PRICE Cost Analytics

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Roland Eaton
5 years ago
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the status quo and think differently by making our products uncommonly

1 PRICE Cost Analytics for Supplier Assessment PRICE Cost Analytics Predictive Power for Supplier Assessment Everything we do is to challenge the status quo and think differently by making our products uncommonly powerful, flexible and easy to use, ensuring the success of innovative thinkers. Page

Executive Summary PRICE Cost Analytics for Supplier Assessment PRICE Supplier Assessment is a quantitative methodology used to evaluate potential suppliers of Commercial-Off-The-Shelf (COTS) and

Supplier Assessment is also applied to current suppliers to benchmark/monitor performance to evaluate if a provided quotation is a reasonable expectation prior to commencing negotiations.

2 Executive Summary PRICE Cost Analytics for Supplier Assessment PRICE Supplier Assessment is a quantitative methodology used to evaluate potential suppliers of Commercial-Off-The-Shelf (COTS) and developmental end items. The result of Supplier Assessment is to establish a portfolio of preferred suppliers for use mainly during the proposal process and post-award. Supplier Assessment is also applied to current suppliers to benchmark/monitor performance to evaluate if a provided quotation is a reasonable expectation prior to commencing negotiations. Once established, a negotiated bottom-line based on evidence from a data-driven process becomes an effective tool when negotiating with suppliers. Ultimately, the buyer has a much stronger position for negotiating lower pricing based upon data-driven findings from past procurements of like items using the PRICE Supplier Assessment methodology. This paper provides the rationale and methodology for a jointly executed pilot implementation of data-driven supplier assessment and integration estimating using PRICE Cost Analytics. Validating Quotations from Suppliers One of the most effective applications of PRICE Cost Analytics is derived from the ability to produce normalized cost density or Manufacturing Complexity data. This significantly broadens the number of projects that can be used for comparisons when proposals are received from suppliers. The fact that Manufacturing Complexity values are a consistent, empirical representation of the technology used in a product (along with the productivity of the manufacturing organization) is important. If the technology is held constant, then the only difference between two suppliers providing the same technology is the productivity of those organizations. The supplier with the lower Manufacturing Complexity will be the preferred supplier (see Figure 1). One of the applications that will provide the quickest and most obvious return on investment is proposal validation. This involves the analysis of proposals relative to the historical complexities that have been paid for in the past an application of predictive cost analytics is called Supplier P a g e 2

Assessment, which helps procurement staff to make sure they will pay the right price for what they buy. One of the main issues in proposal analysis is the comparison of non-consistent data.

3 Assessment, which helps procurement staff to make sure they will pay the right price for what they buy. One of the main issues in proposal analysis is the comparison of non-consistent data. The solution is normalization, which means the extraction of what comprises the differences. In this example, the cost on the proposal is first normalized by converting into a Manufacturing Complexity and then compared with the reference range. This is a process that needs to be implemented for all the proposals. Proposals that fall inside the range show costs that are valid. However, the Manufacturing Complexity can also fall outside the range; this can be due to three reasons linked to the consistency with the requirements and the design (see Figure 2). The first reason why a high Manufacturing Complexity may occur is because of a high level of design complexity resulting from the specification. The cost is justified and the element must be put in another family. The second reason is high complexity due to over-design for which the solution is a re-design. The third reason is a spurious level of complexity, with no justifiable reason, and in this case the cost can be negotiated. Supplier Assessment PRICE Supplier Assessment is a unique methodology to assess submissions for suppliers to rapidly determine if they are reasonable and provide best value for the money. This methodology offers great benefits in the procurement of equipment both subcontracted and Off the Shelf (OTS) items. The model enables: the establishing of cost targets for Requests for Proposals (RFP) the evaluating of bids the selecting of the most appropriate suppliers There are many factors that influence the cost to produce an item. To make meaningful cost comparisons between different items and suppliers will often require adjusting raw costs in a normalization process. A simple example of this is production batch quantity. A production run of 3,000 is likely to result in a significantly lower Unit Production Cost (UPC) than a run of 300, but a comparison of UPC fails to show whether the costs are reasonable. Alternatively, different sizes of the same technology prevent direct comparisons. Other elements such as exchange rate, production rate or technology improvement makes the analysis and comparison difficult. The Supplier Assessment solution is based on the use of the normalized representation of the cost, the complexity factor. P a g e 3

The evaluation process starts with an analysis of the current situation, via the calculation of the Manufacturing Complexity of the purchased items; this is called product calibration.

4 The evaluation process starts with an analysis of the current situation, via the calculation of the Manufacturing Complexity of the purchased items; this is called product calibration. The costs are translated into normalized values, using complexity. Many PRICE Cost Analytics users have made significant cost savings in their procurement activity using this method. The qualitative benefits of the process are: quick return on investment proposal validation in minutes, detailed evaluation if necessary different negotiation material based on technology Cost Drivers normalization enables bigger data samples across industry better estimating accuracy for purchased items at the concept phase suppliers know that you can control them they need more control themselves Preferred Supplier How are preferred suppliers identified? Now it is obvious. The supplier who has the track record for the lowest complexity is the preferred supplier. This does not necessarily require the elimination of all the other suppliers from the organization s records: once the resources of the preferred supplier have been exhausted, the services of the next most productive supplier will be needed. Many competitive proposals open with: As the world s leading provider of. This type of unsubstantiated claim is not nearly as convincing as a detailed analysis of an organization s competitors which identifies the organization itself as the most productive and thus identifies it as a candidate for the role of preferred supplier. PRICE Cost Analytics and the Supply Chain PRICE Cost Analytics can be used at any level in the supply chain; whether by government procurement agencies spending millions of dollars or by a specialist subcontractor providing equipment. The common approach is shown in Figure 3, where cash flows down the supply chain to acquire goods and services are integrated as they travel up the supply chain, hopefully with each layer adding some value. The information which travels both up and down the supply chain can sometimes be misleading, particularly when it comes to costs. PRICE Cost Analytics and the use of predictive cost modelling, adopted by a supply chain will provide a common language which allows information to be shared. Tier 1 integrators have taken the initiative to stipulate a predictive cost model which is now used for all major proposals. It enables them to focus on the inputs and outputs of the cost model, rather than the difference in P a g e 4

5 the cost modelling between suppliers. It also ensures that the predictive cost model used to present the proposals is identical. This ensures that the supply chain has a common understanding of all the Work Breakdown Structure activities and the Organizational Breakdown Structure resources, but leaves the suppliers total freedom to propose any configurations of product or system using the Product Breakdown Structure. With this approach everyone, suppliers and customers, involved in the project is aware of the production cost, for example, and its definition. There are no questions such as: is the tooling cost included or not? Or has the development cost been amortized over the production program or not? The use of predictive cost models in the supply chain avoids commercial taboos. As soon as costs are discussed, the barriers come up between competitors. This makes the open discussion of different solutions to a customer s requirement very difficult. Using predictive cost analytics, the actual costs can be substituted for predictive model cost drivers which describe the technology of the hardware, complexity of the software and the magnitude of the hardware and software. This is an area which engineers feel more able to discuss with other elements of the supply chain without feeling commercially exposed. Finally, the use of predictive cost analytics in the procurement function helps to refine the information available for the estimation of future bids and proposals. This application of predictive cost models in procurement closes the loop, as seen in Figure 4, and provides for more successful and accurate estimates. Procurement authorities have the responsibility for auditing suppliers quotations. If this is done using PRICE Cost Analytics, this can lead to efficiencies in an organization regarding future estimates. As cost analytic knowledge regarding supplier s technology is stored in the systems knowledge management database, it can be used to represent more accurate cost modelling of future concepts. There is also the added benefit that when predictive cost modelling is applied to the new bids and proposals, a proportion of these will be successful and lead to the placement of new contracts. Without doubt these new contracts will become projects which will need components, equipment and systems to be acquired or purchased. If these bids and proposals have utilized the knowledge from previously investigated programs within the procurement function, then these new projects will hopefully already have been based upon the preferred supplier of the procurement function, in due course making their task easier. P a g e 5

6 In summary, if your suppliers are selected on an ad-hoc basis then you are less competitive. The application of cost analytics in the supplier assessment process can help: Selecting the preferred supplier can be conducted on a rational basis Bids can be evaluated quickly Realistic and achievable cost targets can be specified Bids can be compared on a consistent basis In complexity terms the difference between two suppliers providing the same technology is the productivity Cost analytics can be used at any level of the supply chain As a stipulated solution, PRICE Cost Analytics, can provide a common language between organizations and countries Detailed discussion around parametrics can avoid commercial taboos Usage in procurement or purchasing can improve accuracy of future bids About PRICE Systems, LLC. PRICE Systems, a world leader in predictive cost analytics solutions, enables our clients to significantly improve the speed and accuracy of cost analysis and estimation in support of many key processes. PRICE delivers cost estimating, cost analysis and knowledge capture tools, combined with expert consulting in predictive cost analytics and best practices, to help customers better predict and manage costs and schedules throughout a project s lifecycle, ensuring program affordability. PRICE s value to you is rooted in 40+ years of predictive cost analytic experience, a dedicated cost research team and comprehensive cost models with the most recent, relevant benchmark data. Established in 1975 with offices in the United States, Europe and Asia-Pacific, PRICE Systems serves more than 300 customers worldwide. More than 15,000 project professionals have been trained in the company s cost estimating and analysis methodologies. We have achieved and maintained this leadership position in the industry by growing a team of seasoned professionals with a track record of success and putting our focus on customer success and satisfaction. The people at PRICE include experienced cost estimators and cost analysts, model builders, project leaders, mathematicians, logisticians, hardware and software engineers, computer scientists, and consulting professionals all committed to your success. P a g e 6

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