29 December 2009 | Rebecca Ellinor
To find out the truth behind the costs suppliers charge, you need to work with them. That’s the advice of Paul Livingston and Mike Fogg of PMMS Consulting Group.
Writing in an article to be published in the 7 January issue of SM, Livingston and Fogg say “breaking costs down collaboratively with suppliers can lead to significant reductions”.
The consultants, who are also trainers on a CIPS course that examines how to dissect a supplier’s cost structure, said the first step is to “recognise that every price paid – for everything from the morning newspaper to a complex software solution - is a total amount comprised of labour, materials, overheads and a margin for profit”. Buyers need to understand how much cost suppliers apportion to each of these areas, and what method they are using to do this.
Fogg and Livingston said while there is no arithmetic formula between the cost of producing the goods and services sold and the price charged, there are a number of tools and concepts buyers can apply.
These include “open-book costing”, where buyers “require” their suppliers to indicate the breakdown of costs; and “break-even analysis”, where purchasers may be able to determine the quantity at which their supplier breaks even on a production run - and therefore when the supplier is making a profit or loss.
The best way they suggest, however, is to try to work with vendors after doing your homework on them. “We advocate building relationships with suppliers to work together to reduce cost wherever possible, while being aware that there are people and organisations who exploit customers and continually stall - even on commencing cost-reduction discussions.”
The full article will appear in the 7 January issue of SM
CIPS is running “Dissecting a supplier’s cost structure”, a non-residential two-day course with PMMS trainers exploring these techniques on 19 January in Manchester and on 20 April in Birmingham. Call 01780 756777 to book a place.