![]() ![]() These actions are targeted to happen in a year, at which point the gap between does- and should-cost is fully recovered. ![]() Achieving that target will require the supplier to shift the part's production to a different, more-efficient line, and conduct a lean process-improvement event to generate further efficiency ideas. In this example, the supplier and customer agree that another $18 of savings is possible with only minimal changes. Exhibit 2 shows the diagnosis of the cost gap for a gear. Let's look at how this approach might work on an actual part. The Cleansheet product cost management process in action It will also have a better idea of which of those root causes are addressable, helping to focus future efforts on the largest remaining savings opportunities. What matters more over the long run is that that the purchasing team develops a deeper understanding of the size and the causes of the remaining cost gap. Yet it remains likely that the two will never meet. Steps such as these gradually close the gap between quoted and could-cost. Examples might include the supplier installing new production equipment, or the customer's development of alternative sources of supply. We assume that by this time, that parties are able to take cost-reduction actions that weren't feasible when the initial negotiation took place. This process is the reason that Exhibit 1 shows the light-blue bar starting to shrink after one year. So, for example, after the review at the end of year one, the supplier and OEM should agree on a new does-cost for year two, with contract revisions spelling out the specific actions by the supplier and the customer in order to further analyze the gap and find additional cost-reduction opportunities. Instead, the team should incorporate a review process into the contract's terms, setting up a defined cadence for assessing each of the segments that comprise the total gap. But the reductions won't happen by themselves. The horizontal axis shows the progress that's possible over time. Finally, the black segment (quoted to does-cost) is what the team should be able to recover immediately in negotiation. The grey does- to should-cost segment comprises smaller changes that can be done in the medium term. The light-blue segment, representing the should- to could-cost gap, shows limitations that require substantial longer-term action to correct, often involving capital investment or new-supplier development. Before negotiation, in the column at left, the calculated could-cost (the bright-blue segment) shows the minimum cost that can be achieved without major redesign or feature changes. The vertical axis in Exhibit 1 shows the segments of a part's cost, calculated using Cleansheet analysis. In this four-part series, cost-management expert Eric Arno Hiller looks at the thorny issue of "should-cost" versus quoted price-and how organizations that better understand their purchases' true costs only capture immediate savings in supplier negotiations, but also drive long-term cost reductions. ![]()
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