Buyers rely on cost breakdown analysis to reduce material costs and ensure competitive pricing on purchased components. However, the ability to impact costs is directly correlated with the usefulness of the data collected from suppliers. A well-designed detailed cost breakdown is the foundation of highly effective cost breakdown analysis.
Well-designed detailed cost breakdowns reflect the cost drivers that are important to a specific commodity. They bring visibility to the things that influence cost, going well beyond the traditional “5 elements” analysis (materials, labor, overhead, SG&A, profit). Cost drivers vary by commodity, as do the accounting methods used to determine the values assigned to a manufactured good.
Developing optimal detail cost breakdowns to improve negotiations will be discussed in more detail during the
Strategic Cost Negotiations Training
June 14th in Southfield, MI
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Here are 7 steps to more productive detailed cost breakdowns.
- Use commodity-specific detailed cost breakdowns. Trying to use one format that incorporates the needs of many commodities often results in a breakdown that is too complicated and unlikely to provide useful data from suppliers. Commodity-specific breakdowns can be tailored to reflect the accounting practices and unique data requirements for the commodities manufacturing process.
- Use pick lists. This makes data more searchable and easier to analyze.
- Capture physical part characteristics likely to drive costs. Physical part attributes can be used to develop regression models to estimate values that you won’t get from other cost drivers, such as cycle times.
- Don’t forget raw material scrap. Capture engineered and process scrap rates, as well as the expected reuse (and benefit) of scrap.
- Get the details on direct labor costs. Separate direct labor rates from fringe rates, and make sure indirect labor is not included in direct labor costs.
- Capture burden by process type. Avoid plant-wide burden rates as they can be grossly inaccurate.
- Capture SG&A separately from Profit. Both SG&A and profit are legitimate supplier costs, but don’t lump them together as you’ll lose the ability to question if the quoted rates are appropriate.
APD has developed a Best Practices checklist document for detailed cost breakdowns. Click Here to download and begin evaluating (and improving) your detailed cost breakdowns.