Cost Modelling Bricesco
Procurement Analysis
Challenge / Requirement
A supplier with a dominant monopoly position was able consistently to dictate pricing of system critical products. With year on year price increases and little understanding of the rationale for the uplift, the client had little option but to accommodate the supplier with limited scope to resource.
Process
A small number of the most used products from this supplier were reverse engineered to understand the true cost makeup of the product at component level, considering not only material and processing costs but attempting to determine whether the supplier purchased the components as “sub-assemblies” or added value by processing them. All periphery costs including transport of components, duty (dependent of source location) etc. was estimated using available matrices to product a comprehensive ‘Should Cost Model’. The model was then used to challenge the validity of the suppliers cost profile.
Outcome
During the subsequent negotiation meeting the ‘should cost model’ was interrogated by both parties with the emphasis being placed on the supplier to challenge the findings of the model.
Following an in-depth negotiation meeting with the supplier analysing each area of discrepancy highlighted by the model, in which the supplier was not able to justify the elevated cost.
Benefits
A new lower framework costing pack was agreed across all products purchased from the supplier which produced 12% cost saving across 50 products equating to an £84k saving on a spend of £700k.
Following the exercise, a more mutually beneficial relationship was developed with the supplier, one where cost pricing became more transparent.
