When writing about cost breakdowns, famed negotiation trainer Chester Karrass opined “Buyers should always ask for detailed cost breakdowns and suppliers should always refuse to provide them”.
Buyers often win this first battle of the cost breakdown war through the use of carrots and sticks; carrots being incentives like new business awards or preferred supplier status and sticks being punishment that your quotation will not be accepted without them.
However, that is just the first battle of the war; there are more battles to follow. Why? I think it comes down to interests.
When we ask suppliers what their interests are in providing cost breakdowns, they most often state two reasons:
- Win the business
- Obtain the highest possible margins
When we ask buyers what their interests are in obtaining cost breakdowns, they most often state these two reasons:
- Source the business
- Justify to their management/organizations that they have obtained the lowest possible price
The suppliers’ interest of obtaining the highest possible margins and the buyers’ interest of obtaining the lowest possible price are conflicting interests that perpetuate the war over cost breakdowns.
Suppliers fight the war by:
- Omitting key elements of the cost breakdown
- Hiding or lying about costs throughout the detailed cost breakdowns
Buyers fight the war by:
- Including many suppliers in the quotation process
- Conducting multiple rounds of quotations
- Misleading and lying about the quotation results to drive prices lower
Like most wars, this one wastes resources, takes time and often leads to one or both parties losing.
So, how do you avoid the war? Buyers who are successful identify mutual interests to motivate the suppliers to provide cost transparency via detailed cost breakdowns. Examples include:
- Buyers and suppliers have a mutual interest in more efficient sourcing processes: “We need to source new business in the most efficient way possible. Cost breakdowns will help us understand cost structures and source more efficiently.”
- Buyers and suppliers have a mutual interest in lowering the costs: “We need to identify the best way to design and produce parts so that we can buy at the lowest possible prices while our suppliers make reasonable profits. Cost breakdowns enable us to work with our suppliers to change the cost–driving physicals in design and manufacturing to the benefit of both parties.”
- Buyers and suppliers have a mutual interest in reducing the number of suppliers: “We need to reduce the number of suppliers we have. Understanding costs and developing agreed costing methods will enable us to this.”
Our experience over 15 years of consulting is that buyers can achieve 8-18% lower prices by moving from warring with their suppliers over breakdowns to warring against costs with their suppliers as allies.
Why You Can’t Trust Your Supplier Quotes
Doug Hicks who has made a career helping suppliers develop and implement costing systems discusses why you can’t trust your supplier quotes.
Looking to improve your detailed cost breakdown? Click here for our best practice detailed cost breakdown check sheet.