carried out for the defined measures. They provide early indications of the area of possible cost optimization as well as the ability to achieve the cost targets.
In cost engineering - the overall process of cost structure analysis - business units, various departments on the supplier side and other participants in the supply chain are equally involved. The groups must be informed in a timely and comprehensible manner about the respective status of costs and optimization plans.
Information paths can be implemented more efficiently through process automation. For example, calculations can be sent from the costing solution to other organizational units at the push of a button. Or variant management can be integrated to ensure that everyone involved, from the R&D department to the purchasing team, has a comprehensible view of cost developments.
Source: Costing Reports umlaut (FACTON Partner)
Reporting mechanisms provide central information of a calculation and simplify responsive reporting. Interfaces to common reporting tools such as Tableau or Power BI also enable personalized dashboards and cross-functional reports. Transparency enables concerns to be addressed and resolved early in actions to be agreed upon.
With a global and collaborative strategy and the right software environment, the potential in Should Costing can be tapped across all stages of the value chain.
Read our white paper to learn in detail how EPC Should Costing can help you achieve better prices for purchased parts and increase the value-added share of procurement.