Using Should-Be Cost Models to Negotiate Pricing

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.

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Knowledge-Based, Collaborative Negotiation

In most manufacturing companies, half or more of revenue is paid out to direct material suppliers.  The classic purchasing approach of “3 quotes and a cloud of dust” simply puts your purchasing team at odds with the very people who impact the competitiveness of your products in the market place.  Competitive negotiations – where both sides strive to win at the expense of the other – have proven to be less effective than collaborative negotiations, where both parties seek a “win-win” outcome.

Should-be cost models can provide the knowledge needed to negotiate collaboratively and achieve the best pricing possible while ensuring suppliers can support your business.  With simple cost tables or linear price models, you can have productive discussions with suppliers.  Multivariate regressions models and manufacturing process cost models provide greater insights into supplier production processes and cost drivers, providing the basis for buyers to have even more productive discussions with suppliers.

Download our newly published white paper The Road to Should-Be Costs:  Proven Methods for Estimating Costs of Manufactured Components for more information on the benefits and limitation of different types of should-be cost models.

Price Negotiation Steps

A cardinal rule is: Do not use should-be cost models to set unachievable price targets.  Instead, use the cost models to help you understand the basis for supplier quotes and help you select the best supplier(s) to engage in negotiations.  Then, once you have adjusted your cost model to reflect your new understanding, you can discuss reasonable price targets with the suppliers you intend to award the business.

Here are the steps we’ve used to successfully negotiate pricing:

  1. Review supplier quotes and cost models before meeting with potential suppliers
  2. When meeting with suppliers, ask questions to enhance your understanding of how they develop their pricing
  3. Update your cost models to reflect what you’ve learned
  4. Meet again with the most competitive supplier(s) to present achievable cost targets and invite them to collaborate on ways to meet the targets

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