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Quote vs Transparency

Quotes VS Cost Breakdowns

When I started at my previous employer one of the first things I did was to ask for a copy of some of the supplier quotes. To my surprise these were usually noting more than a paragraph or two stating the price and volumes. When I asked where the Cost Breakdown was, I got everything from blank stares to responses like “You can’t ask for that, it’s illegal.” to “That proprietary information, and against company policy to ask for.”   To my knowledge, there is nothing illegal about asking a supplier to justify their pricing and there is nothing proprietary about defining their costs. These are just the internal excuses. A skilled sales team will do everything in power to avoid filling out a cost breakdown and will train buyers not to expect them. Most often a supplier will claim they do not do this for anyone. This is usually not true. If they have customers in highly competitive industries, like automotive, or governmental contracts, they are very familiar with this request. They will also claim that they define their buckets differently. This is not an issue. Remember our definitions are just guidelines. The key is to let them tell you where their costs are, and you adjust accordingly. Often, you will catch them with inefficiencies buried in these costs.

A good cost breakdown is designed to require a supplier to defend their cost in enough detail to allow you to understand the price and the cost drivers. Material should be broken down into Gross, Net and Rate. This will allow you visibility into how much material they claim is wasted and how much they are paying per UOM. See example 1. Example1

Description Gross Usage Net Usage UoM Material cost per UoM Material Sub Total Scrap Reclaim Rate Scrap Credit Total Material Cost
Stainless Steel 1.00 0.75 Pounds $2.00 $2.00 $0.20 $0.05 $1.95

A “Machine Rate” in not enough. You really need to know what is in the machine rate by asking for it to be broken into smaller buckets; Fixed, Variable, Indirect at a minimum. You will also need to know how much time they are spending on the equipment.

Description Size Cycle Time (hours/pc) Fixed Rate

($/Hr)

Variable Rate ($/Hr) Indirect

($/Hr)

Total Machine Cost ($/PC)
Injection Mold 50 Ton 0.0083 $4.00 $8.00 $15.00 $0.224

These are just two very quick examples of what you should be asking for and in what level of detail. You should not only expect, but require them to complete this as a requirement for doing business.

In the coming weeks we go in to much more details on Cost Transparency.

Thanks

Gerald (Jerry) Collins

Owner and Founder of Society of Cost Engineers

 

 

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