So, When Should I Cost Model My Products?

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Spend Matters welcomes this guest post from Nick Peksa, opportunities director at Mintec.

Rather than speak about raw material and commodity prices, I thought I would introduce you to some of the ways I encourage people to use Mintec data.

Fast-moving consumer goods are manufactured from multiple, potentially volatile, raw materials. With access to raw material prices and to your recipes/specification, you should be able to create a simple cost model.

Before you start modelling anything, you must relate it back to your company’s business objectives — are you looking for strategic or tactical advantage? Below are a few examples to help guide your approach.

Use cost models tactically (to challenge price):

  • To increase the level of buyer power in negotiations
  • To identify and challenge the supplier’s negotiation position
  • To create a different negotiation framework
  • To challenge price increases, profit or overhead aspirations

Use cost models strategically (to understand total cost of ownership):

  • To gain alignment on true costs
  • To create open book pricing
  • To align purchase price with supplier input costs
  • To challenge or agree supplier overhead expenses

Figure 2, below, outlines how you can use cost models tactically to leverage private label products in the negotiation process.

Leveraging Private Label Products: Cost Modeling in Tactical Negotiations

Using cost models in the approach described above lends itself to analysis of individual stock keeping units (SKUs). But how do you use cost models to your advantage if you are purchasing a number of different SKUs from the same supplier?

Simply cost model the entire category!

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