From the course: Cost Reduction for Procurement: Using Demand-side Tools

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Should-cost modeling for cost reduction

Should-cost modeling for cost reduction

From the course: Cost Reduction for Procurement: Using Demand-side Tools

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Should-cost modeling for cost reduction

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- How do your suppliers determine their pricing? There are many possibilities here from premium pricing, market pricing, to cost plus pricing. Unfortunately, it can be very difficult for a procurement professional to dictate to the supplier how they should price their products. If you have very high buying power, then you'll certainly stand a better chance. This technique works best for physical goods. The essence of this lever is to deconstruct the individual cost components of the product that you buy in order to arrive at a logical cost. Ideally, for the product in question, you need to know the costs for each of the raw materials, labor cost, processing cost, energy, overheads, and profit, and try to establish whether the price you are being charged is reasonable. Once you have this information, you can model the cost that you think the item should cost, rebuilding it from the bottom up using all the market…

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