Purchasing success cannot be achieved by purchasing organizations or individual buyers without cost success. But what is cost success?
One of the best purchasing leaders in the manufacturing industry explained it to us this way:
“The best purchasing organizations and buyers can answer these questions:
- What does it cost?
- What should it cost?
- What is the plan to close the gap?”
He was right…whether they are doing it consciously or not, almost all buyers and purchasing organizations are trying to answer these questions. When they are successful, they have achieved Optimal Costs.
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What are the attributes of organizations and individuals who succeed in achieving Optimal Costs? Our 15 years of experience leads us to the following conclusion; companies and individuals who succeed at understanding and closing the gap to should-be costing aggressively pursue the following:
- Commodity specific approaches
- Data, data, data
Education – Organizations and individuals who achieve Optimal Costs develop an education plan by identifying what knowledge and skills they need to have, what they already possess, and what actions they are going to take to achieve the knowledge and skills required.
When it comes to Optimal Costs, our belief is that the education assessment needs to include the following:
- Understanding of manufacturing processes and costs
- Negotiation skills
- Ability to make the complex simple or the ability to understand and analyze details and explain clearly
Commodity specific approaches – Manufacturing processes, physical part design, the number and capability of suppliers will all vary greatly by commodity. For that reason, Optimal Cost strategies and tools will also vary by commodity. Commodity specific approaches are developed by:
- Identifying/understanding cost drivers
- Assessing the availability and capability of the supply base
- Understanding the past, present and future needs of your company for the commodity
- Selecting the right tools and processes for gap analysis and closure
Data, data, data – 85% of the purchasing organizations who obtain cost detail from suppliers look at that detail to make the decision at hand and then set the data aside. Leading organizations recognize cost detail for what it is, Big Data, and treat it accordingly. They develop data strategies to cleanse, refresh, store and use the data in their day to day decision making most frequently by modeling (see below).
Modeling – Good data gives the purchasing organization the ability to build predictive and validation models. What the difference? Predictive models enable purchasing to provide sales, engineering and operations with credible estimates of what an item will cost. Validation models are used to verify supplier quotations for cost and process parameters like machine size and cycle time.
Benchmarking – Optimal Cost is not a static destination. Designs, manufacturing process and supplier capabilities are constantly changing. Often Optimal Cost is achieved in part by reducing, not expanding, the number of suppliers a company is using. While aggregating spend with fewer suppliers helps achieve near-term Optimal Cost, it will reduce the amount of data coming into the process.
Successful leaders and buyers achieve cost success by developing effective cost strategies for the attributes noted above that enable continuous monitoring of the key question – What should it cost?