How to Collaborate with Suppliers to Reduce Product Costs
The relationship you have with your supplier is critical to the success of your business. Especially if that relationship has spanned over many years and many successful products. That’s why we find that a majority of the manufacturers we work with feel hesitant to push back on a supplier about the cost of product materials.
Can this product cost estimate really be 5x lower than the price I’m paying?
In some cases the answer is yes.
That doesn’t mean you should run to your supplier with an estimate in hand and demand a lower price. There are several factors that contribute to the cost of a product. If negotiating product price with a supplier is a key function of your job, then a cost estimating tool like aPriori can give you leverage you need to begin a conversation with your supplier about product cost reduction.
In this post, we explore three key ways to collaborate with your suppliers to reduce product costs.
The History of Manufacturing Cost Negotiation
For many years, companies followed the typical practice of asking for a defined annual price reduction percentage every year from their suppliers. For example, they may request a 5% reduction in price on everything they purchase from the supplier. The next year, they may request a 6% reduction. And so on.
This type of cost reduction is beneficial to both the business and the supplier. The business benefits from an annual reduction in cost while ensuring they are working with a supplier that fully understands their product’s specific design and build.
The supplier, in turn, benefits by working with a business and a product that they truly understand, which can reduce training, floor set up, and other overhead costs. Plus, the supplier has the added benefit of securing the business for another year.
But the unfortunate reality is that this type of annual-discount supplier relationship can become adversarial over time. In order to remain profitable, your supplier may overcharge you for some parts knowing that eventually they may be losing money on the parts they sell you because they have run out of margin.
Nowadays, businesses have a lot more power when it comes to negotiating the specific cost of a product by using fact-based negotiation insights derived from a Product Cost Management (PCM) platform. The right PCM platform can save you hundreds of thousands of dollars – and in some cases millions of dollars – over the course of your supplier relationship.
What is a Product Cost Management Platform?
A Product Cost Management platform is a highly intelligent manufacturing costing software that uses both global and highly-localized product cost inputs to help businesses estimate the should cost of their products.
A Product Cost Management (PCM) platform gives you the insights you need to conduct a fact-based negotiation with suppliers. This helps to ensure that you purchase each part at a fair price, that you’re not overspending for the part, and that your suppliers are not losing money.
How to Use Facts to Collaborate with Your Suppliers
Fact-based negotiation is a highly effective cost reduction strategy.
During fact-based negotiations, the detailed component cost information within your PCM platform enables you to have focused discussions with your supplier about parts that you may be overpaying for. A PCM platform also helps you to identify the biggest gaps between your data and your supplier’s data.
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.
Leverage PCM Data to Identify Cost Reduction Strategies
Like in 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 all of the negotiation power on the desk of your supplier. They now control the conversation surrounding the costs that contribute to your quote.
That’s why utilizing a PCM platform like aPriori is a critical first step to having a fact-based negotiation with your supplier.
With existing parts, a PCM platform helps you to identify potential savings opportunities by facilitating a spend analysis. Conducting a spend analysis leverages your detailed cost data to begin a collaboration with your supplier.
Here are three key ways you can collaborate with your supplier to reduce costs.
Collaboration #1: Parts for Which You May be Overpaying
A manufacturing cost estimating software is going to make it easy for you to identify parts for which you may be overpaying. Not only will aPriori help you identify your product’s should cost, but the cost breakdown also includes detailed secondary cost analysis as well.
For example, let’s say you have two sheet metal parts. With aPriori, you can identify cycle times for each part. For one Part A you see that you’re paying $1 a second for manufacturing time. For sheet metal Part B, you pay $3 per second for manufacturing time. This is a perfect example of a cost discrepancy that you can bring to your supplier.
Negotiation Tip: With your PCM estimate in hand, ask your supplier: Can you help me understand why Part A is $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 second because that particular part has more tolerances which can slow own the manufacturing process. But you won’t know for sure until you approach your supplier.
Collaboration #2: Parts That Can be Redesigned to Reduce Costs
You may not need a PCM system to understand how a part can be redesigned to reduce product costs. Simply asking your supplier for advice on what design changes they would recommend is a great way to reduce costs and quoting time. But a supplier suggestion is no substitute for an optimized design.
An advanced PCM platform gives you real-time design suggestions to ensure you’re designing to cost the first time. This is a great way to build a stronger relationship with your supplier.
If you’re not using manufacturing costing software, you’ll likely need to request several quotes from your supplier during the design process. And sometimes, it can take weeks for that quote to get back to you and your engineering team. In a situation where you need to redesign your part to cost 3-4 times, production times are pushed back by months because of the quoting process. And your engineers may feel frustrated by delays and multiple iterations of the same part.
Quoting this many times can be frustrating for your supplier, too. Providing multiple quotes for a single part increases the cost of doing business with you. And because they aren’t guaranteed your business in many cases, they spend valuable man hours quoting your part repeatedly – sometimes knowing that you may get a better quote somewhere else.
Instead, using a cost modeling software helps you design to cost in the first iteration. Sending your supplier a single, optimized design requires only one quote from them. Not to mention, with your PCM you’ll have a strong understanding of what that product should cost.
Negotiation Tip: With your cost optimized design in hand, say to your supplier: Can you provide us with a quote for this part? My PCM system estimates this part will cost X dollars. Do you think we can get close to this estimate?
Collaboration #3: Parts Which Are Not Being Produced in the Most Cost-Effective Manner
You may already know that matching parts to the supplier’s capabilities is one of the biggest opportunities to cost save while maintaining strong relationship with your supplier.
For example, a premier PCM platform can identify when a part will be better suited for a Turret/Bend process than for a Laser/Bend process which will allow you to eliminate from your RFQ list suppliers that do not have a turret.
For suppliers that have both laser and turret, often times the turret capacity is maxed out, so they may quote you for lasering which is more expensive. This gives you the insight to select the right supplier, or push for use of the turret instead of the laser.
Negotiation Tip: Can you help me understand why we’re being quoted for a laser/bend process when this part is suited for turret/bend?
Supplier negotiation is an integral part of your cost-saving strategy. And while a PCM tool can give you the insights you need to frame a strong negotiation in your favor, it’s important to not foster an adversarial relationship with your supplier.
Instead of asking, “why” questions like why am I overpaying, instead, frame it as a request for understanding.
Start your collaboration with “can you help me understand” instead.
Negotiation Tip: Ask, can you help me understand the difference between my estimate and your quote?
This opens up a two-way dialogue instead of beginning with a one-way accusation. Sometimes, there are legitimate reasons for the cost difference. Sometimes, the supplier simply isn’t the right fit for your part.
Opening a dialogue allows both you and your supplier to reach a common, profitable ground to move forward together.
Are you using a product cost management platform to collaborate with suppliers and reduce costs? What results have you had? Tell us about it in the comments.