Cost Scenario in Unstable Economy and Fluctuating volume

Economy in every country of the globe is trying to recuperate from the meltdown of 2008~09 and is still to find its firm footing back onto the path of growth. As a buyer it becomes very difficult to close any contract as with unstable economy, volumes are also fluctuating.

In the era of growth and increasing volume, there are abundance opportunities available at buyer end to push vendors for cost by showing the supposedly rosy picture ahead. The volume card also attract more vendors and thus more competition, all in all a perfect picture for buyer. But how to perform in challenging economy:

1. Consolidation: The best medicine of the problem. Consolidate the spend towards bigger and more stable vendors. Increasing their pie in reducing economy and volume helps in achieving the cost advantage and also it’s the strategy to derisk you in economy where small players might be facing financial issues.

2. Changing the strategy: The strategy in increasing volume is showing the rosy picture of business increase but in reducing volume, the strategy is to show a picture of “continuation of business”. The strategy helps in negating the effects of reducing volume as you can project a picture of continual engagement and thus showing supplier that they are part of the core group and they can reap rewards of the current engagement in future.

3. Revisiting basic cost drivers: This is the most basic concept and is the most effective one in all circumstances. Understanding all the cost drivers and try to reduce cost by using techniques like value engineering, value analysis, localizations of tier 2 parts, yield Improvement etc.

Technology and single source items

Quite often as a buyer I have faced issues while finalisation of source for a product when the particular product is technology dependent. You have limited options to choose from and you have very limited room for negotiation of final price.

Traditional method of price estimation and negotiation like differentiating cost in RM (Raw Material) , Process Cost and Overheads and Profit doesn't hold good and neither you have multiple suppliers where you can go for competitive bidding to reduce the cost. 

Essentially you are dependent on the supplier to give you the correct cost. Still how you can determine the correct cost.

1. Historical buying pattern : The first thing to look at is to see the cost pattern  of similar products. This will help in achieving some cost estimation and perhaps helps in determining the cost drivers.

2. Dependency of the supplier: Determining the dependence of the supplier on your organisation or that particular product. It will help you increase your BATNA in the negotiation.

3. Look for competitors: Though the toughest part for this kind of component, yet the idea is to use them as leverage during negotiation. They may not be 100% match but yes they can be helpful as part of negotiation.

4. Understand the product: The knowledge about the product, volume, no. of years of usage, maintainence requirement or other cost drivers help in determining the negotiation points and helps in determining the correct cost.

The idea as always in any negotiation is keep pushing the supplier and with above inputs, determining the correct cost becomes slightly easy.