Leveraging Cost and Price Analysis

When electronics buyers receive multiple quotes from different vendors on a specific order, the differentiators among those quotes are usually pretty clear. One vendor may offer the best delivery times and payment terms, for example, while another may stand out as the low-cost leader. Buyers make the best purchase decision based on these parameters, negotiate further with the suppliers or go in search of more sources of supply.

But what happens when there is no competition and just one quote is received? Perhaps the parts in question are obscure, custom-built, only made by a single manufacturer, or are facing production constraints. Whatever the underlying reasons, buyers can overcome the challenge with a process known as cost and price analysis.

Bill Michels, a senior vice president for the Institute for Supply Management (ISM) and president of ADR North America, a Tempe, Ariz.-based procurement, learning and sourcing consultancy, says the cost and price analysis exercise is important for any type of buy—be it a single bid or not.

“Buyers have to know the input costs, materials costs and overhead costs associated with the purchase,” says Michels, noting that the process is particularly critical for firms that are focused on continuous improvement. “How will you know what to improve with a particular supplier if you don’t know their cost make-ups?”

Price analysis at work

Conducting solid price and cost analysis doesn’t have to be cumbersome or time-consuming. For example, when procurement agents at the University of Colorado are grappling with the “single quote” issue—a scenario that occurs mainly when an acquisition is sole source justified or when competition is solicited but only one response comes back—buyers use a five-step solution to prove that they are paying a fair and reasonable price for items. The institution’s procurement agents ask themselves:

1. Are we receiving some type of discount on this order?
2. Are we being charged the same price as another customer would be charged?
3. Is our price a catalog or list price?
4. How does the current price compare to a price paid in the past for the same or similar goods or services?
5. If the item we’re buying is custom-built, does the cost breakdown from the vendor show our price is fair and reasonable?

“Buyers have to know the input costs, materials costs and overhead costs associated with the purchase,” says Bill Michels, a senior vice president at the Institute for Supply Management and president of ADR North America.Using these questions as guidelines—and then building upon them as they hone their price and cost analysis strategies—electronics buyers can determine whether the single quote aligns with industry standards and expectations around price and delivery, or whether further investigation and/or negotiations are in order.

Cost versus price

When attempting to drive costs out of the purchasing process, buyers have two options: accept the seller’s price and try to drive it down, or estimate the vendor’s costs and then help that supplier work more efficiently, do a better job of purchasing raw materials or consult with the company on how to locate and leverage more affordable labor. Using cost and price analysis, electronics buyers can select the latter strategy and not only wind up saving money, but also forming long-lasting relationships with top suppliers.

When conducting cost and price analysis, Michels says buyers should look at four key input costs: materials, labor, overhead and profit.

“Even in a service where there isn’t a lot of material, you’ll still be able to dissect the labor rates, overhead and profit,” he says.

Much of that information can be found through simple online searches, says Michels, who recommends the Bureau of Labor Statistics’ site for a gauge on current labor rates.

Some of the tools that electronics buyers can use to analyze costs include paid online trading platforms like E2open and GT Nexus, or subscription-based services like freebenchmarking.com, a component price benchmarking solution for the electronics industry. When a buyer submits data to freebenchmarking.com’s proprietary database of current industry pricing, for example, the service provides price analysis for those components that it can exact-match against its own database by manufacturer part number.

In many cases, a visit to the supplier’s site will help buyers better understand the company’s input costs.

“You can look at how much equipment they’re using and how much overhead they have and utilize that information to make some judgments and estimates,” says Michels. “Once you get to a level of cost transparency, you can help your suppliers make improvements. It’s about going upstream in the supply chain and taking some money out of the process.”

Developing a strategic approach

According to Michels, once a buyer gets to a level of complete transparency with one or more suppliers, he or she can continue to strive for efficiency improvements and cost reductions that will affect future projects.
“There is an opportunity to move from a tactical approach to a strategic approach,” says Michels, “and move across the supply chain to take real costs out, thus allowing the supplier to make a reasonable margin.”

On a final note, Michels cautions buyers not to confuse cost (which is a fact) with price (the buyer’s perception of the product’s value).

“It’s important to know the difference between the two,” he says, “because prices are often based on what the market will bear—and not cost-plus-profit.”