5 Steps to Successful Cost Reduction Negotiations With Suppliers

You know that pricing discussion you’ve been meaning to have with your supplier? It’s time. In fact, it’s past time to discuss potential cost savings with all of your suppliers. By now, you should have powerful data-backed cost insights to achieve win-win cost reduction negotiations while keeping strong supplier relationships.

Cost reductions won’t happen on their own. Conducting a spend analysis that includes should cost data is a reliable way to come to the table with your supplier prepared and educated so that you can achieve cost savings. And the best part? You will know you’ve done your homework, and so will your supplier.

Supply chain procurement can be challenging. So, try the following methodology to turbocharge your cost reduction negotiation initiatives. Read our five simple steps to prepare for productive cost reduction negotiations with your supplier(s).

How to Achieve Cost Savings Throughout the Supply Chain

Step 1: List/Audit All Components for Procurement

You’ll want to gather as much information you can about pricing on all components currently sourced at this supplier to identify opportunities for lower cost. It doesn’t make sense to discuss each individual part in your first meeting, so the next steps will help you determine ahead of time which parts have the best opportunity for price reduction. That’s where should cost can help.

Step 2: Create a Should Cost Estimate for Parts To Identify Cost Savings

Start by focusing on a specific sector of your commodity that is your supplier’s core competency. An example may be aluminum sheet metal parts fabricated in North America.

Collect a detailed should cost estimate for as many components in that commodity sector as you can, even if they are produced by multiple suppliers. Make sure to get a detailed should cost breakdown to understand all elements of the total cost. For now, you’ll need just the number, but later you’ll reinforce your position with detailed facts like material utilization, scrap rates, and machine cycle time down to the second to understand full operating costs.

Although you can identify potential cost-saving opportunities manually, a product cost management solution can analyze a greater number of parts faster and use more sophisticated filters. The automation-driven solution streamlines the cost analysis process by delivering quick, precise estimates that identify overpriced components for cost-saving opportunities.

Step 3: Run an Outlier Analysis

An outlier analysis is a bar graph (see image below) that ranks components from highest to lowest based on the difference of what you’re currently spending (what you’ll pay if you do nothing) and what you should be spending (your should cost) on an annual basis. To translate how your actions could affect your commodity’s spend, it’s convenient to record these differences in terms of annual spend, meaning multiplying the difference of each component’s current cost and its should cost by its annual volume.

An outlier is any component that has a significant difference between current price and its should cost estimate. A difference is considered significant if it is 20% or greater. Look for patterns of outliers in components that have a common supplier, weight class, or manufacturing process. Respectively, these outlier patterns provide clues about a supplier’s business conditions, raw material or handling cost drivers, or production inefficiencies that lead to more specific discussions.

Step 4: Make a Meeting Agenda for Your Next Supplier Negotiation

You now have a list of outliers that represent the agenda for your meeting. For each outlier, you have a detailed breakdown of the outlier’s should cost. These metrics spotlight opportunities for cost reduction. The components that are not outliers in your analysis can be assumed to be fairly priced, and you can agree to back off negotiating price on these outliers as concessions when driving to negotiate price reductions for the outliers.

You’ll likely get the attention of the sales rep by asking questions reinforced by facts and data. A should cost breakdown, such as an aPriori part cost report, is a great cheat sheet to help you present your secret weapon—educated assumptions about your supplier’s manufacturing methods and costs.