Cost performance benchmarking is the process with which to measure and analyse the costs associated with the purchase or production of the company’s products – the Cost of Goods Sold (COGS) - compared with market prices and competitors. It is one of the important components of an effective Spend Analysis process.
Cost benchmarking helps companies to better:
- Control costs, to remain profitable and stay ahead of the competition.
- Improve efficiency, by reducing the time - ensuring you negotiate and buy at the lowest cost.
- Manage risk, to protect the business from an increasingly competitive environment and respond quickly to market-making trends.
To do this it identifies how competitive the company’s product pricing is, in industry terms of similar companies in the industry. This helps organisations to make comparisons between the costs they incur through the purchase of raw materials, ingredients and finished goods from their suppliers. This comparison enables the business to evaluate its overall competitiveness and take appropriate business decisions.
An effective benchmarking process can help organisations to highlighting best in class pricing and subsequently shows areas for competitive pricing improvement.
By benchmarking input costs, the procurement function can determine where and how it can make strategic as well as tactical improvements to is purchasing process.
This can help deliver better outcomes from supplier negotiations, through evidence-based pricing. In addition, it provides the platform to deliver a wider and more robust supplier sourcing process. Furthermore, it can also support the overall delivery of stronger category management. Furthermore, it will also support a more data-driven approach to strategic decision-making, influencing product selection, product substitution or raw material alternatives and provide a potential response to competitive threats.