Rising Material Costs and Their Influence on Supplier Prices
Today’s inflationary environment is challenging the way buyers negotiate savings with suppliers, especially when rising material costs influence prices. Members of the procurement organization, including cost engineers, require an accurate data-driven approach to analyze supplier price increase requests, and to determine whether the prices truly align with a material cost increase. For buyers, the objective is to understand how rising material costs should impact the piece part cost of a product to avoid paying for more than what is fair.
In this article, we uncover how digital manufacturing simulation software, such as aPriori, helps cost engineers examine how much should a component cost increase given a material rate increase. We also discuss how cost engineers can use aPriori to help sourcing managers initiate fact-based negotiations with strategic suppliers.
Using aPriori Manufacturing Cost Models to Address Rising Material Costs
Cost engineers can use aPriori’s cost models, powered by the digital factory, to check how a material rate increase should impact total product costs. To generate a cost estimate in aPriori, cost engineers simply select all the parts used in a product and add them to a “rollup.” Within an intuitive material selection screen, cost engineers can change material rates to automatically re-cost the parts included in the rollup (Figure 1).
Figure 1: Re-Costing Product Parts in aPriori
Accurate cost estimates from aPriori detail how much a component or part should cost given a specified material rate increase. That way, buying organizations know how much they should pay a supplier for parts without spending hours evaluating one component at a time. Further, cost experts can use these estimates to identify the best opportunities for savings to support the sourcing team with negotiations.
How aPriori Delivers Highly Accurate Part Cost Estimations
aPriori estimates the manufacturing and material costs of a part to assess how it will be impacted by rising material rates. For instance, a simple, non-complex part will have most of its cost in material rather than manufacturing (Figure 2). If material rates double, the piece part cost of this component, or the price the buyer pays the supplier, may also double.
Figure 2: Simple Component
In the case of a more complex part, it is likely that most of the cost is in manufacturing rather than material (Figure 3). If material rates double, the piece part cost of this component should not double. The manufacturing cost of the complex part will stay the same regardless of the material rate increase.
Figure 3: Complex Component
aPriori’s detailed, data-driven cost insights give buyers full visibility into their parts. This insight ensures that buyers do not pay unreasonable prices for a particular component.
Helping Initiate Fact-Based Negotiations for Sourcing Managers
The cost engineer can support sourcing leaders by analyzing and vetting supplier prices early in the product development life cycle. Through aPriori, cost experts have the calculative means to identify discrepancies in supplier prices based on rising material costs. These accurate should-cost estimations are shared with sourcing professionals before they even start negotiating with the selected suppliers.
With accurate part cost estimates in hand, sourcing leaders can initiate fact-based negotiations with suppliers to review differences between the estimate and their cost breakdowns. These collaborative discussions allow buyers to achieve savings in today’s most challenging market environment in the past 20- to-30 years. Buyers that bring more transparency to negotiations can build or strengthen their relationships with critical vendors.
The return of inflation has disrupted the manufacturing industry, creating obstacles for buyers in negotiating savings with suppliers. As material costs continue to rise, buyers require digital manufacturing simulation software to gain accurate insights into what their parts should cost and avoid paying for more than what is fair.
Powerful manufacturing cost models for supplier collaboration and cost reduction
Learn how HARMAN leverages aPriori to develop manufacturing cost models capable of driving true supplier cost and pricing transparency.Read the Case Study