Why Understanding and Using Cost Models Drives Successful Outcomes 

Cost models can play a crucial role in driving successful outcomes for purchasing departments. Used effectively, they help drive optimal design, reduce the time required to bring products to market, and help companies succeed.

Here’s how cost models contribute to achieving favorable outcomes in purchasing:

  • Supplier selection:
    • Cost models enable purchasing professionals to evaluate potential suppliers based on their pricing structures. By analyzing cost models, purchasing departments can compare suppliers, assess the total cost of ownership, and make informed decisions regarding supplier selection.
  • Negotiations:
    • Cost models provide a fact-based framework for negotiations with suppliers. Purchasing professionals can leverage cost models to understand the cost components of products or services, identify cost-saving opportunities, and negotiate favorably with suppliers. Using cost knowledge when negotiating allows purchasers to achieve more advantageous pricing, ultimately improving the organization’s bottom line.
  • Total cost analysis:
    • Cost models consider not only the purchase price but also other cost factors associated with procurement. By evaluating the total cost of ownership, purchasing departments can make informed decisions that optimize costs over the entire product lifecycle. This approach helps avoid hidden costs and ensures that purchasing decisions align with the organization’s overall cost objectives.
  • Cost reduction initiatives:
    • Cost models are crucial in driving cost reduction initiatives within purchasing departments. Cost models enable purchasers to identify areas of potential savings, negotiate better pricing, explore alternative sourcing options, or optimize procurement processes. These cost reduction efforts enhance the purchasing department’s efficiency and contribute to overall organizational cost savings.
  • Collaborative cost modeling:
    • Collaborative cost modeling enables purchasing, engineering and operations to work with fewer suppliers. Suppliers can be sourced prior to design, brought into the design process and can help optimize it; this results in shorter design time/lower cost. Customer and supplier teams can use the models to drive cost and design improvements.

By leveraging cost models, purchasing departments can drive successful outcomes, including cost savings, improved supplier relationships, and enhanced overall procurement performance. Cost models provide a structured approach to cost analysis and decision-making, enabling purchasing departments to make data-driven choices that align with the organization’s strategic objectives.

Read a Viewpoint on 5 Cost Reduction Successes from Cost Management Certification Participants by Denise Mattern

Costing skills can be acquired through APD’s Cost Management Certification program

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