Controlling Those Costs !

Professional Development Learning Event – 30th April 2008

Controlling Those Costs !

Presenter

Graham BaileyCost Control Manager

Tesla Motors Inc.http://www.teslamotors.com/

PLEASE NOTE the web links contained within this presentation can only be

opened whilst you are in ‘SLIDE SHOW’ mode


PRESENTATION OUTLINE

● Why challenge?

● What’s to be challenged?

● Methodology

● The benefits

1


WHY CHALLENGE ?

The majority of companies send out RFQ’s to a number of potential suppliers when looking to place business

However, once responses are received, and provided all other selection criteria are more or less equal, how many customers spend time determining if the company offering the lowest price:

1. has room for further improvement (and which cost elements should befocused on during negotiation)

or, more importantly:

2. is attempting to ‘buy’ business(by offering un-realistic material prices or un-sustainable recovery rates)

2


WHY CHALLENGE ?

I’m sure you’ve all seen many examples of suppliers who have won business by meeting or beating a cost target or their competitors prices, when it’s later been demonstrated that by spending a little more time validating the costs provided within their, sometimes very detailed, supporting Cost Models, that there would have been significant scope for further price reduction prior to order placement

3

The risks are especially high with new suppliers

It often doesn’t matter what the contract T&C’s say

When a supplier comes back to you, often some time after receiving a PO (usually just after you’ve introduced their product on line) and presents you with an unjustifiable price increase, you’re often in no position to argue

Resourcing will only mean additional costs so, more often than not, you end up paying the higher price simply to maintain production


WHAT’S TO BE CHALLENGED ?

This session will look at some of the ways that you can confirm, validate or challenge the quotes and cost models submitted by your suppliers for goods and services

5

Whilst the Buyer should always insist on a breakdown from the supplier to support their quote, more often than not this either does not happen or it’s not closely analysed

Don’t forget to interrogate the NRC’s (tools, R&D or capital equip./ facilities)

Don’t be put off by the statement, “We don’t give breakdowns ! ”. If you push enough, even the largest suppliers will start to open up, providing the basics from which you can start to construct a cost model for their product

A supplier who can’t or won’t provide a breakdown in support of their quote has to be treated with some suspicion


WHAT’S TO BE CHALLENGED ?

6

However, the supplier needs to trust that any information they divulge to you will be treated in the utmost confidence

This can be supported by not showing them information from their competitors or even allowing sensitive files to be lying around on your desk. For suppliers to your industry, it’s a very small world and word does and will get back to them

We may not like or agree with the breakdown a supplier provides. If, for example, a supplier shows they’ve added a 30% margin to their costs, don’t immediately jump down their throats (it may well be that case that this % mark-up is made up of overhead elements in a manner different to others, or maybe this is the norm for their industry peer group and their competitors will be recovering similar margins, but have presented these elsewhere within their cost models)

Focus on the make-up of claimed manufacturing costs. On occasions, it may even be the case that you can agree to ‘ring-fence’ a reasonable profit value, in return for reducing the base costs

Analysis of even the most basic of cost models can highlight areas of doubt concerning supplier assumptions / pricing integrity or simply opportunities to eliminate waste and non-added value during negotiations


METHODOLOGY

9

1. Market Information

2. Market Intelligence

3. Material Costs

4. Process Costs

• Earnings• Overheads

5. Some Examples


In order to generate ‘best value’ cost estimates or to establish credibility of a quoted price, there is value in understanding what the global market has to offer

Do you know which areas of the world or indeed which regions of the UK (subject to governing sourcing strategy), can offer the technical capability, quality and logistics requirements necessary for your particular products or services?

MARKET INFORMATION

10


MARKET INFORMATION

Such information may already exist within your company. Do you know if it does? If so, is the information up-to-date and relevant ?

If not, why not gather your own market information ?

Do you set cost targets based on UK manufacture, Low Cost Country manufacture or manufacture somewhere else? How flexible is your system?

11


MARKET INFORMATION

Once you’ve identified regions of relevant expertise, evaluating the economic variances for these regions is a relatively simple task

Such information can add significant value to your Cost Estimating / Cost Engineering services, allowing you to generate tighter, more competitive cost targets and provide advice to the purchasing team as to which economic regions meet the criteria for achieving them

Go on, provide your purchasing staff with a challenge ! 12


MARKET INTELLIGENCE – some useful sources of information

http://www.corporateinformation.com/Report-Information.aspx

http://www.marketing-intelligence.co.uk/resources/index.htm

https://www.cia.gov/library/publications/the-world-factbook/

https://www.uktradeinvest.gov.uk/ukti/appmanager/ukti/countries

http://www.mas.dti.gov.uk/

http://www.armedforces.co.uk/index.php

http://www.jigsaw.com/

http://cost.jsc.nasa.gov/economic.html

http://country.alibaba.com/profiles/index.htm

CORPORATE INFO

MARKETING INTELLIGENCE

CIA

UK TRADE INVEST

DTi

ARMED FORCES

JIGSAW

NASA

Alibaba

13


MARKET INTELLIGENCE – for example:

Trade directories:

QIMTEK ► http://www.qimtek.co.uk/default.aspx

Automotive On-line ► http://www.automotive-online.com/suppliers-directory.html

Economic / Statistical Data (including):

Financial Data (including):

Graydon ► http://www.graydon.co.uk/UKContent/UKPublicHTMLPages/About.html

Dun and Bradstreet ► http://www.dnb.co.uk/About/DNB_Database.asp

Experian ► http://www.experian.com/corporate/index.html

Bureau van Dyke ► http://www.bvdep.com/en/Company%20data%20-%20international.html

Equifax ► https://www.econsumer.equifax.co.uk/consumer/uk/sitepage.ehtml?forward=gb_cs_about

Moodys ► http://www.moodys.com/moodys/cust/AboutMoodys/AboutMoodys.aspx?topic=intro

Hoovers ► http://www.hoovers.com/global/hoov/companies/index.xhtml?pageid=16184

Hemscott ► http://www.hoovers.com/global/corp/index.xhtml

Companies House ► http://www.companieshouse.gov.uk/

FT.com ► http://markets.ft.com/ft/markets/researchArchive.asp

RGE Monitor ► http://www.rgemonitor.com/

D A S A ► http://www.dasa.mod.uk/

NationMaster ► http://www.nationmaster.com/index.php

The World Bank ► http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/0,,menuPK:476823~pagePK:64165236~piPK:64165141~theSitePK:469372,00.html

OFNS ► http://www.ons.gov.uk/about/our-statistics/index.html

OECD ► http://www.oecd.org/document/42/0,3343,en_2649_201185_38616362_1_1_1_1,00.html

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Sources of information – Metals (include):

MATERIAL COSTS

16

LME http://www.lme.co.uk/

Base Metals http://www.basemetals.com/

UK Steel http://www.uksteel.org.uk/Download/uk%20steel%20stats%20guide%202006.pdf

About.com http://metals.about.com/od/unitedkingdom/United_Kingdom_Metal_Suppliers.htm

Metals Forum http://www.metalsforum.org/print.htm

Stockholders (for example): http://www.sesmetals.co.uk/ http://www.apollometals.com/

Recycling Int’l http://www.recyclinginternational.com/markets/nickel_stainless.aspx

Directories (for example): http://www.1800miti.com/links/wholesale/metal/service-centers.html

http://www.powersourcing.com/sf/cobalt.htm


Sources of information – Plastics / Rubber (include):

MATERIAL COSTS

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IDES http://www.ides.com/resinprice/resinpricingreport.asp

LME (Plastics) http://www.lme.co.uk/plastics_links.asp

Polymer Age http://www.polymer-age.co.uk/prices.htm#polyethylene

Plastics Technology http://www.ptonline.com/dp/pt/resins.cfm

GlobalSpec http://materials.globalspec.com/Industrial-Directory/resin_price

COMPOSITES WORLD http://www.compositesworld.com/sb

Stockholders (for example): http://www.chesterfield-plastics.co.uk/catalogue.php http://www.resinexgroup.com


• National Statistics http://www.statistics.gov.uk/cci/nugget.asp?id=285

• NBER http://www.nber.org/oww/

• OECD http://www.oecd.org/document/0/0,3343,en_2649_34637_34053248_1_1_1_1,00.html

• LABORSTA http://laborsta.ilo.org/

• ASHE http://www.statistics.gov.uk/StatBase/Product.asp?vlnk=14203

PROCESS COSTS - EARNINGS

Sources of information

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DON’T FORGET:

NewspapersEmployment agenciesBusiness Link:Reports (eg. KeyNote)BBC Job centre Plus: ttp://www.jobcentreplus.gov.uk/Internet/setLocale.do?country=GB&language=en&page=/initialise.do

Job Title PRINTED CIRCUIT BOARD ASSEMBLY OPERATOR

Location WIGSTON, LEICESTERSHIRE

Hours 40 PER WEEK MONDAY-FRIDAY 7.25AM-4PM

Wage £5.52 PER HOUR DEPENDING ON EXPERIENCE + BONUS

Work Pattern DAYS

Employer XXXXXX

Pension PENSION AVAILABLE

TypePERMANENT ONLY

Description

Previous experience is essential. Duties are to place components onto printed circuit boards, some hand soldering experience required, training will be given. We are open from 7:25am - 7pm, part time hours available to suit applicant.


Median gross weekly private sector earnings in Eastern Europe (February 2006)

CountryWeekly pay in

euros †Index: Germany =

100

Bulgaria 37 5

Croatia 182 25

Czech Republic 145 20

Estonia 104 14

Hungary 135 19

Latvia 68 9

Lithuania 89 12

Poland 147 20

Romania 66 9

Slovakia 113 16

Slovenia 247 34

Source: FedEEhttp://www.fedee.com/PayChartEg.shtml

Median gross weekly private sector earnings: alternative production centre's (February 2006)

Country Weekly pay in euros †Index: Germany =

100

India (directly employed regular workers)

22 3

China (urban workers) 34 5

Russian Federation 56 8

Brazil (Rio de Janeiro) 85 12

South Korea 475 66

Source: National statistical offices and economic agencies

Notes: † Pre-tax pay expressed in euros, based on a five-day week of 40 hours. All figures rounded to nearest euro.

* Eastern Europe has been taken to include eight of the states that joined the European Union on May 1st 2004 plus the EU accession states, Romania and Bulgaria, and the EU candidate country, Croatia.

** Pay in Europe is published annually and contains benchmark pay tables with hourly rates for 32 standard job positions in 48 European countries and territories. .

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PROCESS COSTS - EARNINGS


Energy & Utilities (include) :

Eurostat http://www.eustatistics.gov.uk/themes/environment/datalinks/index.asp

http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&language=en&pcode=er02c2&plugin=1&tableSelection=1&footnotes=yes&labeling=labels

BERR http://www.berr.gov.uk/energy/statistics/publications/prices/tables/page18125.html

GFD https://www.globalfinancialdata.com/

OFGEM http://www.ofgem.gov.uk/CustomPages/Pages/Results.aspx?k=prices

Energy Information Administration http://www.eia.doe.gov/

PROCESS COSTS – Other Overheads

Sources of information

21


EUROPEAN ELECTRICITY PRICES 2006

Source: Eurostat Industrial Users (Latest Data)

Deregulation of electricity supplies in the UK has resulted in lower prices and improvedservice for businesses. Electricity prices in the UK are among the most competitive in Europe.

0

0.01

0.02

0.03

0.04

0.05

0.06

0.07

0.08

0.09

0.1

IRELAND

ITALY

GERM

ANY

NETHERLANDS

DENMARK

HUNGARY

SPAIN

CZECH REPUBLIC

UK SWEDEN

POLAND

FRANCE

Euro

per

kWh

22

PROCESS COSTS – Other Overheads


INTERNATIONAL COMPARISON OF BUSINESS COSTS 2006

2.2 1.9

0

-6.9-7.4

-14

-12

-10

-8

-6

-4

-2

0

2

France Italy USA

Source: KPMG Competitive Alternatives Report 2006

The eight month research programme covered more than 2,000 individual business scenarios in 121 cities throughout Australia, Canada, France, Germany, Italy, Japan, The Netherlands, the UK and the USA. The basis for comparison is the after-tax cost of start-up and operations for 12 specific types of business, over a ten-year time horizon.

Advantage

Disadvantage

% Cost Advantage/Disadvantage Relative to the United States of America

4.4 4.3

JapanUK

Netherlands

Germany

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Other Info ?


Other Info – Fuel ?April 2008 Averages

http://www.theaa.com/motoring_advice/fuel/

Source: The AA

http://www.theaa.com/allaboutcars/advice/advice_rcosts_diesel_table.jsp

See also:

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• Better Prices !

• Message to suppliers that you expect quotes to have integrity from day one

• Clearly highlights areas of cost variance at the supplier selection stage

• Provides objective data when analysing future QAF’s, negotiating new prices or challenging Price Increase Claims

• Builds confidence in your own estimates

• Supports development of a cost history database and cost trackers

• Sorts ‘those who do’ from ‘those who don’t’ when it comes to the ‘OPEN BOOK’ issue

THE BENEFITS OF CHALLENGING SUPPLIER COSTS

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• Be clear and direct with your suppliers as to what you want, why you want it and what the benefits will be for all

• Don’t be afraid to ask and to keep asking

• Maintain good records

• Maintain confidentiality at all times

• Request a breakdown in the suppliers own cost model format, before you present them with your ‘Standard’ QAF form. You’ll often get far more information than you realise

• Provide feedback to those suppliers who are unsuccessful, yet provided sufficient cost breakdown, so as they may also gain from sharing information with you. This need only be a generic benchmark positioning to their ‘un-named’ competitors

LESSONS LEARNT

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Controlling Those Costs !

Documents

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