Cost modeling is a key purchasing strategy that helps companies understand what factors determine the cost of their products. Even if this is the first time you’ve heard of the term, you are likely doing a variation of it in your own procurement process. Indeed, the most common steps simply involve analyzing the cost of each purchase and then negotiating the best possible price with your suppliers.
However, the unique challenge presented by cost modeling is in studying both cost drivers and cost components to see if the price is right. The process itself may take time, a lot of hard work, and even some know-how with cost modeling tools in order to perfect. But all these are a small price to pay to get rid of inaccuracies from pure guesswork. Indeed, the wrong data can cause your company to overspend during procurement and lose money even before you start selling a product.
Keen to know more about cost modeling? Here’s everything that you and your purchasing officers need to know when you’re evaluating your company’s purchasing and cost.
A Guide to Cost Modeling: What It Involves and What It Influences
Before applying cost models, you have to understand what factors are involved in determining the true cost of a product for companies and suppliers. These are the most important factors that influence true cost:
Once all of these factors are quantified, you’ll end up with a set of accurate cost-related insights, or a realistic picture of where your company’s procurement funds should be going. Among the things that an optimized cost model can then help determine are:
Tips on Adapting Cost Models for Your Procurement Processes
Now that you understand what values you are after and what good it will do to quantify them, here are some additional tips to help you arrive at functional cost models during your company’s procurement phase:
If applied correctly, cost models will not only curb unnecessary spending. They will also enhance the application of key purchasing skills, such as identifying overpriced components and being able to negotiate more persuasively.
In the end, it’s best to remind your purchasing officers and other employees involved in procurement of their goals when applying cost modeling. Indeed, they can go a long way by focusing on how to develop their talents, how to stay on top of all procurement costs, and how to know what it takes for the price to be right.