Key Cost Drivers in Procurement

During the negotiating part, one must understand on how the cost plays a role for a product or service. If you can understand what is driving the cost will help you in improving the negotiation procedure. There are 2 main factors in procurement that drives the cost.

1. Product Cost Drivers –If the main focus is on a physical product, then there are a few aspects to consider what will drive the cost of the product.

  1. Used Materials –This is about the type and quantities of the material. The cost can come down however, if the priority is preferred for the quality, then the cost will always be on the higher side.
  2. Product Components – The quantity of the components along with the type of material, design and packaging. You need to check whether the cost can be reduced just by changing the material or switching over to another supplier.
  3. Labor Cost during Production –The cost of the workforce will be different when compared to efficiency rate and manufacturing methods.

2. Service Cost Drivers –Now the cost for the service is a little different and complicated especially if the cost is only for the labor. In order to understand the service cost, you will have to understand the supplier’s process.

  1. Map the Supplier Process –In order to understand the supplier process, you will have to ask the supplier of how the process of supplying undergoes.
  2. Allocating Cost for Every Activity –In order to understand how the cost is allocated to every activity, you must get information from job boards along with indicators for the labor prices.

Contract and procurement courses is a must, if you wish to become a procurement professional.