Tools & Tips
Calculating supplier costs? 6 Key steps to follow
Calculating supplier costs as a procurement professional involves considering various factors. Here are the key steps to follow:
1. Identify cost elements: Determine the specific cost components associated with the supplier’s products or services. This includes direct costs (e.g., raw materials, labor, manufacturing) and indirect costs (e.g., overhead, administrative expenses).
2. Request cost breakdown: Ask the supplier to provide a detailed breakdown of their costs. This can be in the form of a cost breakdown sheet or a cost proposal that outlines the different cost categories and their corresponding values.
3. Analyze pricing structure: Examine the supplier’s pricing structure and terms to understand how costs are allocated. Consider factors such as unit pricing, volume discounts, or any additional charges such as shipping or handling fees.
4. Conduct market research: Conduct market research to gain insights into prevailing market prices and industry benchmarks for the products or services being procured. This information helps you assess whether the supplier’s costs are reasonable and competitive.
5. Assess economies of scale: Evaluate whether there are potential cost savings through economies of scale. This involves analyzing the supplier’s production capacity, efficiency, and scalability. Suppliers that can produce larger quantities may offer more competitive prices.
6. Calculate total cost of ownership (TCO): Consider the broader costs associated with procuring from the supplier, such as transportation, storage, maintenance, or warranty expenses. Use a TCO framework to capture the entire cost picture, including both direct and indirect costs over the product or service’s lifecycle.
Want to learn more? Attend our Strategic Sourcing and Category Management Training, Managing Total Cost of Ownership – TCO (1 Day), Finance for Procurement Professionals (2 Days), Fundamentals Of Purchasing and World Class Procurement (2 Days) and Introduction to Supplier Relationship Management (2 Days) courses.