Buyers simply treat the custom item as if it were COTS, submit drawing packages to multiple vendors, and compare the quotations. The logic of strategic sourcing has worked well. By comparing quotations from multiple potential suppliers supply chain gains insights that can be used to leverage spend.
It is largely responsible for driving offshore procurement as companies search for the lowest possible comparative quotation. Strategic sourcing is particularly useful to organizations that lack the resources to effectively analyze what the product should cost basically, all of us!
In contrast to strategic sourcing, should costing begins with an internal assessment of the product's expected cost. Generally, engineering helps assess the necessary labor, procurement gathers the expected material cost, and supply chain assigns expected labor rates and profit margins.
Supply chain collects the costs and sums them to determine should cost. In the case of printed circuit board assemblies PCBA's , note that should costing still utilizes strategic sourcing. Most companies do not conduct should costing for PCBA's because they believe the process is to complex for their existing resources. Essentially, you are behaving as if you were responsible for manufacturing the item yourself.
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In procurement organizations aiming to shift to a more strategic sourcing approach, the should-costing is a valuable tool in ensuring supplier negotiations go well and are as profitable as possible. The should-cost analysis also helps in understanding supplier strengths and quotients, to make sure they can appropriately fulfill both current and future needs at scale. Procurement can also use the information to find viable alternative materials to use and how those affect the cost, to determine if making the switch to another material option is a worthy tradeoff.
Just because the material is cheaper, however, may not be enough to justify the cost of the switch. Ultimately, the procurement function aims to source quality materials and services at the best possible cost, to keep business running as smoothly as possible. This means balancing cost and quality with things like total cost of ownership , lead time, supplier location, etc.
A cheaper supplier who takes longer to deliver raw materials may not be the best option if it leaves production without the things they need to create products that are in high demand with customers.
Great sourcing is about keeping the total cost of ownership as low as possible. If the cost of the product differs significantly from the estimate, there may no longer be room for any profit. When this happens, the bottom line takes a hit and depending on how well they are established within the market, it may cause the company to go under. Enter your email below to begin the process of setting up a meeting with one of our product specialists.
How Should-Cost Modelling Can Be Used To Optimize Procurement Should-Cost modeling, also known as cost breakdown analysis or clean sheet analysis, is an exercise to determine what a product or service has to cost based on a number of factors such as cost drivers like raw materials cost, manufacturing cost, labor rates, overhead costs, and the addition of a fair markup for profit.
Step One: Input Study This stage uses drawings, 3D models, engineering specifications, assembly procedures, and testing and qualifications to set the stage for the parts and processes that are required to produce a product.
Step Two: Process Requirements In this stage, the team sets out to analyze the primary and secondary processes, plan the processes, look closely at compliance requirements, and gather material costs. Step Three: Cost Modeling At the cost modeling stage, they outline annual volumes, batch quantities, and unit of measure. Step Four: Outputs The outputs are: Cost driver models Cost graphs representing the key cost drivers Cost parameters with respect to the breakdown of processes Process time for each individual process Breakeven cost with respect to volumes Step Five: Reporting In the final stage, there is a cost summary, typically presented in Excel format.
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