The Value of Cost Breakdowns
Obtaining cost breakdowns from incumbent suppliers can provide invaluable insights to procurement professionals looking to optimize their organization’s purchasing strategy. By having a detailed understanding of the costs associated with a particular product or service, procurement teams can better negotiate with suppliers to ensure they are getting the best value for their organization.
In addition, cost breakdowns can help procurement teams identify areas where they can potentially cut costs without sacrificing quality. By analyzing the various components of a supplier’s cost breakdown, procurement professionals can determine which areas are most expensive and identify potential alternatives or cost-saving measures.
Moreover, obtaining cost breakdowns can also help procurement teams identify potential areas of risk or inefficiency within their supply chain. By understanding the various components of a supplier’s cost breakdown, procurement professionals can identify potential areas for improvement, such as consolidating orders or negotiating better payment terms.
Here are some excerpts of one particular dialogue regarding challenges associated with obtaining cost breakdowns from incumbent suppliers who may be in a single- or sole-source situation. I have done a lot of negotiating for cost breakdowns in my career with a lot of success, so I think that you’ll be able to benefit from my advice.
Subscriber: Under a Sole Source or Single Source situation, it is difficult to get a breakdown. Do you have suggestions under these circumstances?
Me: The more certainty the supplier has of having your business, the less interested they will be in giving you a cost breakdown.
However, it is a huge mistake to fail to ask for a cost breakdown because you “think” that the supplier will resist. Ask anyway. If you don’t ask, you won’t get.
If the supplier resists, which suppliers have done to me in the past, I’ve always appealed to them in an emotional style of negotiation to get the results I’ve wanted, saying things like:
- “We’re spending $x with you each year. Why do you feel that we do not deserve to know what we are paying for?”
- “By withholding this information, I am kind of getting the feeling that your management is trying to hide something. What’s the big secret?”
- “We’ve been doing business with you for a long time and consider you a strategic partner. In a true partnership, there has to be transparency and openness and I’m not feeling that right now. How much of a partner do you consider us?”
Subscriber: We ask for it all the time. We just do not “think.” Tried your suggestion numerously. We get “that is proprietary information and we are not allowed to share”” and other false reasons.
Me: That’s great that you are asking for the cost breakdowns. You would be surprised at how many buyers simply don’t ask because they assume they know that the answer is.
I will address this further with two different strategies for securing the breakdown…
The one quote you’ve provided is evidence that you are hearing the answer from the wrong person. The “we are not allowed to share” response reminds me of the common situation I wrote about in the article Negotiating with Suppliers.
Every organization that has a policy has an individual who can waive that policy. You, or someone in your organization, need to speak with that person because the supplier rep you are speaking with is too apprehensive to present your case to that person on your behalf.
This can get challenging because business etiquette in the situation may require that, if the supplier is going to escalate the request, you should too. That means it may take executive-to-executive communication (i.e., your president talks to their president). Obviously, you don’t want to run up the chain of command unless the potential profit improvement would be significant (at least several thousand dollars). Your president or VP may even be asked to sign a confidentiality agreement if s/he is successful at persuading the supplier to share the breakdown.
The bottom line is that the greater the opportunity for savings, the harder you should push, adding executive firepower, if necessary.
Psychologically, you have to consider the reason why the supplier is so reluctant to give you the cost breakdown. Basically, because when it is requested, the supplier is likely to assume that you are going to use the information against the supplier.
If you find fault with their breakdown or conclude that their profit margin is too fat, you are going to push them for better pricing. Giving you the breakdown will be a strictly losing proposition. From their point of view, they can see no benefit of giving you the breakdown.
However, if the savings opportunity is significant, you may present your request as an opportunity to pursue a savings sharing project. By getting the breakdown, your technical team responsible for specifying the technical requirements can review the breakdown to identify cost drivers and then consider re-specifying the product in terms of material used, standard items that could be used, etc.
And, if your team finds that they can take cost out, both your organization and the supplier can share equally in the financial benefits.
Let’s use an example based on the cost breakdown in yesterday’s article assuming that the unit price of the item is $100.
Wood = 20% ($20)
Aluminum = 7% ($7)
Other materials = 3% ($3)
Labor = 45% ($45)
Overhead = 13% ($13)
Profit = 12% ($12)
Total = 100% ($100)
What if your technical team found that they could eliminate aluminum and replace it with plastic at half the cost ($3.50 per unit) without sacrificing quality?
That would result in a reduction of the total costs of $3.50. Splitting the savings would mean that half of that price reduction would go to the supplier’s profit and half would go to a reduction in your price. So the new cost breakdown would look like this:
Wood = $20
Plastic = $3.50
Other materials = $3
Labor = $45
Overhead = $13
Profit = $13.75
Total = $98.25
If you buy 100,000 units a year, that would save you $175,000 and give the supplier an extra $175,000 in profit a year – a true win-win.
You need to be realistic when implementing advanced strategies. The payback must be worth involving top management or your technical team. Although each supplier and sole source situation is unique, there are no guarantees.
However, the need for these strategies justifies the previous tip’s last paragraph. To obtain cost breakdowns, it’s essential to request them when obtaining pricing from a supplier. While suppliers may hesitate to share such information, they’re more likely to do so when competing for your business.
Once a supplier has your business, it becomes less likely to get the cost breakdown. Although you can’t change the past, you can avoid future struggles by always requesting cost breakdowns during the bidding process.
- Keys to Negotiation Success
- Powerful Negotiation For Successful Buying
- Negotiation Checklist
- How To Negotiate Price Increases
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