Mastering Supplier Negotiations: Tips and Tricks for Effective Preparations and Successful Outcomes

Lily Thomas: Hi everyone and thank you for joining this session on mastering supplier negotiations. I will be presenting today, and also my colleague Abe Chaves is going to be facilitating the presentation. I am a consultant here at aPriori. What that means is I work with our customers to help them get value out of aPriori. And that can mean supporting them in discussions with suppliers as they are trying to figure out how can they work with suppliers to reduce the cost of a part. And it can also mean working with engineers to evaluate designs with aPriori to try and produce more cost-effective designs. Before joining aPriori, I worked for a number of years for a division of GE in a variety of different supply chain and manufacturing roles. And a lot of that time was spent as a commodity manager.

LT: So the key takeaways that we want to cover today are what are the top five challenges in supplier negotiations and how can you address them and how does having data help you address those challenges? And how can data instill confidence in your team when you are in negotiations with suppliers? We will also talk about how data having can benefit the suppliers as well as the buyer in figuring out ways to reduce the cost of a part. So we are going to cover the top five challenges, and we are going to have interactive examples where Abe and I will do some back and forth to demonstrate how you can overcome each of the challenges.

Top Five Challenges

LT: So what are the top five challenges? I will kind of give an overview of all of them, and then throughout the presentation, we are going to go through them one by one. So the first issue is having data. So if you do not have any kind of benchmarking tool and aPriori is one benchmarking tool, then you do not have any data and it can be really difficult to negotiate from a position with very little knowledge about the part of the process. So aPriori arms you with some of that data. But then you have the issue of getting confidence in the data. So you have this detailed estimate from aPriori, but how is aPriori getting that estimate? Where are all the numbers coming from? That can be a big challenge for customers who are using any type of should costing tool. They need to be confident and understand where the numbers in the should cost are coming from.

LT: The third challenge is getting the supplier to engage. So suppliers are just as busy as buyers are and convincing them to come to the table to review some parts with you so that you can work together to try and reduce cost. The fourth challenge would be not getting distracted by discussing things that do not have a big impact on cost. So you want to… It can be challenging sometimes to focus your discussions with suppliers on key cost drivers. You do not want to get distracted by other things that may not have a big impact on cost. And then finally, the last challenge is perhaps one of the biggest, it is how do you reconcile differences between your estimate and the supplier’s reality? So you will undoubtedly find out that the supplier is doing things differently from how a benchmarking tool has modeled it, and how do you reconcile those differences.

LT: So we are going to cover each of these and we will go give some role-play examples for each. So first, let us talk about data. So having data can actually benefit both the buyer and the supplier. And if we think about coming… Trying to go to a negotiation with no data is one of the first challenges. So aPriori will put you or another tool like aPriori will put you in a position where you at least have some data. Going into a negotiation without any data can be challenging for both the buyer and the supplier. Having data allows buyers to focus the discussion with suppliers on specific parts and specific cost drivers. They know what data to ask for and they will become more educated about the commodity that they are purchasing. So buyers will… Or commodity managers, I will use those terms interchangeably. They will learn about the supplier’s capabilities so they can better place parts with that supplier.

LT: And buyers, when they have some data, you know, a benchmark estimate for a part, they will not be asking the suppliers to negotiate parts that are already competitively priced. And suppliers are out to rip off a buyer, but I do believe that suppliers are human and they can make mistakes when quoting. So having some data, a benchmarking tool might help you identify where there’s just been an error in quoting, and you can work with the supplier to resolve that error versus being in a position where the buyer’s going to go and get a cheaper quote from another supplier and then just start going to that other supplier instead. So sometimes when your buyers and suppliers are reviewing detailed data and reconciling differences, they might find an error on either party’s part. And then finally, comparing aPriori data to supplier reality can enable the buyer to uncover ways they can change their practices to actually reduce cost.

Sourcing And Negotiations

LT: So an example of this, and I am sure many of you have experienced, let us say you are trying to… You are sourcing a part that has been around for a long time, you may be reviewing the part with the supplier and the supplier says, well, you are missing this step, this process step that needs to be done. Someone from the buyer’s organization told me five, 10 years ago that I have to do this step. And maybe that is not documented anywhere. So, that enables the buyer to kind of go back and figure out, okay, do we actually need to do this? There are a lot of instances where the buyer can figure out something they can change on their end to help enable lowering the cost of a part and having the data helps facilitate that discussion to find those areas for improvement.

LT: So let’s look at a non-manufacturing example first, just to really think through how having some data can help you with the discussion versus going from a point maybe where you don’t have aPriori or you don’t have any type of benchmarking or should costing tool and you’re in a position where you have no data. So I am going to start with a non-manufacturing example. Let us say the year is 1999 and someone is asking you how long does it take? Quote for me how long it would take to get from Boston to New York. Now, I happen to be from the Boston area, I have family and friends that live in New York. So I travel this route a lot, and I would consider myself a subject matter expert in this route. And if you are not familiar with this route at all, your options would be to pull out the map and figure out the distance.

LT: Maybe assume that you are going sixty miles per hour and produce a time estimate. But what you do not know is how the time of departure might impact that, what different public transit options there are. You might not know the exact departure and arrival locations. What is the mode of transport? Is it driving? Is it flying? Is it public transportation? If your only source of data is being able to open a map and look at the route, you would probably have difficulty negotiating with someone like me who I have a lot of experience doing this route, and I know all the different variables that can really impact the time it’s going to take. So let us say you were hiring me to drive something from Boston to New York, and I say it takes six hours. You may not have a ton of data at your fingertips to figure out why you think it could be more or less.

LT: Let us fast forward to 2023 where we do have Google Maps, which has done us a favor or other sources like Google Maps, and that has done us a favor of actually aggregating a lot of data. So now all of a sudden, a person who is not from this area and does not drive this route a lot can account for some of the different things that I mentioned. You can look at different transit options, you can look at leaving at different times and you can look at different routes. And so now everyone has this data at their fingertips and they can make a more informed decision and get a better understanding of how long it might take me to drive this route, and what are the assumptions that are really going to impact the time. So the mode of transit is going to have a big impact, the time that I am leaving at is going to have a big impact. So now we have data at our fingertips and we can make more educated. Get a better understanding of all the variables that could impact the time to travel this route.

Manufacturing Example

LT: Okay. So let us look at a manufacturing example now. So similar to what I mentioned with my driving from Boston to New York example, if you have no Google Maps and someone comes to you and says, how long does it take to go here? You may be able to figure it out, but you had limited data to help inform that decision. Let us look at a manufacturing example. So let us say you are sourcing this part and you are trying to figure out, okay, well how long is this part going to take to make? Without any kind of benchmarking tool or being an expert in, let us say injection molding yourself, it would be very difficult to figure out how long is this part going to take to make. What aPriori does or other tools like aPriori is they give you some data. So we generate how long we think this part is going to take to make, the final cycle time, and also share with you all the underlying assumptions of how we have produced that value.

LT: So kind of like today when you would go to Google Maps and you’d put in New York to NYC and you can pick different transit options and you know that there’s historic data that Google is leveraging, a tool like aPriori is providing you that for the question of how long does it take to make a part. So just having data at your fingertips makes a really big difference when you are engaging in supplier discussions. So if you do not have any data, you might go to a supplier and say, hey, this is my highest spend part with you and I need to reduce the cost by 5%. And that is your starting position and that is as much information as you have. But when you have a tool like aPriori, you have a benchmark to find parts where there is a big difference between the estimated cost and the quote, and you can start actually reviewing some of the underlying cost drivers.

LT: All right. So you have all of this… You have some data. I just showed on the last screen that aPriori generates a number and reports a number of different variables that impact cost. But how do you know if the data that aPriori is giving you is reasonable? So, returning to my Boston to New York City example, Google Maps could spit out one and a half hours or it could spit out six hours. How do I know where on that spectrum I need to be? Well, in Google Maps, you can see all the underlying assumptions. So, I am going to propose that having confidence in the data comes from having confidence in the underlying assumptions. So if Google Maps is telling me it is going to take 4 to 5.75 hours to travel this, I can see, well, what time is it assuming I am leaving at? What route is it assuming that I am taking? I can look and see what would that be, you know, if it is telling me it takes four hours, what route was it assuming, what date and time did it assume I was leaving?

Negotiation Process

LT: If it is saying that it is going to take one hour, I can see what mode of transport it is assuming, you know that it is actually a flight, it is a nonstop flight. So I can become comfortable with the estimate of 5.75 hours with these assumptions up to one hour with these different assumptions. So you need to do the same thing with aPriori. You need to dig into what are the assumptions of how I am producing my 38-second cycle time? And you need to get comfortable… You need to understand what those assumptions are and build confidence that they are reasonable. And how can you do that? So how can you instill confidence in the assumptions in aPriori?

LT: So it is a two-step process. And the first step would be to identify the critical assumptions. So first, identify the things that have a big impact on cost and do not spend your time validating assumptions that have little impact on cost. So I previously just stated that having confidence in the data comes from having confidence in the assumptions. If I return back to this slide, that is a lot of assumptions. So we have material assumptions, we have ejection time, injection time. It would be very time-consuming to go and validate every single variable. So what you are going to do is you are going to identify the assumptions that have a big impact on cost, and then you are going to spend your time vetting those. And we will talk about how you can figure this out, and the work you put in here on identifying the critical assumptions will help you in the process later when you are reconciling differences with the supplier.

LT: So first part is identifying the assumptions that are critical to cost and then the second part is validating those assumptions. So putting in the legwork to validate is the… If material, the part thickness is identified as being critical to cycle time for that injection molding part, then you can put in the legwork to check, okay, well what is the part thickness that aPriori is producing? Maybe I go and measure the part and see what the part thickness is there. The good news is typically this two-part process is required only once per commodity. So let us say that you are using aPriori for the first time for injection molded parts. Oftentimes the variables that are critical to cost are going to be the same across injection molded parts or at least injection molded parts that is like similar size or material.

LT: And so the legwork that you are doing to kind of validate some of… Understand the critical assumptions and validate that the assumptions make sense, oftentimes you only have to do that once per commodity. But how can you validate this? So you see that, you know, the cycle time is 38 seconds, you have the dimensions of the part, you see that aPriori has data on the material parameters, but how do you actually go about vetting those things? Well, there’s a couple different ways you can utilize a variety of resources. So first of all, you may have an aPriori consultant who can help you identify the assumptions that are critical to cost. You could ask an aPriori consultant to share with you some of the logic behind the assumptions. Hey, what is the formula that you are using to produce cycle time?

LT: How do you produce the part thickness, where are you getting the material properties? So your aPriori consultant can help you. You may have an internal subject matter expert in your organization. This could be a design engineer, a manufacturing engineer, a supplier development engineer, a technician that maybe makes similar parts in-house as to what you are sourcing. So you can get with an internal subject matter expert and say, hey, I am looking at this part. It has a large gap between the quote and the aPriori estimate. Can you help me figure out for this type of part what are going to be the things that are critical to cost and help me see if the aPriori’s benchmark for them are reasonable, pass your kind of gut check. You can also do some research yourself. So again, we are in 2023, not 1999.

LT: So we do have the internet. So there is a lot of YouTube videos you can look up about how parts are made. You can go to different websites to look at material indices. You could look at distributor websites for buying material. You can look up things from the Bureau of Labor Statistics. So there is a lot of research you can do. And part of that research is you can also play around with changing the assumptions and measuring the impact cost. So if you cannot find a publicly available index that is giving you the material rate, you can go in and try changing it. Or you are not sure about the material parameters that would be driving cycle time. Just go in and change some of the parameters or change the cycle time and see how much of an impact that has to cost.

Supplier Relationships

LT: And I will show an example of that in a second. You can also use the supplier to help you identify these things. So you can start the conversation with the supplier, not necessarily from a cost perspective, but from an assumptions perspective. Hey, I am trying to understand this part. This is the machine on which it is made. This is the cycle time it takes. Does this align with reality? Where am I different? You could also visit the supplier and see if you can see this part being made and that might answer some of your questions. And one thing that I want to mention too is, there is a lot of different options. It does take some time. So you might be asking a subject matter expert to sit down with you for 30 minutes or an hour to review a part. You might be researching processes to try and learn about them, but you are only doing this for the handful of parts that have a big gap between the aPriori estimate and the quote.

LT: So, returning back to how data… Not having any data can be a challenge because you do not know what parts room for savings or negotiation potential have potentially, but when you have that data, you can isolate the parts that have a large gap between the estimate and the quote and spend your investigation time on just those. So let us look at a manufacturing example. So I had the question of how long does this part take to make? And this is a pretty big part by the way. So I have the dimensions here. It is about a kilogram. It is almost a meter long and I have some of the cycle time assumptions. So let us say, how could we validate some of these assumptions? So for one thing, we could try editing some of these assumptions in aPriori and see how much impact they have on cost.

LT: We could go to Google, go to the internet, you know, how do you determine injection molding cooling time? There are formulas that are out there on how to do it. And then you could compare that to how aPriori is doing it. You could find the material properties for the material in which you are interested. So you can look for the data sheet and see if you can find these properties to validate what aPriori has. You could go and measure the part, right? So one of the things we have is the wall thickness. And if you have consulted with a subject matter expert or with aPriori or if you Googled injection molding cooling time, you would see that thickness is a cost driver. And so you could go out and measure the thickness of the part and you could visit the supplier, right?

LT: And try to see this part being made. And I want to show you one example of editing the assumptions to see how big of an impact they have. So let us say that this part right now is 1725, and right now I have a cycle time of 194 seconds. And I am concerned that it might take longer. I am not an expert on injection molding. I do not know just by the look of it, if this is a reasonable time, I am going to try doubling it just in case aPriori is missing something. So I want to test out what is the sensitivity of cost to cycle time. So I simply make the edit in priori based on what feedback I am brainstorming that the supplier might have and then I can re-cost it and I can actually quantify how sensitive the cost estimate is to cycle time.

LT: So if I go… You can see the labor time also changed with the cycle time and you can see it went from 1725 to 3389. So it is quite sensitive. So now I know if I am talking to the supplier and they say, hey, the cycle time is not one hundred seconds or two hundred seconds, it is actually almost double that, I already know ahead of time what that means for the cost of the part. And I know I am going to have to really pay attention when the supplier mentions that because it is very sensitive. Let us look at another input. Let us say I want to… I am having trouble finding a benchmark for the cost of ABS to validate this. So I want to see what would happen if I was really far off on the cost of ABS. So I am just going to change it to $8 per kilogram. Now, those of you who are customers know that aPriori, we do use different indices for our material rates, but let us say you just want to test it out.

Successful Supplier Negotiations

LT: This does not have nearly as big an impact on the total cost of the part as the cycle time did. Remember, that part only weighs a kilogram. So even doubling the material cost from four dollars to eight dollars only had about a $4 impact. So by going in and manipulating some of the inputs, I am able to start developing for myself an idea of how sensitive this cost of these different inputs is. Okay, so let us talk about getting the supplier to engage. So you have data, you have generated your aPriori estimate, you have put in the legwork to understand for this commodity or this part, what are the things that are going to be critical to cost. And you have maybe worked with a subject matter expert internally, or you have done some online research to help vet the different assumptions that we are using.

LT: Maybe you have engaged with your aPriori consultant and now you feel really comfortable with your estimate, you are comfortable with the assumptions that it is using. So you want to talk to the supplier and start comparing the aPriori estimate to their reality. So some tips to get the supplier to engage with you. So one is you can utilize your leadership team or executive team to set expectations that individual buyers or commodity managers are going to be having these types of fact-based discussions with suppliers before bringing specific parts. So going to the supplier and explaining what aPriori is and showing them the parts that have a big gap is a lot of content to cover in a single meeting. You could utilize your executive team to give the message about cost transparency to suppliers through maybe an email, a supplier summit, just a quick initial phone call with the supplier, and then you will schedule subsequent time to review specific parts.

LT: This can help align the supplier’s expectations and get them mentally prepared for the fact that you are going to be coming to them with some data and they are not taken off guard. Also, always be collaborative. So you can say, look, we want to improve the manufacturability of this part. We want to compare how you are making it to this benchmarking tool and see where we are different and see if together, we can produce ways to make the part better or understand where our benchmarking tool is off. And you can focus the discussion on the manufacturing steps, potential manufacturing issues versus focusing completely on cost.

LT: You also need to explain to the supplier what the benefit to them is by reviewing the part with you, maybe the part is going to be increasing in volume. Maybe there are other parts of the same commodity type that you are going to have to source in the future and so you want to align on assumptions for these types of parts now. Tell the supplier ahead of time what parts you do want to discuss. So remember, you are not asking them to discuss with you every single part. You have the data so you are able to identify parts with big gaps between the estimate and the quote. And you can tell the supplier, here is the three, four, five parts of the fifty that I buy from you that I want to have a little deeper dive on. When you do discuss, start getting into detailed discussions on specific parts, it is good to set timelines.

Win-Win

LT: You could set up a recurring weekly meeting with the supplier to review the part. Everyone is very busy, buyers and suppliers and so generally with any project that you want to get done, it is important to kind of set timelines so that you all can be working towards an end goal together. And then finally, include a subject matter expert in the process if available. This could be a consultant from aPriori or it could be someone internal. So I mentioned already when we were talking about the validating assumptions piece that you might engage with someone to help you validate those assumptions. A lot of our customers have been very successful when a buyer can kind of bring in a technical person, they can help them review the estimate ahead of time and support the conversation with the supplier in case it starts getting very technical. All right, so now I am going to bring my colleague, Abe, in and let us do an example of supplier engagement. And we will talk… We are going to kind of role-play some different approaches that you may take with the supplier and well, you will see some that will be more effective than others.

LT: I am going to approach Abe. Abe will be the supplier and I am the buyer, and I am going to try a couple of different approaches to get him to engage. Hey, Abe, following that meeting you had with our executive team, I have a few parts that I want to discuss.

Abe Chaves: Sure, sure, but let us do it in January because it is the end of the year and you know how it is in manufacturing. We got to put parts out the door, so.

LT: That is true, but I do have some new product launch parts that also need to be quoted and we will be looking to get those quoted before January. So I think it would be really helpful to align on some of the assumptions for these existing parts because I think those assumptions will apply to the new parts, I will ask you to quote as well.

AC: Okay, right. If it is going to save us time, then let us do it.

LT: Okay, so let us pause there for a second. So, I was able to kind of tie some of the review to some future NPI business. Let us try another approach. Hey, Abe, following the meeting you had with our executive team, I have a few parts that I want to discuss.

Contract Negotiations

AC: Yes. Can we focus the discussion on new parts, not the existing one, just so that we can save a little bit of time? Because, like, you know, it is the end of the year and we are focusing on putting parts out of the door.

LT: Good point. So you want to focus on the new spend only, but some of these existing spend parts, the volume is expected to go up this year, and we’re going to actually be issuing more orders before the end of the year, so I really want to be able to get them reviewed because the volume will be going up.

AC: Okay, all right, in that case, then we can also discuss the schedule to see what we can deliver to you this year.

LT: Perfect. Okay, great. So let us pause there. So that was another example that I have seen this with suppliers where they kind of want to just apply this process to new stuff and not existing stuff, existing parts, but you want to make sure you are looking at parts that are significant for you and the supplier. And so volume going up in the future would be something that the supplier would be interested in and that you would want to make sure you have costs under control. Okay, let us do one more. Hey, Abe, following the meeting that you had with our executive team, I have a few parts that I want to discuss. We have this new tool that screens the parts for potential manufacturability issues. And I want to see if any of the features that it is catching are causing issues for you.

AC: That would be great because some of these parts, frankly, are a pain in the butt to produce. So I am eager to see what you got.

LT: Perfect. Okay, we will end there. So, again, in that case, I did not necessarily lead with costs. I led with that it is screening for design for manufacturability and can we discuss some of the things that it is screening, which ultimately would be driving costs and I will probably be able to uncover if there is differences in the routing that aPriori chose versus how the supplier is doing it. Okay, so now let us talk about focusing on cost drivers. So you will undoubtedly uncover differences between the aPriori estimate and the quote, but you want to make the most of you and the supplier’s time by focusing on the assumptions which have a big impact to cost. So you want to be able to kind of keep these discussions on track to focus on cost drivers. And there is two ways to do that. So one, the first is the research that you already did to identify critical assumptions will help you and the supplier avoid getting sidetracked. So some of that homework or legwork that you put in before about figuring out for this commodity or for this part, what are the variables that are really important to cost and what are the variables that don’t have a big cost impact, this will help you and the supplier not get sidetracked when you’re discussing things.

Cost Drivers

LT: You may also find out that the supplier is adamant that something you thought had a small impact on cost actually has a large impact on cost. And that is a good finding as well because then you can start reconciling differences and figure out, okay, why is this thing, this variable, let us say material cost that I thought was not a huge impact on cost, the supplier is telling me that it is. Maybe their rough mass is much higher than aPriori had estimated. And why is that? You can start digging into that. The other thing that can help you focus on cost drivers is getting cost breakdowns. We are going to come back to this one in a second. I want to give an example of not getting sidetracked by focusing on cost drivers first. So we are going to come back to this example that we looked at before where I tested out. Remember, I tested out changes to material cost and to cycle time. And I saw that the estimate was much more sensitive to changes in cycle time than material cost.

LT: So Abe’s going to help me again and we are going to do another example of redirecting the conversation based on cost drivers. Abe, I am getting pushback from my management team on the cost of this part. We have this new benchmarking tool that estimates cycle time, material cost. And the estimate we are getting is very different from the quote. So I want to validate some of the assumptions that the tool is using to make sure I am using the correct inputs. So for example, we are estimating material cost of $4 per kilogram and a cycle time of 90 seconds. How does that compare to what it is for you in reality?

AC: Well, I am not sure where you are getting the $4 a kilogram from, but if you can buy it for that, just dropship me the material, because I pay about twice that for that material.

LT: Oh, okay. That is really good to know. So you are paying twice, that is about like $8 per kilogram. Okay. So I have to keep that in mind and I will see if we could dropship something. But one thing I am thinking is this part. It is big, but it only weighs about like a kilogram. So $4 a kilogram versus $8 per kilogram on a 1 kg part, that should be like a $4 difference. But the estimate that we are producing is like $20 cheaper. So there must be something else going on too. What size machine are you using for this?

AC: This part goes on a 5,000-ton machine.

LT: Oh, okay. I have it being done on a 3,000-ton machine. Would that not be capable for this part?

AC: Yes, no, I remember this part because… You are right, if it were just pressure, then only a three thousand ton would be required. But the mold size on this part is too big for a 3,000-ton machine. So we actually could not use a 3,000-ton machine. We had to use a 5,000-ton machine.

LT: Okay, got it. So we will end it there. And I am going to come back to this example where we have uncovered that they are using a different size machine. Okay, so I mentioned that the second thing… Your research to identify cost drivers will help you in the negotiations as you just saw. The second thing is getting cost breakdowns. Getting cost breakdowns can really help identify major gaps between the estimate and the quote. It can help you and the supplier ensure that you are focusing all of your energy on those gaps. And they really can often help the buyer learn ways that they can change what they are doing to lower cost. So for example, if you have just got an aPriori estimate and a quote, let us say there is a $50 gap, there is a lot of assumptions that you need to run down. You have to look at the material cost, the cycle time, secondary processes. If you get a breakdown, even a breakdown of material cost versus manufacture cost, you may be able to identify that you and the supplier are already aligned on manufacture cost, for example. And then you can make the most of you and the supplier’s time and simply discuss material costs.

LT: Now, let us look at a manufacturing example. So this is an assembly and we can see we have the aPriori estimated cost for both the assembly. This is a weldment and the different components. And we have the aPriori cost per kilogram and then the total subcomponent cost. And then we have the same quote. So we have basically a costed bill of material from the supplier for the quote. So, we can see that there is a sizable gap between the estimate and the quote, and that most of that gap is on the assembly operations, the welding. So I know going into my discussion that most of the gap is here, and so I want to focus my conversation there. So let us look at this example again with Abe, and we will kind of show the power of a breakdown and focusing on cost drivers and how having a breakdown enables you to really focus on cost drivers. Prodding the cost of bill of material for this assembly, I am noticing that our estimate for the assembly cost is really different from the quote, and so I want to dig into that. I am wondering what is the longest assembly operation for is you?

AC: Well, actually, I wanted to talk to you about this assembly as well. And thank you for sending me your estimate because we noticed that your material rates, again, are off. They are much lower than they really are. Where are you getting those from?

LT: Oh, okay. I will definitely have to figure out the exact source for that. Although it seems like the overall estimate for the component costs is not as far off from your quote as the assembly process is. Most of the gap that I am seeing is in the actual assembly process. So we will definitely look into the material rates and that can be something we can update going forward, but I do not think it is causing a huge gap on these parts in particular. But most of the gap is from this assembly operations, and I thought that most of the time, most of the assembly cost is in the cost of the welding. Is that the case or are there other operations that drive a lot of time for you?

AC: Well, yes, the welding is a significant portion, but it’s also the grinding because we have to blend one part into the other and just to make it look like if it was one part, basically both of them over the weld, and that takes a significant amount of time.

LT: Oh, okay. Yes, we were thinking that the grinding time would be basically a fraction of the welding time, but it sounds like it is quite long. I am surprised we need so much grinding and the blending of one part into the other for this assembly, because once this goes into the bigger assembly, you cannot even see the welds anymore. So let me check with engineering if we really need that nice of a finish on this assembly.

AC: Sounds good. That would be great, because then the grinding time would be a fraction. It would be like a quarter of what it is now.

LT: Great. All right, so let us end there. So that is a good example because I was able to uncover a difference in how it was being modeled. And we may actually be able to find a design improvement that could truly reduce the cost of the part. If in fact you cannot see this assembly at the end, maybe whoever designed the part put on that finish, but we do not really need it at this level of the assembly. Okay, so let us talk about now reconciling differences. So let us for example, like in that last example that Abe and I did, you find out that the weld grinding time is different from aPriori’s estimate. Or in the previous example where we talked about the injection molded part, you find out that the machine being used is different from your assumption. How do you handle it? How do you proceed when you do uncover a difference? And for me this can be the most overwhelming part and it is really where the rubber meets the road because you have generated the data, so you have a benchmark, you have done your homework and you have validated… You have identified the key assumptions driving cost and you have validated those, maybe with an aPriori consultant or an internal subject matter expert or some of your own research. You have the supplier to the table, which can be a major hurdle.

Long-Term Relationships

LT: So let us say you have the supplier to the table. You have been able to direct the conversation to focus on assumptions with a big cost impact. Now you found a difference in one of those assumptions that has a big impact. Now what do you do when you found a difference? So you found a difference, how do you know if it is the root because of the gap and if you should accept the difference of assumption? So first you found the difference, then you need to decide, is the way the supplier is doing it fair for both parties, both me and the supplier? If I do not think so, if the supplier is telling me something that I do not think is fair, then I can discuss it with them. So an example of this could be, hey, I find out the supplier is using a different machine to run this part than I expected and it is because they do not have capacity on another machine.

LT: Maybe there is something we can produce to open up more capacity. Maybe I can change my ordering pattern. Maybe we can look at investing in new equipment. I would want to discuss that. If the supplier tells me something and it is fair, for example, the weld-grinding, right? They say, hey, it takes this long to grind the welds because you have a note on your drawing that it needs to be polished smooth and maybe I can. Maybe I validate that with a subject matter expert and they say, yep, that would really add a lot of time. Then I do not have to just accept the price that the supplier is giving yet, I am going to accept that they have a different assumption and I am going to agree with the way that they are doing it. Now, I need to test if accepting that assumption will close the gap between aPriori’s estimate and the quote.

LT: So I just go into aPriori and I update that assumption. So let us say I change the welds time, and then I measure, does that close the gap between the quote and the estimate? If it does close the gap, then I am in a situation where I do have to accept the price. If it does not close the gap, then it gives me a mechanism by which to continue the discussion. So I can say, okay, look, I understand that it is a long time to grind these welds. I have updated my estimate with the time that you mentioned, and I am still seeing a gap. So can we talk about another couple of assumptions to see if there is anything else that we are doing differently? So it gives you a mechanism by which to continue the conversation.

LT: Okay, so let us go back to this example. Remember, Abe and I talked about this earlier where aPriori was estimating a 3,00-ton machine. Remember this is a pretty big part, and the supplier said… Abe said, well, I have to do it on a 5,000-ton machine because the dimensions of the mold cannot fit on any of my 3,000-ton machines. And let us say I do a little due diligence. So maybe if I was the buyer, or someone in my organization might have a record of how this mold was designed when we purchased it, I could look at the dimensions, I could go to the supplier and see the dimensions of the mold, and then I could google some different 3000 ton machines and check the maximum dimensions that they have.

LT: I could talk to a subject matter expert, so I can probably do some due diligence to figure out if, okay, I am on board with what they are telling me. It does seem that this mold is too big for a 3,000-ton machine. So I have decided that their assumption is valid. Now I can go into aPriori and I can make the change. So remember Abe also mentioned the material cost. I was able to redirect on that, but I do need to keep that assumption in there as well. And I am going to go in and manually pick a larger machine that is in line with what Abe’s telling me.

LT: So now I have the two assumptions. So one, Abe mentioned the higher material rate. I had that one accounted for. I accepted it because I knew it was not a major cost driver anyway. And now I have changed the machine and you can see the cycle time changed a little bit, probably different mold open and close time, I could dig into why, and then I have a much higher overhead rate now. So then I can evaluate if this does close the gap between the quote and aPriori estimate. Now, let us look at one more example. So let us say I have a part where the estimate is $18 and the quote is $31. With the help of an internal subject matter expert or aPriori consultant or my own research, I have identified these as the key drivers of costs, the material costs, the yield, the cycle time, and 150-ton machine. So let us do one more role play example where Abe and I are going to work through reconciling some of these differences.

LT: So as you know, we have been using this benchmarking tool. We have looked at estimates from it in the past.

AC: Yes, yes, no, I know the drill now.

Negotiation Strategy

LT: Okay, great. So I have another part where the estimate is $18, and the quote that we are paying is $31. So I just wanted to go through some of the key assumptions and see where we might be misaligned. So I am assuming that the material cost is $4 a kilogram. It is made on a 150-ton machine, and the cycle time’s about 128 seconds. What do you have on your end?

AC: Yes, no, again, this is a proprietary resin. So it is a little more expensive than the generic, basically. So this is more like $6 a kilogram. The cycle time is a bit longer because you require special finish and so it is about 170 seconds. And because of that finish, our yield is about 90%. We have to throw away about one part in ten, basically.

LT: Okay, so we heard a few differences from Abe. So we have… He is proposing a different material cost, a different cycle time, and a different yield. The machine that he gave, he did not have any issue with the machine, so we think that is right. So we have identified three assumptions where we are different. So there are three things we need to reconcile. So remember our workflow, when we identify assumptions, different assumptions, we need to decide if we think the supplier’s assumption is fair for both parties. That is the first step. So let us go through each of these one at a time. The resin cost. Is this is fair? How could I validate this? I could go try and look up Plastics News. I could see if my company also buys this material and see what the price is. I could look if I have gotten quotes from other suppliers recently where they have shared the price.

LT: So there is a variety of different things I could do to try and research this. I can also go in and change the resin cost in aPriori and check how sensitive the cost is. And if there is not a big change, then I can say, okay, well, this part only is one kilogram, there is not that big a change if my resin cost is a difference in two kilograms. For cycle time, how could I vet this assumption? Well, first of all, let us note that the cycle time, 170 seconds versus 128 seconds, it is actually not a huge difference. I could certainly pull in a subject matter expert. I could start looking at the material properties, measuring the thickness of the part. If it is not a huge difference, I could also just accept what the supplier’s saying here because it is within reason, it is not a huge margin of error.

LT: And then finally, the yield. So I could go back to my engineering team and see if they have ever had any discussions with the supplier about yield. Again, I could talk to a subject-matter expert about difficulties making this part. I could see if aPriori picked up any difficult to manufacture features. And let us say that I do decide that I agree with the supplier’s assumptions on all of these points. Let us say I do my homework and I decide, do you know what, the supplier is valid on all of these points, then I can go into aPriori and make the updates. So as you saw in the videos that I showed earlier, I can go in and I can update the resin cost, I can update the cycle time, I can update the yield and my new estimate assuming all of this data from the supplier is correct, is $21 and this is adapted from a real customer example, this happens a lot.

LT: So now I have a mechanism to go back to the supplier and say, okay, I see what you are saying. I agree with your assumptions. Now my estimate is $21 compared to the quote of $31, and now I can go back to the supplier and I could say something like, you know, what else might I be missing? Our labor rate is $28 an hour, our overhead rate is $122 an hour. So I can share then the next level down of assumptions, that would make a big difference. And in many cases, then the supplier may end up re-quoting. They may go back and like I said, sometimes they find an error on their side that they were using an incorrect rate or they quoted in such a rush that they over quoted it. And so sometimes what happens is the supplier may just come back and re-quote and oftentimes you kind of land somewhere in the middle from your original estimate and the quote.

Knowledge Is Power

LT: So in summary, the top five challenges that we talked about were having data in the first place. I mean, knowledge is power. And so going into cost discussions with no data on cost is a very difficult starting point. So having a tool like aPriori at least gives you some data. But once you have that data, then a huge challenge is being confident in it and leveraging experts either from aPriori or internal to your organization. Doing some of your own homework and research to understand the underlying assumptions can make you more confident in them. And that is hugely powerful, again, when you are in discussions with cost. Getting the supplier to engage can be difficult. You really have to frame it, what is in it for the supplier, how are they going to benefit by taking some time out of their busy schedules to review some of these parts with you.

LT: And you want to focus those discussions because you are all busy. You want to make them as efficient as possible. You want to focus your discussions on the cost drivers. That means you need to invest the time upfront to understand the critical to cost items and getting a cost breakdown can help you and the supplier make your conversations efficient and it can really help the buyer identify areas where they can change potentially what they are doing to reduce cost. And then finally, one of the last challenges is when you find out there is a different assumption. So the supplier has a different material rate, a different cycle time, and a different yield rate. You can discuss those as different assumptions with the supplier. You can go back to your experts or the research you did to vet is how the supplier is doing it fair for both of us.

LT: If you decide it is not, then you can discuss that difference. If you decide the way the supplier is doing it is valid, then you update the estimate on aPriori and see if it closes the gap. If it does close the gap, then you maybe need to evaluate, is there an update you need to make in the digital factory? Or you can go back and continue the conversation if it does not close the gap. Thank you all for your time today. This was a lot of content, but this covers a lot of areas that we see customers have challenges and that you will feel better equipped to tackle negotiations and discussions with suppliers going forward.