Cost Reduction Strategies: Cost Reduction Strategies:

Focus and TechniquesFocus and Techniques forfor

NAPM-WichitaNAPM-Wichitapresented bypresented by

Thomas L. Tanel, C.P.M., CTL, CCAThomas L. Tanel, C.P.M., CTL, CCAPresident and CEOPresident and CEO

CATTAN Services Group, Inc.CATTAN Services Group, Inc.College Station, TXCollege Station, TX

© 2009 CATTAN Services Group, Inc.

Agenda TopicsAgenda Topics Cost Reduction Strategies and IdeasCost Reduction Strategies and Ideas Price and Cost Analysis--Applied Price and Cost Analysis--Applied Total Cost of Ownership and Total System Total Cost of Ownership and Total System

CostCost Use of “Should” Cost ModelsUse of “Should” Cost Models Innovative Thought and Ideas SolicitationInnovative Thought and Ideas Solicitation Value Analysis and EngineeringValue Analysis and Engineering Target Cost Analysis and Target PricingTarget Cost Analysis and Target Pricing Low (Best) Cost Country SourcingLow (Best) Cost Country Sourcing SummarySummary

Cost Reduction StrategiesCost Reduction Strategies

Cost SavingsCost Savings

Cost AvoidanceCost Avoidance

Cost ContainmentCost Containment

Value EnhancementValue Enhancement

Cost Reduction TerminologyCost Reduction Terminology

Product cost savingsProduct cost savings Defined as obtaining and realizing a lower unit Defined as obtaining and realizing a lower unit

price on the same item than the unit price was in price on the same item than the unit price was in the last contract period.the last contract period.

A cost saving is A cost saving is valid for as long as the valid for as long as the comparative that generated the savingcomparative that generated the saving is; but is; but it is not to exceed the end of the contract period it is not to exceed the end of the contract period in which the saving was produced. On the first in which the saving was produced. On the first day of the next contract period the old price day of the next contract period the old price becomes the baseline against which any future becomes the baseline against which any future cost savings are measured.cost savings are measured.

Cost Reduction TerminologyCost Reduction TerminologyRevenue generationRevenue generation New financial sources that can be used to leverage or New financial sources that can be used to leverage or

increase monies/resources available to an activity.increase monies/resources available to an activity. Revenue generation is a Revenue generation is a quantifiable monetary quantifiable monetary

benefit.benefit.

Non-monetary benefitNon-monetary benefit A benefit that A benefit that cannot be measuredcannot be measured in terms of finances in terms of finances

or resources, such as better quality of services; or resources, such as better quality of services; improved health, safety or quality of life; enhanced improved health, safety or quality of life; enhanced security; enterprise-wide consistency; or contribution to security; enterprise-wide consistency; or contribution to achieving supplier diversity goals.achieving supplier diversity goals.

Return on investmentReturn on investment Monetary benefit from an investment as a ratio or Monetary benefit from an investment as a ratio or

percentage of the amount invested.percentage of the amount invested.

Cost SavingsCost SavingsCost Savings—definitionCost Savings—definition A cost reduction that can be specifically identified A cost reduction that can be specifically identified

and will be made to a budget or program, and will be made to a budget or program, resulting from implementing a specific alternative resulting from implementing a specific alternative in lieu of continuing the present system.in lieu of continuing the present system.

The result of a The result of a planned or deliberate action planned or deliberate action taken by Purchasingtaken by Purchasing

Savings are a Savings are a quantifiable monetary benefitquantifiable monetary benefit There must be a direct activity reduction for a There must be a direct activity reduction for a

savings to occur; thus, benefits are considered as savings to occur; thus, benefits are considered as savings only if the estimate identifies benefits that savings only if the estimate identifies benefits that start accruing during the budget/activity’s fiscal start accruing during the budget/activity’s fiscal year.year.

Cost AvoidanceCost Avoidance

Cost avoidance—definitionCost avoidance—definition Financial or economic benefits that result from Financial or economic benefits that result from

an initiative but do not permit a monetary an initiative but do not permit a monetary reduction to a funded activity or budget.reduction to a funded activity or budget.

Is a quantifiable monetary benefitIs a quantifiable monetary benefit Usually addresses the Usually addresses the reduction or elimination reduction or elimination

of a future costof a future cost Does not lower the cost of materials purchased Does not lower the cost of materials purchased

when measured against historical results, but it when measured against historical results, but it does minimize or avoid entirely the negative does minimize or avoid entirely the negative impact on net income that a price increase impact on net income that a price increase would have.would have.

Cost ContainmentCost Containment

Cost containment—definitionCost containment—definition The process of The process of maintaining organizational maintaining organizational

costscosts within a specified budget; restraining within a specified budget; restraining expenditures to meet organizational or expenditures to meet organizational or project financial targets. project financial targets.

Measures taken to Measures taken to reducereduce expenditure or expenditure or the rate of growth of expenditure, or the unit the rate of growth of expenditure, or the unit cost of goods/materials/supplies/services. cost of goods/materials/supplies/services.

When an organization keeps costs low, or When an organization keeps costs low, or within a limit that has been planned. within a limit that has been planned.

Value EnhancementValue EnhancementValue enhancement—definitionValue enhancement—definition Value which affects the Value which affects the whole-lifewhole-life costs costs or or whole-life whole-life

incomeincome and its and its required functionalityrequired functionality..ValueValue For any service or offering to have For any service or offering to have financial valuefinancial value, the , the

organization must have been willing to pay for it out of organization must have been willing to pay for it out of pocket or must have already been paying for it in a pocket or must have already been paying for it in a way way that can be measured on the organization’s income that can be measured on the organization’s income statementstatement. This definition is a requirement for any . This definition is a requirement for any discussion of legitimate cost avoidances.discussion of legitimate cost avoidances.

For example, in practicing sustainable environmental For example, in practicing sustainable environmental management, we may reduce the environmental impact; management, we may reduce the environmental impact; while at the same time achieve cost reduction and create while at the same time achieve cost reduction and create environmental friendly conservation added value. environmental friendly conservation added value.

The Difference between The Difference between

Price and CostPrice and Cost

““Price”Price” . . . . . .

is a sales and purchasing concept.is a sales and purchasing concept.

““Cost”Cost” . . . . . .

is an accounting concept.is an accounting concept.

The Difference between The Difference between Price and CostPrice and Cost

Price =Cost of Material + Labor + Overhead + General & Administrative Expenses + Selling Expense + Profit

Price =Cost of Material + Labor + Overhead + General & Administrative Expenses + Selling Expense + Profit

Cost =Cost of Material + Labor + Overhead + General & Administrative Expenses + Sales Expense

Cost =Cost of Material + Labor + Overhead + General & Administrative Expenses + Sales Expense

Comparability Factors for PricesComparability Factors for Prices

Comparative price analysis involves the comparison of the current Comparative price analysis involves the comparison of the current proposed price with quotes or prices for the same or similar items. proposed price with quotes or prices for the same or similar items.

Total Cost of Ownership Total Cost of Ownership (TCO)(TCO)

TCOTCO – the sum of all – the sum of all costs associated with any costs associated with any given supply streamgiven supply stream

Source: The Executive Guide to Supply Chain Management, David Riggs/Sharon Robbins

= Purchase Cost +

Logistics•Inland Freight•Ocean/Air Freight•Transfer charges

Customs Duties &

Fees

Taxes•VAT•Incentives

+

Other Costs•Quality•Safety Stock•Supplier Development •Currency

+ +TCO

ACQUISITION COST

OPERATING COSTS

TRAINING COSTS

MAINTENANCECOSTS

WAREHOUSINGCOSTS

ENVIRONMENTALCOSTS

SALVAGE VALUE

Trad

ition

al Su

pp

lier Co

st and

Price S

tructu

reT

raditio

nal S

up

plier C

ost an

d P

rice Stru

cture

Typical Negotiation FocusTypical Negotiation Focus

Cost Reduction Opportunities

Cost Reduction Opportunities

Cost Reduction and NegotiationCost Reduction and Negotiation

Total System Cost (TSC)Total System Cost (TSC)

Total System Cost (TSC)Total System Cost (TSC) – – the sum of the buyer’s costs, the sum of the buyer’s costs, supplier’s costs and supplier’s costs and interaction cost between the twointeraction cost between the two

Traditional Strategic

TSC SavingsTSC Savings

PricePriceSavingSaving

ss

FocusFocus

BuyerBuyerCostsCosts

InteractionInteractionCostsCosts

ProfitProfit

SupplierSupplierCostsCosts

BuyerBuyerCostsCosts

Interaction CostsInteraction Costs

ProfitProfit

SupplierSupplierCostsCosts

Total System CostTotal System Cost

Profit

General andAdministrative

Selling Expense

Overhead

Labor

Materials

Elements of CostElements of Cost

SellingPrice and

Margin

Cost of

Goods Sold

Drive Out Costs CreativelyDrive Out Costs Creatively

Considering Considering alternativealternative products, designs, concepts, products, designs, concepts, and services, or looking at different or and services, or looking at different or alternativealternative solutions to existing services, processes or solutions to existing services, processes or applications, requires a multi-disciplined approach, applications, requires a multi-disciplined approach, making use of internal customers or subject matter making use of internal customers or subject matter experts as well as first-tier suppliers or prime experts as well as first-tier suppliers or prime contractors.contractors.

Remember to create an arena that is friendly and open Remember to create an arena that is friendly and open to suggestion, change, and innovation.to suggestion, change, and innovation.

When defining the elements of cost, focus on When defining the elements of cost, focus on cost cost reduction opportunitiesreduction opportunities..

The Creativity FormulaThe Creativity Formula

Remember: Most of the opportunities to reduce costs occur during the design, SOW, or conceptual stage for products and services—not after.Remember: Most of the opportunities to reduce costs occur during the design, SOW, or conceptual stage for products and services—not after.

Should Cost TechniqueShould Cost Technique

““Should Cost” as a price challenge Should Cost” as a price challenge technique:technique: Provides cost analysis to buyers to be used Provides cost analysis to buyers to be used

for negotiations and determining price for negotiations and determining price reasonablenessreasonableness

Provides cost analysis in responding to price Provides cost analysis in responding to price challenges and pricing issues from your challenges and pricing issues from your internal customers and management internal customers and management

Should costs are independent analytical Should costs are independent analytical estimates to determine the cost forestimates to determine the cost for manufacturing an item. manufacturing an item.

Building a Total Cost ModelBuilding a Total Cost Model

Profit/Fee

Total Price of Contract

Total Cost of Contract

Costs to Meet Contract Requirements

G & A Expenses

Product CostsOther Direct Costs

Direct Costs

Indirect Costs

(Other Allocable

Costs Plus Overhead)

Direct Labor Plus Direct

Material

(Allocation of

Overhead to Labor

and Material)

Should Cost—Supplier Cost Should Cost—Supplier Cost DecompositionDecomposition

What is in a typical “Should Cost” report:What is in a typical “Should Cost” report: A detailed description of the item.A detailed description of the item. A list of references used in the analysis.A list of references used in the analysis. A break down of cost and labor burden rates.A break down of cost and labor burden rates. Estimated unit prices for specified quantities.Estimated unit prices for specified quantities. A break down of the material and associated A break down of the material and associated

cost and minimum economic buys.cost and minimum economic buys.

Material—Terms & DefinitionsMaterial—Terms & Definitions

TermTerm DefinitionDefinition

Raw materialsRaw materials Materials in a form or state requiring further processing Materials in a form or state requiring further processing before they can be usedbefore they can be used

PartsParts Items that, when joined with other items, are not subject Items that, when joined with other items, are not subject to disassembly without destruction or impairment of to disassembly without destruction or impairment of useuse

SubassembliesSubassemblies Self-contained units of an assembly that can be Self-contained units of an assembly that can be removed, replaced, and repaired separatelyremoved, replaced, and repaired separately

ComponentsComponents Relatively simple hardware items which are listed in the Relatively simple hardware items which are listed in the specifications for an assembly, subassembly, or end specifications for an assembly, subassembly, or end itemitem

Manufacturing Manufacturing suppliessupplies

Items that are required by or in support of the Items that are required by or in support of the manufacturing processmanufacturing process

Inbound Inbound transportation andtransportation and

in-transit insurancein-transit insurance

Freight, express, cartage, insurance, and postage for Freight, express, cartage, insurance, and postage for goods purchased, in process, or delivered, which goods purchased, in process, or delivered, which can be added to the cost of an item or as an Other can be added to the cost of an item or as an Other Direct Cost (ODC)Direct Cost (ODC)

Direct Labor—Terms & DefinitionsDirect Labor—Terms & DefinitionsTermTerm DefinitionDefinition

Direct LaborDirect Labor Work performed by individuals which is directly related to a specific Work performed by individuals which is directly related to a specific cost objective. This work is readily identifiable with a particular cost objective. This work is readily identifiable with a particular product or service.product or service.

Indirect LaborIndirect Labor Work performed by individuals which is not identifiable with a single Work performed by individuals which is not identifiable with a single final cost objective but is identified with two or more final cost final cost objective but is identified with two or more final cost objectives or an intermediate cost objective. One example of objectives or an intermediate cost objective. One example of indirect labor is the work expended by the Controller of a indirect labor is the work expended by the Controller of a company. The Controller’s work is not directly identifiable in company. The Controller’s work is not directly identifiable in the production of a specific product or service, since his or her the production of a specific product or service, since his or her work includes several projects or tasks.work includes several projects or tasks.

Labor HourLabor Hour The unit of time by which direct labor activity is measured.The unit of time by which direct labor activity is measured.

Labor RateLabor Rate The dollar amount paid to an individual per a given amount of time The dollar amount paid to an individual per a given amount of time in consideration of work accomplished.in consideration of work accomplished.

Labor CostLabor Cost The product (i.e., result) of multiplying labor hours by appropriate The product (i.e., result) of multiplying labor hours by appropriate labor rates.labor rates.

Labor CategoryLabor Category A grouping of workers with similar skills or expertise or trade A grouping of workers with similar skills or expertise or trade classification.classification.

Labor MixLabor Mix The combination of functional skills and levels of worker experience The combination of functional skills and levels of worker experience required to accomplish a given task.required to accomplish a given task.

Basis of Estimate (BOE)Basis of Estimate (BOE) A statement of the rationale used by a supplier/contractor to A statement of the rationale used by a supplier/contractor to generate a cost estimate for a specific task or item to be generate a cost estimate for a specific task or item to be produced.produced.

Indirect Costs—Terms & DefinitionsIndirect Costs—Terms & Definitions TermTerm DefinitionDefinition

Indirect CostsIndirect Costs Any cost that cannot be directly identified with a single final cost objective Any cost that cannot be directly identified with a single final cost objective but can be identified with two or more final cost objectives or an but can be identified with two or more final cost objectives or an intermediate cost objectiveintermediate cost objective

OverheadOverhead Indirect costs related to specific operations, such as general product Indirect costs related to specific operations, such as general product lines, organizational groups, and groups of contracts. Overhead is a lines, organizational groups, and groups of contracts. Overhead is a type of indirect cost pool that is related to the specific operations of type of indirect cost pool that is related to the specific operations of the firm. The three major types of overhead are material, labor, and the firm. The three major types of overhead are material, labor, and fringe benefit (if not included in labor overhead). The three fringe benefit (if not included in labor overhead). The three overheads differ in regard to which costs they include and how they overheads differ in regard to which costs they include and how they are allocated.are allocated.

General & General & AdministrativeAdministrative

Any management, financial, and/or other expense incurred by or Any management, financial, and/or other expense incurred by or allocated to a business unit for the general management and allocated to a business unit for the general management and administration of the business unit as a wholeadministration of the business unit as a whole

Business UnitBusiness Unit Any segment of an organization, or an entire business not further divided Any segment of an organization, or an entire business not further divided into segmentsinto segments

Home Office ExpenseHome Office Expense The expenses of an office responsible for directing or managing two or The expenses of an office responsible for directing or managing two or more, but not necessarily all, segments of an organizationmore, but not necessarily all, segments of an organization

Indirect Cost PoolIndirect Cost Pool A logical grouping of incurred costs identified with two or more objectives A logical grouping of incurred costs identified with two or more objectives but not specifically with any final cost objectivebut not specifically with any final cost objective

Cost ObjectiveCost Objective A function, organizational subdivision, contract, or other work unit for A function, organizational subdivision, contract, or other work unit for which cost data are desired and for which provision is made to which cost data are desired and for which provision is made to accumulate and measure the cost of processes, products, jobs, accumulate and measure the cost of processes, products, jobs, capitalized projects, etc.capitalized projects, etc.

Profit—Terms & DefinitionsProfit—Terms & Definitions

TermTerm DefinitionDefinition

ProfitProfit Represents the excess of revenue over applicable costs of Represents the excess of revenue over applicable costs of performance and is associated with fixed-price type performance and is associated with fixed-price type contractscontracts

FeeFee Represents a flat charge paid as compensation for services or Represents a flat charge paid as compensation for services or supplies provided and is associated with cost supplies provided and is associated with cost reimbursement contractsreimbursement contracts

RiskRisk The level of uncertainty associated with specific factors The level of uncertainty associated with specific factors regarding contract performanceregarding contract performance

SUPPLIER PART COST BREAKDOWN WORKSHEET—Part ASUPPLIER PART COST BREAKDOWN WORKSHEET—Part ASUPPLIER NAME:SUPPLIER NAME: CONTACT:CONTACT: E-MAIL:E-MAIL:

PART NUMBER:PART NUMBER: VOLUME QUOTED:VOLUME QUOTED: QUOTE NO:QUOTE NO:

DESCRIPTION:DESCRIPTION: EST. TOOL LIFE:EST. TOOL LIFE: DATE:DATE:

DRAWING ISSUE:DRAWING ISSUE: TOOLING CAPACITYTOOLING CAPACITY@ Hrs/day:@ Hrs/day:@ Days/Week:@ Days/Week:

EXCHANGE RATE:EXCHANGE RATE:

RAW MATERIALS & PURCHASED COMPONENTSRAW MATERIALS & PURCHASED COMPONENTS CURRENCY:CURRENCY:

## Item Descriptions (1)Item Descriptions (1) Item ID (2)Item ID (2) Unit of Measure (3)Unit of Measure (3) Unit Cost (4)Unit Cost (4) Total Cost (5)Total Cost (5)

11

22

33

44

55

66

77

Total Material Cost Total Material Cost

SUPPLIER PART COST BREAKDOWN WORKSHEET—Part BSUPPLIER PART COST BREAKDOWN WORKSHEET—Part B

LABOR AND OVERHEADLABOR AND OVERHEAD

Labor Labor DetailsDetails Machine DataMachine Data Overhead DetailOverhead Detail

## Operations Process Descriptions (6)Operations Process Descriptions (6)LaborLabor Rate Rate (7)(7)

Std Std Hrs Hrs (8)(8)

Labor Labor Cost (9)Cost (9)

Op. Op. (10)(10)

Mach. Mach. Size (11)Size (11)

Mach. Type Mach. Type (12)(12)

Var. Cost Var. Cost (13)(13)

Fixed Cost Fixed Cost (14)(14)

Total Cost (15)Total Cost (15)

11

22

33

44

Total Total Labor Labor CostCost Total Overhead CosTotal Overhead Costt

   Total Manufacturing Cost (material + labor + burden) (16)Total Manufacturing Cost (material + labor + burden) (16)

   Selling, General and Administration Expenses (17)Selling, General and Administration Expenses (17)

   Selling PriceSelling Price

   FROM TOOLING COST BREAKDOWN—TOTAL TOOLING COST QUOTEDFROM TOOLING COST BREAKDOWN—TOTAL TOOLING COST QUOTED

Meeting the Competitive Demands of Meeting the Competitive Demands of Supply Management through Supply Management through

Supplier Ideas SolicitationSupplier Ideas Solicitation

Meeting the Cost Reduction Mandate Meeting the Cost Reduction Mandate through Innovative Thought and through Innovative Thought and

Supplier Ideas SolicitationSupplier Ideas Solicitation

EPI and Concurrent EPI and Concurrent engineeringengineering

VMI/SMI/SOMI/ISMVMI/SMI/SOMI/ISM Cycle or lead time Cycle or lead time

reductionreduction Addition or elimination Addition or elimination

of value-added of value-added servicesservices

StandardizationStandardization

Change procurement Change procurement method/instrumentmethod/instrument

Volume and forecastsVolume and forecasts Inbound freight and Inbound freight and

packagingpackaging Relaxed specification, Relaxed specification,

material substitution, material substitution, or service level or service level improvementsimprovements

Competitive Bidding—Competitive Bidding—Use Use Ceteris ParibusCeteris Paribus

Buyers normally look at the price (total cost) as Buyers normally look at the price (total cost) as stated on each bid to determine which supplier stated on each bid to determine which supplier should be awarded the PO or contract.should be awarded the PO or contract.

If there are any differences, for a fair evaluation, then If there are any differences, for a fair evaluation, then allowances must be made for the differences in allowances must be made for the differences in performance and pricing.performance and pricing.

When comparing performanceWhen comparing performanceor prices the buyer should use or prices the buyer should use Ceteris ParibusCeteris Paribus assumptions assumptions (everything else held constant) (everything else held constant) so you compare so you compare “an apple to an “an apple to an apple, not an apple to an orange.”apple, not an apple to an orange.”

ValueValue

What Is Value?—Four Distinct KindsWhat Is Value?—Four Distinct Kinds

Exchange ValueExchange Value

Cost ValueCost Value

Esteem ValueEsteem Value

Use ValueUse Value

Value Analysis and Value Analysis and Engineering (VA/VE)Engineering (VA/VE)

1. An organized creative

approach to cost reduction

2. Emphasis on function or use

3. Identifies areas of excessive

or unnecessary costs

4. Eliminates non-value added

activities

VA/VE Job Plan—Philips ExampleVA/VE Job Plan—Philips Example

ValueValue EquationEquation

ValueValue =

Quality/Worth

Cost

How To Get Started in VA/VEHow To Get Started in VA/VE

Identify what is it and what Identify what is it and what does it do?does it do?

Obtain and review all available Obtain and review all available cost informationcost information

Try to anticipate roadblocksTry to anticipate roadblocks Promote cooperation with Promote cooperation with

VA/VE effortVA/VE effort Seek guidance from those in Seek guidance from those in

management that assigned management that assigned studystudy

VA Is the Way—Ten Ways to VA Is the Way—Ten Ways to

Reduce CoReduce Co$$t t 1.1. Use it to reduce cost in Use it to reduce cost in

design, concept, or SOWdesign, concept, or SOW2.2. Use cross-functional teams to Use cross-functional teams to

approve product or service approve product or service offering changesoffering changes

3.3. Consolidate supplier base Consolidate supplier base using full service partnersusing full service partners

4.4. Reduce paperwork with Reduce paperwork with supply base by using more supply base by using more EDI/E-ComEDI/E-Com

5.5. Bundle any engineering Bundle any engineering changes or project scope changes or project scope changes quarterlychanges quarterly

6.6. Move towards common, simple Move towards common, simple methods and standard items or methods and standard items or services used at multiple sites services used at multiple sites or facilitiesor facilities

7.7. Use returnable dunnage or Use returnable dunnage or containers instead of non-containers instead of non-returnablereturnable

8.8. Identify and eliminate Identify and eliminate unnecessary testing, measuring unnecessary testing, measuring and diagnosticsand diagnostics

9.9. Reduce the number of Reduce the number of prototypes or modelsprototypes or models

10.10.Consolidate “A” type purchases Consolidate “A” type purchases with suppliers’ if possiblewith suppliers’ if possible

Process of Determining Process of Determining Target CostsTarget Costs

Target

Costs=

Cost subject to

cost reductionactivities

+

Costs not subject to

cost reduction activities

TargetTarget CostingCosting ProcessProcess

Target Cost Breakdown Target Cost Breakdown and Impactand Impact

Target Cost Breakdown Target Cost Breakdown and Impactand Impact

Target PricingTarget Pricing

A reduction in the direct A reduction in the direct costs of a supplier’s cost costs of a supplier’s cost profile has more impact on profile has more impact on your bottom line than a your bottom line than a major percentage discount major percentage discount in the supplier’s price. in the supplier’s price. Negotiation based on cost Negotiation based on cost allows you to challenge the allows you to challenge the logic of each element of the logic of each element of the price.price.

VendorVendor Preferred SupplierPreferred Supplier

Marketing, Purchase Orders, Marketing, Purchase Orders, Proposals, Variations in QualityProposals, Variations in Quality

Partner/AlliancePartner/AllianceRedundant Capabilities in Systems, Redundant Capabilities in Systems,

Activities that Add No Value,Activities that Add No Value,Approval Processes, Contracts, Approval Processes, Contracts, Excessive Communications and Excessive Communications and

Controls, etc.Controls, etc.

Cost to ServeCost to Serve Cost to ServeCost to Serve Cost to ServeCost to Serve

ProfitProfit ProfitProfit ProfitProfit

Competitive Bidding Competitive Bidding Based upon Variable ProfitBased upon Variable Profit

Redefined (Streamlined) Process Redefined (Streamlined) Process Reduces Cost and Yields Reduces Cost and Yields

Acceptable ProfitAcceptable Profit

Reengineered Process through Reengineered Process through Close Relationship; Maintains Close Relationship; Maintains

Profit and Greater Cost Profit and Greater Cost ReductionReduction

Target Pricing Perspective—Target Pricing Perspective—An ExampleAn Example

For a service contract, the For a service contract, the total quoted price was total quoted price was $260,565$260,565. .

A A 1%1% reduction on the price is reduction on the price is one thing, but reducing each one thing, but reducing each of the cost elements by of the cost elements by 1%1% yields an actual price yields an actual price reduction of more than reduction of more than 2.5%2.5%..

Individual cost elements are more vulnerable to argument than the price as a wholeIndividual cost elements are more vulnerable to argument than the price as a whole

Elements of Cost-ServicesElements of Cost-Services

Profit and MarginProfit and Margin

Other Services/OverheadOther Services/Overhead

Service LaborService Labor

Materials and SuppliesMaterials and Supplies

OccupancyOccupancy

Equipment and TechnologyEquipment and Technology

COSP

Opportunity KnocksOpportunity Knocks

Sometimes the buyer has a chance to gain the upper hand. This occurs when the supplying industry’s margins are healthy because selling prices rose faster than their costs escalated.

The ultimate objective is to maximizeThe ultimate objective is to maximizethe value of each purchase spendthe value of each purchase spend

dollar.dollar.

Low (Best) Cost Country SourcingLow (Best) Cost Country Sourcing(LCCS)(LCCS)

Near Sourcing Near Sourcing DomesticallyDomestically

Outsourcing Outsourcing OverseasOverseas

Indigenous Indigenous LocalizationLocalization

Transfer business Transfer business to provide materials to provide materials

or services by or services by swapping out swapping out

overseas suppliers overseas suppliers for closer proximity for closer proximity

to home countryto home country

Transfer internal Transfer internal dept,activity or dept,activity or

process to more process to more capable suppliers or capable suppliers or contractors to lower contractors to lower cost of ownershipcost of ownership

Find and develop Find and develop local indigenous local indigenous

sources to support sources to support country markets for country markets for

low cost country low cost country plants and plants and

distribution facilitiesdistribution facilitiesAdapted in part from Ariba’s Executive Overview on this subject

LCCS and Supply Chain RiskLCCS and Supply Chain Risk

Although significant cost savings opportunities exist , the risk may

be greater when dealing with unfamiliarsuppliers, different business protocols,

language barriers and new cultures.

Landed CostLanded Cost

LC = TSC LC = TSC SU SU

Note: Total Selling Cost (TSC) and Selling Unit (SU)

SUMMARY and THANKSSUMMARY and THANKS

© 2009 CATTAN Services Group, Inc.