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Learn How Modern Manufacturers are Leveraging PCM to Improve Profitability

Rick Burke

Negotiate More Effectively with Suppliers Using Manufacturing Process Data

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In direct conversations with customers and according to the TechValidate research study below, one of the most significant sources of stress for Supply Chain professionals is conducting negotiations with suppliers that are not based on true manufacturing data, but rather a conversation that begins with “that price is too high”.

 

Customer Proof verified by TechValidate.


The first statistic in the chart above is what we often describe as “flying blind”.  61% of the people who responded to this survey cite this issue as one of their biggest frustrations.  Imagine that there is a stream of requests coming in from the engineering team for quotes on new product designs.  The sourcing team puts together an RFQ as quickly as they can, and sends it off to 3 or more suppliers that have done similar work for them in the past.  Let’s put aside for a minute the fact that this RFQ/Response cycle can take 1, 2 and sometimes upwards of 3 weeks to complete.  The sourcing people really have no idea what these products should cost.  It’s not their fault.  They’ve never been given tools that can help that understand that information in a timely fashion.  When the quotes eventually come back (A) they are all in different formats (that’s statistic number 2 above), and (B) they all have different prices for the exact same product.  Typically these quotes are very high level, and at best are broken down into Labor, Materials and Shipping costs.  How much of the total cost represents “true manufacturing cost” and how much represents “commercial cost” is virtually impossible for the Sourcing team to determine.

Let’s dig into the concept of true manufacturing cost for a minute, represented by statistic number 3 above – “disagreement over production standards”.  Often, if the two customer and the supplier can engage in a conversation at this level of detail, it comes down to who has more manufacturing experience, and how much detail they are willing to reveal.  Again, this is a very frustrating situation for both the buyer and the seller.

Enterprise Product Cost Management technology was designed to make all these problems disappear

Subjective interpretation and guesswork are eliminated from the conversation with a modern enterprise PCM solution.  Companies interested in EPCM should look for a system that has the capability to perform detailed mechanistic analysis on a product design (irrespective of whether the input is a 3D CAD model, a table of specification data or manual input from the designer).

What does “mechanistic analysis” really mean?  It refers to a system that can perform a highly detailed simulation of the manufacturing process, including both primary and secondary operations, for a specific volume of parts, manufactured in a specific region of the world, and not only generate a specific should cost for that product, but also supply the system user with all the manufacturing detail of how that cost was derived.

Imagine having the cycle time of every machine for every step in the manufacturing process?  Imagine having detailed material utilization data, or labor costs, or plant overhead costs at the tip of your fingers when negotiating with your suppliers?  This is what you get with EPCM technology!

To learn more about how to effectively use EPCM technology to improve supplier negotiations, I highly recommend you take a look at the 3 blog posts offered by my colleague Abe Chaves:

Also, if you would like to read about how one of the world’s greatest High Tech Electronics companies is using EPCM to conduct more effective negotiations with their Contract Manufacturers…

Read This Case Study

 

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Comments

  1. Douglas Brown

    This is great; but what about product feature value vs. competing product feature value. Then there is the issue of economic pricing. Not pricing for single unit margins, but pricing for higher sales while optimizing company profitability. Sounds like a fit to me. Or is it being done?

    Doug

    Posted on Tuesday, September 15, 2015 at 12:36 pm
    Reply
    • Rick Burke

      Thanks for the comment Doug. Everything you point out is certainly valid. In early design tradeoff analysis, product cost management systems that enable customers to quickly estimate the cost of 3D CAD models can very quickly analyze product feature cost/value for design alternatives, with the objective of approving the design that meets form, fit, function and finance (or target cost) requirements. Furthermore, modern PCM systems allow you to analyze the tradeoffs of different manufacturing techniques & routings, based on low volume, medium volume, high volume scenarios and quickly optimize your approach based on final market sales projections. And I left the stickiest issue for last – economic pricing. We have found through many conversations with customers that having true manufacturing cost first allows you to quickly understand what percentage of a final quote price is the economic margin. True manufacturing cost is the actual cost to fabricate a product without any of the commercial noise or variability that is very difficult to discern when suppliers don’t break down their RFQ response with enough granularity. Understanding the cost drivers in a supplier quote is not an easy job. We have found that companies who leverage modern PCM technology are able to understand all of the details around what their product should cost, before they ever even see an RFQ response. I hope this helps. If you want to know anything else, feel free to write back or give us a call.

      Posted on Tuesday, September 15, 2015 at 12:59 pm
      Reply

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