Experience has taught us that buyers who have cost breakdowns entrenched as a part of their sourcing process achieve prices that are 2-5% lower than buyers who buy the same commodities without detailed cost breakdowns. What differentiates those who save 5% from the ones that only save 2%?  Following are the key differentiators employed by high performers: They utilize commodity specific cost breakdowns.  Trying to use one format that incorporates the needs of many commodities often … [Read more...]

In whack-a-mole a person hits the mole forcing it down only to have it pop right back up in another location.  In quotation whack-a-mole buyers push on an area of supplier costs in order to get pricing to go down only to have costs pop-up in another area bringing prices up as well.  … [Read more...]

A well-designed detailed cost breakdown is the foundation for saving money by enabling the understanding of ‘manufacturing processes and costs. Buyers rely on cost breakdown analysis to reduce material costs and ensure competitive pricing on purchased components. However, the effectiveness of using detailed cost breakdowns is directly correlated with how well the cost breakdowns are designed. Well-designed detailed cost breakdowns reflect the cost drivers that are important to a specific … [Read more...]

We have 15 years of data that shows that buyers who move from price-focused, competitive purchasing to cost/value-focused, collaborative purchasing can achieve savings of 8-18% (see figure). I wish we had a similar level of data on the career progression experienced by buyers who develop cost knowledge and utilize it in a collaborative way.   I think it would be revealing. It has been my experience that buyers who develop a deeper understanding of cost also increase their knowledge of … [Read more...]

For the past few years I have participated in career development academies for a couple of industry associations by doing a short negotiation primer. The facilitator for the sessions always leads off with an exercise he likes. The exercise assigns the trainees into groups A, B and C and gives Group A the most negotiation power, Group B the next highest level of power and Group C the lowest. … [Read more...]

Last week we blogged about the reasons why buyers should use should-be cost models.  In summary, effective should-be deployment needs to be designed with the following objectives to maximize success: Reduce buyer workload Make cost negotiations easier Help achieve lower cost designs Improve career prospects for buyers Even when the application of should-be cost models achieves these 4 objectives buyers still may resist.  Why?  Here is what our experience tells us: … [Read more...]

In a recent round table we conducted with Chief Purchasing Officers, CPO’s were lamenting about the difficulty they encounter in getting buyers to develop and use should-be cost models.  They were looking for the magic dust that would make buyers as enthusiastic about should-be models as they were. … [Read more...]

Our blog “If Value Matters, Why Am I Measured on Cost?” always gets a lot of interaction from purchasing managers who believe that performance metrics that focus on PO to PO price reductions do not show the value that purchasing is providing their companies. Here is a thought.  Instead of waiting on the CEO’s and CFO’s to change, why don’t we take advice from Michael Jackson and look at the man (or woman) in the mirror and change our ways? … [Read more...]

58% of the CEO’s we surveyed questioned whether or not their purchasing organizations are providing value to their companies’ bottom line.  However, when we look at the metrics used to measure performance we often find: Purchasing is measured on price reductions alone, not on value provided Purchasing alone has ownership of the cost/value goal Metrics are short term/current year focused Here are three insights that were shared in the June 15 webinar “Purchasing Metrics that Matter – … [Read more...]

What’s the best way to leverage should-be cost data when negotiating pricing with suppliers?   When your supplier is integral to your organization’s success, we assert that the best outcome is one where the buyer gets the lowest price possible while the supplier makes a reasonable profit.   At APD, we’ve found that a knowledge-based, collaborative negotiation is the best tool for achieving this outcome. Past posts have summarized how to build should-be cost models, which are very useful for … [Read more...]