Cost modeling is like having a backstage pass that shows what’s driving prices for the audience. By breaking down the actual costs of a product (materials, labor, and overhead), procurement professionals can approach negotiations with confidence and data-driven arguments. Let’s dive into how should-cost modeling can enhance your negotiation tactics and help you secure better deals.
What is Should-Cost Modeling?
Should-cost modeling is a method that empowers procurement teams to understand the true cost structure of a product, providing transparency and clarity in negotiations. This data-driven approach allows buyers to break down price hikes and identify genuine cost drivers, ensuring suppliers can’t justify inflated prices without detailed inspection.
This technique lets buyers get to the heart of cost structures and better understand what’s influencing the final price tag. For example, when a supplier attempted to justify a 10% price increase due to rising raw material costs, a procurement team used should-cost modeling to reveal that those raw materials only made up 30% of the total product’s cost. Armed with this knowledge, they negotiated the increase to just 3%, ensuring the price change accurately reflected reality.
Why data-driven procurement negotiations matter
In today’s procurement landscape, data is a powerful asset. Accurate data not only helps you push back on inflated prices but also enables you to negotiate on your terms. Moreover, should-cost modeling equips you with the data needed to negotiate smarter, not harder.
For instance, when analyzing two suppliers offering the same product quality, cost modeling revealed differences in their material sourcing, resulting in different costs. This insight is pivotal in selecting the right supplier and securing a better price.
Leveraging cost modeling software and economies of scale
Many buyers understand that buying in bulk can lower prices, but should-cost modeling, especially when using advanced cost modeling software like Buynamics’ WTP helps you see how a supplier’s costs decrease as order sizes increase. For instance, the WTP platform demonstrates that increasing your order volume by 30% in a specific industry could reduce per-unit costs, resulting in a 10% price cut due to economies of scale. This kind of insight made possible with cost modeling software, can significantly enhance negotiation outcomes.
In addition, understanding the breakdown between fixed and variable costs is essential. Fixed costs (depreciation, rent, R&D) remain unchanged regardless of order size, while variable costs (raw materials, labor) vary with production volume. As you increase order size, fixed costs are spread over more units, lowering the overall cost per unit. Should-cost modeling gives buyers the leverage to negotiate for better prices by highlighting these economies of scale.
Improving negotiation skills with should-cost modeling
Developing negotiation skills is crucial for procurement professionals, and cost modeling is a key aspect of this skill set. Many worry about needing perfect data, but the reality is you don’t need flawless information to negotiate effectively. Should-cost modeling allows you to leverage the data you have, even if it’s not 100% accurate.
As should-cost specialist Eric Hiller emphasizes, the goal isn’t to get an exact number but to use your data as a foundation for negotiating. Engaging suppliers in discussions based on the data you have often leads to them providing more detailed insights, improving the overall negotiation outcome. The key takeaway? Don’t let imperfect data hold you back; use what you have to drive better results.
Conclusion
Should-cost modeling plays a crucial role in helping procurement professionals negotiate more effectively. But at last, how does ‘should cost modeling’ improve your negotiations? By breaking down costs and challenging supplier pricing with data-backed insights, you can ensure you’re not just negotiating but negotiating with facts. Platforms like WTP make this process even easier by offering real-time data on over 3,000 commodity prices and detailed cost profiles across countless industries. This approach enables smarter, more informed negotiations for better outcomes.
