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How “should cost models” can help support better evidence-based pricing.

Posted by minteclimited on May 7, 2019 12:38:07 PM

Suppliers often use formula-based pricing models to help calculate their costs and apply this to customer contracts. But this does not always demonstrate value or support evidence-based pricing for customers. They are also unlikely to allow for the different sourcing options or apply market benchmarks for other cost inputs.

Since the total cost of even the simplest products is a combination of multiple cost inputs, not only of the individual ingredients, but also the costs of transportation as well as packaging. These are not minor challenges for procurement.

Being able to build “should cost models” helps to identify how to reduce raw material costs and are key to any food commodity procurement strategy. Understanding which of these individual material cost elements to include, make it possible to mirror, compare and track supplier prices based on different input options and create a shared understanding of how costs are moving.

When used in conjunction with independent market pricing data, it’s possible to build an accurate picture of how the individual cost components are moving and to adjust accordingly. When this aligns with the procurement teams, structure it helps support a cost-effective procurement strategy.

Finished product cost models create a shared understanding of raw material costs and help to support your buying strategy. This understanding represents real innovation in the procurement process that can enable procurement leaders to deliver a significant step in the procurement transformation road map.

The output from cost models helps suppliers to demonstrate value to customers while creating a data-driven environment in which strong collaborative negotiations can take place.

For procurement teams, having access to analytical tools, current market price data that support cost models are essential components of any procurement plan in delivering effective category management.

See our 10 Steps to the perfect cost model checklist.

Model Breakdown

Topics: procurement