“40 Proven Ways to Reach
Cost Saving Targets ”
Northeast Supply Chain
Conference and Exhibition
September 21, 2004
Presented by: Dr. George L. Harris
Calyptus Consulting Group, Inc.
76 Bedford Street, Suite 22
Lexington, MA 02420
781-674-0041
gharris@calyptusgroup.com
www.calyptusgroup.com
Why Strategies Are Needed
• Price and cost negotiations needs structure
• Templates can be used to create planning
documents
• Sales staff are typically very prepared
• The supplier knows the market and the
product/service better
• The supplier has negotiated with many diverse
customers with diverse strategies
SCM staff can use strategies to improve results
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Price Reduction Strategies
A. Price
1.
Ask the supplier to provide a cost breakdown
of the quote and to identify the elements of
cost.
• Ask the supplier to include profit or fee in this
breakdown.
• Ask them to specify what factors [cost drivers]
most influence their price?
2.
Ask if the supplier will certify that they have
submitted the lowest pricing for the services or
goods? [If yes, ask next question.]
• If you find a lower price,
is the supplier willing to match it?
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A. Price Strategies
3.
Ask how their pricing is tied to productivity,
economic behavior as well as cost.
• [Buyer’s note: Federal government reports provide
data on productivity gains. Use this data to
rationalize prices.]
4.
Ask if any part of the pricing is based on
projected rather than current, actual costs.
• If so, ask them to show you cost projections.
• Determine the assumptions on which they based
their projections.
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A. Price
5.
Ask the supplier to explain what costs are
covered by G&A expenses. Upon review, ask
for example:
• Why are you paying for advertising expenses for
recruiting new customers when you are already a
long term customer not benefiting from the
advertising effort?
6.
Ask if the schedule [or delivery point] were
changed, would that affect the supplier's offer?
• How?
• Why?
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A. Price
7.
Ask the supplier that since [materials, or
subcontracted] costs are significant, can they
provide the information needed to assess the
pricing of sub-tier suppliers.
• Ask from which suppliers they are buying supplies
or services. [Perhaps you can help them negotiate
lower pricing.]
• Ask if they are leveraging their spend
• Offer to allow the supplier to purchase products
and services under your company’s long-term
contracts
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Price Reduction Strategies
B. Price Changes
•
Use these questions for negotiating Price
Changes. Situations that frequently give rise
to a price change are:
a. Substantial changes in underlying costs
b. Changes in market demand
c. Sharp changes in technology
d. A change in behavior by one or more rival firms
•
Know which is the cause of your cost
changes. If (a) or (c), pursue value analysis. If
(b) or (d), you could have negotiation
opportunities.
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B. Price Changes
8.
Determine what percentage of the Cost of
Sales is represented by the increases /
decreases in:
• Labor
• Material, or
• Overhead.
9.
Ask how can you offset this price increase
with cost efficiencies or process / product
substitution.
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B. Price Changes
10. For price increase due to new facility:
•
How did the supplier justify this new facility to
management?
•
Ask them to show the calculations for ROI
without a price increase.
11. Tell the supplier that you need to see
documentation that this price increase is
based on absorption of costs beyond their
control.
•
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Ask what can they show you to prove that fact.
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B. Price Changes
12. Note that other suppliers for this commodity
have not requested price increases.
• Ask why should you not shift the business to
them.
13. Ask how the price increase history compares
against the Producer Price Index.
• [Realize that these indexes reflect what suppliers
report they are charging – not necessarily market
price. Negotiate to keep price increase below
PPI.]
Buyers that refuse to pay price increases are
successful at least 50% of the time
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Price Reduction Strategies
C. Price / Cost Reduction
14. Ask the supplier that based on the quality of
the product / service, are they willing to extend
the warranty period?
15. Provide an estimate of what you feel the
product or service “should-cost”. In other
words, create an independent cost estimate.
•
Ask the supplier to explain why their prices /
costs are higher.
•
Develop an independent cost estimate before the
supplier’s prices and cost are reviewed
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C. Price / Cost Reduction
16. If the offer is firm fixed pricing, would the
supplier be willing to accept an hourly rate
contract with this price as the maximum?
• [Particularly if you believe that the supplier has
over-estimated the work involved and can finish
sooner and at lower cost.]
17. If the offer is firm fixed pricing, but, since it is
based on a fluctuating commodity market,
would the supplier be willing instead to link
pricing to a standard index for price
determination at time of shipment?
• [If yes, evaluate if this gives you an advantage.]
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C. Price / Cost Reduction
18. Ask if the supplier’s price offer includes yearly
cost-reduction guarantees.
• [If no, insist they be included.]
19. Ask the supplier if they would object to building
in value analysis clauses with cost sharing
once yearly cost-down targets are achieved.
20. Ask what discount will be offered if you allow
the contract to be used by another business
unit as well [to give possibility of additional
volume].
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C. Price / Cost Reduction
21. Ask how much pricing could be lowered if you
agree to link partial payments to the
deliverables required at each of the milestone
dates.
22. Ask if costs in the supplier’s proposal reflect
labor cost reductions resulting from learning
curve volume.
• Ask the supplier to explain how they accounted for
the learning curve(s).
23. Provide your target cost based on market
pricing.
• Ask what steps must be taken for the supplier to
meet it.
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C. Price / Cost Reduction
24. Ask what additional value the supplier can
offer for the price that competitors do not.
25. Inform the supplier that your research,
historical pricing, and the range of quotes
received lead you to believe the market price
of this product / service is significantly lower
than what you quoted.
• How does the supplier justify the increased cost?
[Be prepared to tell them an approximate number
– don’t bluff.]
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C. Price / Cost Reduction
26. Ask if the supplier would be willing to lower
prices immediately by a specific percentage if
you can put a contract in place by [year end,
end of quarter….].
27. Ask if the supplier would agree to allow you to
send in six sigma [or Quality, or SME] team to
see if costs can be lowered by process
improvements.
28. Ask if the supplier is willing to put a cap on
design [or testing or material] costs as a
percentage of total expenditure for the life of
the contract.
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C. Price / Cost Reduction
29. Ask if the supplier is willing to guarantee the
same labor rates for all work performed in
each job category for the life on the contract,
including change orders.
30. Ask if you award the contract to the supplier,
what level of discount can be expected on
other services, such as training and
maintenance.
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C. Price / Cost Reduction
31. Ask if the key personnel on this contract are
replaced mid-stream with new players, will the
supplier agree to reduce their labor rate to
account for the learning curve?
32. Ask if these features offered are standard to
the industry, why does the supplier quote
show separate charges for these services?
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C. Price / Cost Reduction
33. Provide the proposed performance scorecard
[or SLA] for work.
• See if the supplier will accept payment minus 10%
for the basic, ‘satisfactory’ work and make up the
balance with a 10% incentive payment if they
achieve the higher standards.
34. Since your quantities are estimates, determine
how much volume is needed to reach the next
discount level.
• Determine the level of price reduction.
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C. Price / Cost Reduction
35. Ask suppliers for alternate proposals.
• What creative ideas does the supplier have to
reduce costs?
36. Ask what the impact of price would be if you
combined this agreement with the business
the supplier currently has under a separate
agreement.
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C. Price / Cost Reduction
37. Let the supplier know that this work can be
done substantially less expensively in (India,
China, or another region).
• Ask the supplier what they are doing to increase
productivity or lower costs to compete.
• [After receiving answer ask whether you can build
in a year-over-year price decrease?]
38. Look into other locations / divisions of the
supplier to find out if your company bids one
against another.
• Ask questions like…’I know rates / costs are lower
in your Kentucky facility. What would the pricing be
if the work were to be done there?’
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C. Price / Cost Reduction
39. Find the division with the lowest prices
provided by any supplier for a given service or
commodity.
• Ask what your supplier can do to drive pricing
down to that level [don’t reveal names].
40. Ask how much excess capacity the supplier
has if volume or needs were to grow.
• Ask if pricing of the initial work covers both fixed
and variable costs.
• Ask if the supplier is willing to price any extra
volume only to cover marginal [variable] costs.
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D. General Suggestions
•
•
Become familiar with industry pricing
announcement patterns to anticipate the
timing of future increases and to identify which
suppliers tend to act independently and thus
could present good negotiation targets.
Do not give a supplier who initiated a price the
opportunity to meet a price concession offered
by another supplier. This ruins the competitive
climate.
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D. General Suggestions [continued]
•
•
Know where you stand. Prepare for negotiations
with a comprehensive cost-price analysis and
value analysis review and know your supplier’s
legal alternatives under the Robinson-Patman
Act.
Insist on having a most favored pricing clause in
your Agreement, such as: Should any lower price
for any article in this Agreement or any improved
terms be offered to any of supplier’s customers
prior to completion of this Agreement, supplier will
promptly notify your company, and thereupon,
such lower price or improved terms will apply to
this order or contract.
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D. General Suggestions [continued]
•
•
•
Continue to use processes such as reverse
auctions, supplier development activities, value
analysis, and process improvement to drive down
costs.
Don’t reduce the supplier’s margins on profit
when they reduce costs for you.
It is de-motivating.
Share cost reductions with suppliers so they can
get a reasonable ROI on their investments.
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