Reduce Product Costs: Don’t Negotiate Harder. Collaborate Smarter.

Key Takeaways:

• Every dollar counts today, and with increasing material costs, tariffs, and inflation, it is crucial to reduce product costs
• Data-backed evidence and transparency are essential to reducing product costs, improving the bottom line, and more effectively collaborating with suppliers

• Sourcing and procurement teams can make better data-driven decisions, negotiate more effectively, and gain a competitive advantage by reducing supply chain disruptions and other risks

Full Article:

Manufacturers are under pressure to reduce product costs without weakening the supplier relationships they depend on for quality, continuity, and speed. That is a difficult balance: push too hard on price, and suppliers may resist, cut margin, or deprioritize your work. Avoid the conversation, and cost increases quietly erode profitability.

According to the Supply Chain & Logistics Workforce Partnership, supply chain collaboration significantly enhances a business’s ability to drive growth. Among enterprises that collaborate with suppliers, many see approximately 15% growth versus non-collaborators. It is indicative of how critical strong supplier relationships spanning years and multiple successful new product launches are to business success and effective competition. However, those deep tier-one relationships can leave manufacturers reluctant to push back on cost increases.

The Limits of Traditional Annual Cost-Downs

That is why sourcing teams are moving beyond blanket annual discounts and toward fact-based supplier collaboration. With should-cost data, manufacturing process insights, and transparent cost-driver analysis, procurement leaders can identify where prices are misaligned, where design changes can reduce costs, and where a different supplier or process may create a better outcome for both sides.

With a deeper understanding of raw materials and manufacturing costs, sourcing teams can pinpoint cost drivers and use data to find the root causes of the cost discrepancies and reduce product costs. More importantly, you can achieve cost savings while maintaining strong relationships with your strategic suppliers.

You may ask yourself, “Can this product cost estimate really be 5x lower than the price I’m paying?” In some cases, the answer is yes. That said, you shouldn’t necessarily run to your supplier with an estimate in hand and demand a lower price, because several factors are likely contributing to that product cost.

Procurement’s Traditional Approach To Cost Reduction

For years, original equipment manufacturers (OEMs) typically asked their suppliers for a defined annual price reduction. For example, procurement may request a 5% price reduction on all purchases from the supplier. The next year, they may request a 6% reduction. And so on.

However, the unfortunate reality is that with this type of annual discount, a supplier relationship can become adversarial over time. To remain profitable, your supplier may overcharge you for some parts, knowing that eventually, they may lose money on the parts they sell you because they have run out of margin.

A Win-Win Approach To Strategic Sourcing

Today, sourcing teams have much more power when negotiating the specific cost of a product, using fact-based negotiation insights derived from cost intelligence.

The right manufacturing simulation software can save you hundreds of thousands of dollars – and in some cases millions of dollars – during the course of your supplier relationship.

How Cost Intelligence Changes Supplier Negotiations

Product costing software, such as aP Pro, estimates and captures the cost of new products early in the design phase. It leverages manufacturing process models and regional data libraries to run accurate cost simulations with real-time visibility. Together, the data creates digital factories to help cost teams identify and lower cost impacts in designs.

At its core, the software provides companies with insight to optimize new product costs, improve product quality, and maximize profit margins. This cost data ensures that companies achieve their product cost optimization goals. More importantly, its automation capabilities help address risk management by eliminating manual errors associated with using data across multiple systems.

Manufacturing intelligence and simulation software provide teams across the product development lifecycle with insights to conduct fact-based negotiations with suppliers. This helps ensure that you purchase each part at a fair price, are not overspending, and that your suppliers are not losing money. It is a win-win scenario.

Benefits Of A Fact-Based Procurement Strategy

Fact-based negotiations are a highly effective cost-reduction strategy.  During fact-based negotiations, detailed component cost data in your cost intelligence software helps you focus supplier discussions on parts that may be overpriced. It also enables sourcing and procurement teams to identify the largest gaps between your cost estimate and the supplier’s quote.

This cost reduction strategy is much more effective than saying, “I want a 5% reduction in price every year.” Why? Because in cases where you’re paying 5x more than you should be for a specific part, a flat 5% discount may not save you as much as you could be saving. And in cases where you are already getting a fair price, you are not asking your supplier to take a loss.

Use Cost Intelligence To Identify Savings Opportunities

Like any negotiation, the more information you have, the better. Simply phoning your supplier and saying, “I think I should be paying less for this part,” puts the negotiation power in your supplier’s hands. Consequently, suppliers are in the driver’s seat when it comes to controlling the cost conversation.

That’s why a cost intelligence solution is a critical first step to having fact-based negotiations with your supplier.

With existing parts, a cost and design for manufacturing (DFM) intelligence solution helps you identify potential savings opportunities by facilitating spend analysis. Conducting a spend analysis leverages your detailed cost data to begin a collaboration with your supplier.

3 Tips for Cost-Saving Collaboration

Here are three key strategies for successful collaboration with your supplier to cut costs.

1. Identify where you may be overpaying for parts

Cost estimation software makes it easy to identify parts on which you might be overpaying. aPriori helps you identify your product’s should cost and the cost breakdown, including a detailed secondary cost analysis.

For example, say you have two sheet metal parts. aPriori can identify material and manufacturing costs as well as cycle times for each.  With this information, you can determine that, for Part A, you’re paying $1 per minute of manufacturing time. For Part B, you pay $3 per minute of manufacturing time.

Negotiation Tip: With your real-time data estimate in hand, ask your supplier: “Can you help me understand why making Part A costs $1 a minute and Part B is $3 a minute?” 

Now, there may be a good reason for this discrepancy. Perhaps Part B costs $3 a minute because that particular part has tighter tolerances, which can make the process more complex. But you won’t know for sure until you approach your supplier.

2. Identify how design rework can reduce product costs

You may not need a DFM intelligence solution to redesign a part to reduce costs. Simply asking your supplier for advice on what design changes they would recommend is a great way to be more cost-effective and streamline the quoting process. However, a supplier suggestion is no substitute for an optimized design.

A DTC solution gives you real-time design cost and DFM feedback to ensure you’re designing to cost the first time. This is a great way to build a stronger relationship with your supplier.

Why? If you’re not using a costing intelligence solution, sourcing will likely need to request several quotes from your supplier during the design process. Often, it can take weeks to receive that quote. Situations where you need to redesign your part three or four times to meet cost targets result in additional supplier quotes, creating bottlenecks that often prolong production downtimes, often by months. Your engineers may feel frustrated by delays and multiple iterations of the same part.

Quoting multiple times can frustrate your supplier, too. Providing multiple quotes for a single part increases the cost of doing business with you. What’s more, because they aren’t guaranteed your business, they spend valuable hours repeatedly quoting your part.

Instead, using cost modeling software helps you design to cost in the first iteration. Sending your supplier a single, optimized design that often requires only one quote from them. This is a significant incentive for your suppliers. Not to mention, you’ll have a strong understanding of what that product should cost.

Negotiation Tip: With your cost-optimized design in hand, ask your supplier, “Can you provide us with a quote for this part? My costing data indicates this part will cost X dollars. Do you think we can get close to this estimate?”

3. Improve the production process to increase efficiency

You may already know that matching parts to the supplier’s capabilities is one of the biggest opportunities for significant savings while maintaining a strong relationship with your supplier.

For example, a premier cost solution can identify when a part is better suited to a Turret/Bend process than to a Laser/Bend process. With this information, you can eliminate suppliers from your RFQ list that do not have a turret.

For providers with both laser and turret capabilities,  if their turret capacity is maxed out, they may quote you for laser, which is more expensive. This gives you the insight to select the right supplier or push for the turret instead of the laser.

Negotiation Tip: Ask your supplier, “Can you help me understand why we’re being quoted for a laser/bend process when this part is suited for turret/bend?”

Advantages Of Fact-Based Collaboration Across Supply Chain Management

Supplier negotiations are an integral part of your cost-saving strategy.  A costing solution can give you the insights you need to frame negotiations in your favor. However, it’s important to take a diplomatic approach when using this data to negotiate with your supplier.

Ask your supplier, several times, “Help me understand why this part costs X?” and “Why does that one require more manufacturing time?”

Negotiation Tip: Ask, “Can you help me understand the difference between my estimate and your quote?”  This opens up a two-way dialogue rather than starting with a one-way accusation. Sometimes, there are legitimate reasons for the cost difference. Perhaps the supplier simply isn’t the right fit for your part. Initiating a dialogue allows both you and your supplier to reach common and profitable ground to move forward together.