How to Collaborate with Suppliers to Reduce Product Costs

Abe Chaves

There are many ways a product cost management (PCM) platform can help you collaborate with your suppliers, and I really do mean collaborate, to obtain cost savings.

Conduct Fact-Based Negotiations

A PCM platform helps you conduct fact-based negotiations with suppliers to ensure that you purchase each part at a fair price, that you’re not overspending for the part, and that your suppliers are not losing money, which is important for both.

Historically, many companies followed the typical practice of asking for a specific price reduction percentage every year from their suppliers. They would go to their suppliers and say, “I want a 5% reduction in price for everything I buy from you.” The next year it might be 6%, and the following year it might be 4%, etc.

The problem with that method of cost reduction is that it leads to an adversarial relationship.  To stay profitable your supplier will over-charge you for some parts, knowing that eventually they will be losing money on some parts they sell you, because they have run out of margin.

During “fact-based” negotiations, the detailed component cost information within your PCM platform enables you to focus discussions with your supplier on parts where there is room to give, and even identifies the biggest gaps between your data and theirs.

This cost reduction strategy is much more effective than saying “I want a 5% reduction in price.”

Leverage PCM Data to Identify Savings Opportunities

When you have an NPI part, a product cost management platform can estimate what that part should cost, so you have a very good target price.  The detailed cost data helps you negotiate a reasonable price the first time you buy that part.

With existing parts, a PCM platform helps you identifying potential savings opportunities by facilitating a spend analysis. Conducting a spend analysis leverages your detailed cost data to identify:

  • parts for which you may be overpaying
  • parts that could be redesigned to reduce costs
  • parts which are not being produced in the most cost effective manner

Once you identify these parts, ask your supplier for suggestions as to how they could be made differently, or designed differently, so they would cost less to produce.

Reduce Cycle Time in Quoting and Design

A product cost management platform helps you provide your internal customer with initial cost estimates, which reduces the number of quotes your supplier must provide for the same part.

In many cases, for NPI components, the supplier provides three or four quotes for the same part during the design process. Providing multiple quotes for a single part increases the cost of doing business with you. In these cases, the supplier knows he has no chance of getting any business, because none will be awarded.

With a PCM platform, you can generate your own rough estimates, based on the design the engineer has, which will not only accelerate your design cycle time, because you don’t have to wait for the quote, but also make it easier for your supplier to do business with you, because he doesn’t have to quote as many times.

Match Parts to Supplier Capabilities

A product cost management platform also helps you match the capabilities of your suppliers to the requirements of the part, so you can send your RFQs to the most qualified supplier.   A premier PCM platform can automatically  identify the most effective manufacturing process to make a part, which can then be compared to your supplier’s capabilities to better match your supply base.

For example, a premier PCM platform can identify when a part will be better suited for a Turret/Bend process than for a Laser/Bend process which will allow you to eliminate from your RFQ list, suppliers that do not have a turret.

Are you using a product cost management platform to collaborate with suppliers and reduce costs? What results have you had? Tell us about it in the comments.

Want to Learn More?

Read our more detailed post on how to collaborate with suppliers to get the best price on existing components.


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