In collaboration with Shobana J, Senior Cost Modelling Specialist
- Mistake: Focusing only on known raw material, while ignoring substitutes and their benefits.
Remedy: Conducting cost-benefit analysis for existing as well as substitute materials will help identify cost saving opportunities.
- Mistake: Applying a “one-size-fits-all” cost model for multiple specifications/SKUs instead of deploying a dynamic cost tool that would take into account various variables listed out in each specification.
Remedy: A dynamic cost tool that covers various variables across specifications will help the buyer in understanding the impact of individual cost components.
For example, a packaging product such as Label will have variables such as printing type, printing ink, area to be printed, lamination, and varnish that need to be considered in the cost model. In such a case, a dynamic cost tool is necessary to show the impact of individual variables on the final cost of the product.
- Mistake: Ignoring the logistics cost while procuring goods of lower value when it actually matters themost.
Remedy: At times, the cargo value would be lower than that of the logistics cost. This situation can be managed by exploring local sourcing. On the other hand, if the material has to be imported than it is better to keep price terms in FOB and arrange for cost efficient transport alternative.
- Mistake: New products are often developed only by analyzing the commercial/retail success while not focusing much on the total production cost. This could potentially lead to lower ROI.
Remedy: It is better to analyze the total cost base of the new product along with commercial and retail success metrics.
- Mistake: Supplier quotation during the RFP process is not compared with the benchmark price or mark-up.
Remedy: Comparing supplier margins with industry benchmarks through specific cost models for the given product category.
For example, during the RFP process, supplier price quotations are usually benchmarked either against the previous year’s price or with the current year budget price. Whereas, the ideal scenario would be to compare supplier quotation with the industry benchmark, vis-à-vis the profit margin, in order to figure out the right price.