Reverse cost analysis: how companies should use cost analysis negotiations to achieve a win-win situation for buyers and suppliers.
Some purchasing managers who are not very familiar with the Chinese market will try to use the cost analysis method to reduce the profit margin of suppliers, but often they do not work as expected. They use traditional cost analysis methods, or "Should-cost" models, which use techniques to analyze the basic cost and profit structure of a product, and then use this to put pressure on suppliers and force them to lower prices. But purchasing managers will soon find it wrong to think that they have found potential cost savings and that Chinese suppliers will cooperate.
Purchasing managers sometimes ignore the bargaining power of customers and suppliers and use cost analysis techniques blindly. If their own business is not so important to the supplier, then even if they find that the supplier has a 30% profit margin in this business, I am afraid it will not help. Asking a supplier's sales executives to make concessions is likely to be rejected in one go. Not only that, even if the bargaining power of the two sides is roughly the same, and the cost analysis is used properly, Chinese suppliers can still use a variety of conventional methods to disguise their true profits.
Here are some examples, everyone should pay special attention to:
1. The supplier may claim that the rising cost of raw materials is beyond their control, and that the purchase time of raw material inventory (for example, raw materials are purchased before the price rises) and source level are avoided.
2. The supplier may give a fixed energy consumption figure for the production unit, but conceal the profit growth brought about by changes in energy supply contracts, government subsidies or energy efficiency improvements. For example, production is scheduled during off-peak hours when electricity costs are low, but electricity prices are quoted during peak hours.
3. Use broad average data in terms of labor costs and indirect costs, and remain silent as to whether the product is produced by cheap labor or whether fixed indirect costs will increase as output increases.
4. Pricing units may also magnify actual material usage. For example, the paint required for one task is priced by can, but one can is enough to complete three tasks. Or the steel bar is priced by the meter, but a product requires only half a meter.
Your negotiating team may continue to dig deep into the cost and profit structure of the supplier, trying to find hidden sources of profit, but you will soon discover that this task is not only time-consuming and labor-intensive, and may never reach you The desired result, because the supplier will do everything to protect their profit margins. A better approach is to use reverse thinking to clearly recognize that negotiations with suppliers are not always a zero-sum game. You can use cost analysis to help suppliers expand their profit margins, and then share the increased profits to achieve a win-win situation.
For example, suppose you are the sales manager of a supplier in Guangdong, and an old customer calls to discuss business. In the conversation, they mentioned that they analyzed your cost structure and found that if they adjusted their product needs, Any specifications that will add value but increase your costs can help you save costs. In this way, as long as the customer's order or pickup method allows you to combine multiple production batches, the proposal can greatly expand your profit margin, and also reduce the sales price to customers to achieve win-win cooperation.
However, this profit sharing usually goes beyond the purview of the purchasing manager and is not the same as the training ("obtaining" rather than "giving" from the supplier) received by the purchasing staff. Here I provide you with several effective strategies to help you better reach cooperation with Chinese suppliers and take full advantage of the cost savings opportunities identified by cost analysis:
Elect a single decision maker
During the negotiation with the supplier, a single docker is selected, and other influencers cut off the contact with the supplier, so that the chief negotiator has complete control of the information flow. To do this, you cannot eliminate all private contacts of others with the supplier. Instead, you should direct the supplier to contact a single person selected. If the single docker can maximize its benefits, then The Chamber of Commerce voluntarily negotiates with it.
2. Choose your opponents wisely
If your business is not so important to your suppliers, try to avoid negotiating with each other's sales executives or executives because it doesn't matter to them. Instead, you should work with the sales representatives who need your business the most. This is not only important for them to achieve their performance goals, but also to increase your own bargaining chips. You can downgrade the negotiation to the personal level first, and then try to find out the concerns and benefits of the negotiating opponent, and secretly explore its sales commission index and bonus system.
3. Empower CPO to maintain key business relationships
Companies should rely more on the CPO and authorize him to build close relationships with CEOs, sales executives or account managers of key suppliers, depending on the size of the supplier's business. CPOs can seek a win-win solution in addition to unit price and purchase volume. For example, improving your own demand forecast to reduce expedited orders, optimizing product specifications to make full use of the supplier's equipment capacity, and integrating the purchasing power of commonly used upstream raw materials are all worth digging deeper.
4. Give before you take
You can help suppliers find ways to reduce production costs and supply chain costs, put forward provisions that help them improve production predictability and stability, introduce new customers to them, and publicly approve them. In short, the more you "give", the more valuable you are to their customers and the more difficult it is to be replaced. In the long run, this will increase your bargaining chips.
All in all, cost analysis can effectively help companies identify potential cost savings opportunities. But real savings will require a high degree of cooperation from suppliers. Suppliers don't care if you use the cost analysis method, they care whether they can save costs and increase profits. So, if you're aiming to shrink the margins of your suppliers, it's often hard to work. It may be advisable to adopt reverse thinking, to retreat to advance, to help suppliers save costs, and to share a share of them to achieve a win-win situation.