5 Tips for Understanding Costs Better
Purchasing success cannot be achieved by Purchasing organizations or individual Buyers without understanding costs. But what does it mean to understand costs and how can you expand your costing skills?
One of the best Purchasing leaders in the manufacturing industry explained understanding costs 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 understand costs better and have achieved Optimal Costs.
APD’s Cost Management Certification Program gives Purchasing organizations the knowledge and tools to answer the questions and achieve optimal cost.
What are the attributes of organizations and individuals who succeed in understanding costs? Our 18 years of experience in the field leads us to the following conclusion; companies and individuals who succeed at understanding costs and expand their costing knowledge pursue the following:
- Commodity-specific approaches
- Data, data, data
- Education – Organizations and individuals who understand 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.
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, and the number and capability of suppliers will all vary greatly by commodity. For that reason, cost strategies and tools will also vary by commodity. Commodity-specific approaches are developed by:
- Identifying and 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
APD’s Commodity Leadership Certification Program gives Purchasing organizations the knowledge and tools to build effective commodity strategies.
- Data, data, data – Purchasing organizations often 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.
- Modeling – Good data gives the Purchasing organization the ability to build predictive and validation models to understand costs. What’s 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 – 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 Purchasing leaders and Buyers achieve cost success by understanding costs and developing effective cost strategies for the attributes noted above. Costing knowledge enables continuous monitoring of the key question – What does it cost, what should it cost, and what is the plan to close the gap?