The price / Cost of anything can be broken down into as few as 5 cost buckets and still be a valuable tool. The basic 5 bucket are:
- Material
- Labor
- Manufacturing
- SG&A
- Profit
Ideally each of these gets broken down further. Example: Material could be broken down into Raw and Purchased and then further down to Gross and Net.
A Request for Quote (RFQ) should require at a minimum the prices to be broken down in at least these 5 buckets. This will allow you to compare the quoted prices across multiple suppliers and get a better understanding of the questions to ask during a negotiation as well as a glimpse as to how low the price might be able to go.
Here is an example
Table 1
| Supplier A | Supplier B | Supplier C | Supplier D | |
| Price | $3.025 | $2.475 | $2.42 | $2.37 |
The question with this is, do you just go with the lowest quote and how would you negotiate for a better price? If you request a quote with at least the 5 buckets you will gain a lot better insight and have a better negotiation.
Table 2
| Supplier A | Supplier B | Supplier C | Supplier D | |
| Material | $0.50 | $0.75 | $0.50 | $1.00 |
| Labor | $1.00 | $0.75 | $0.50 | $0.55 |
| Manufacturing | $1.00 | $0.50 | $1.00 | $0.50 |
| SG&A | $0.25 | $0.20 | $0.20 | $0.10 |
| Profit | $0.275 | $0.275 | $0.22 | $0.22 |
| Total | $3.025 | $2.475 | $2.42 | $2.37 |
Assuming the quote package was good, and each supplier received the same package, what can we learn for the above table?
Would it be realistic to believe that each supplier should be able to get the material at or near $0.50? They are all quoting the same volumes (and volume discounts will be a topic of a future blog), so why not, after all two of the four are. How about labor? Again, two of the four are very close to each other at $0.50 and $0.55. Is there any reason to believe the others couldn’t get at or near that level? Similarly, for the remaining bucket. This is sometimes referred to “cherry picking” or “the best of the best”.
Table 3
| Supplier A | Supplier B | Supplier C | Supplier D | BoB | |
| Material | $0.50 | $0.75 | $0.50 | $1.00 | $0.50 |
| Labor | $1.00 | $0.75 | $0.50 | $0.55 | $0.50 |
| Manufacturing | $1.00 | $0.50 | $1.00 | $0.50 | $0.50 |
| SG&A | $0.25 | $0.20 | $0.20 | $0.10 | $0.075 |
| Profit | $0.275 | $0.275 | $0.22 | $0.22 | $0.1575 |
| Total | $3.025 | $2.475 | $2.42 | $2.37 | $1.7325 |
How would you negotiate with the details in table 3 vs table 1? Do you think it would be possible to approach $1.73? If you would have settled for the lowest price you would have left $0.6375 on the table.
This example is just a very simple example based on requesting just the 5 buckets of cost. I good Cost Breakdown Template would go much further in each bucket.
Material: Net and Gross Usage and Rate
Labor: Usage and Rate
Manufacturing: Usage, Fixed and Indirect Usage and Variable Rates
Scrap: Rate
Setup: Usage and Rate
Another topic for yet another day will be Cost Breakdowns.
Thanks, and hope you are enjoying and learning from these discussions.
Gerald (Jerry) Collins
Owner and Founder of Society of Cost Engineers
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