There’s More to Cost than Cost Analysis

While it was exceptionally well written, I was a little disappointed with this article on uncovering hidden costs over on

The article, which made the acute observation that there is no fixed arithmetic formula between the cost of producing the goods and services sold to us and the price charged for them: sellers charge what the market will bear and that to break down a suppliers’ figures, we need to know the proportion of each area of cost that the goods or services are likely to attract, did a great job of describing the different types of analysis one could bring to bear on costs, but a poor job of actually indicating how to reduce the “hidden” costs once found. The advice boiled down to “collaboration is key” which, while correct, doesn’t help you answer the important questions that will arise during the collaboration.

While questions like:

  • Can we give our suppliers access to our contracts to reduce cost?
  • Does our supplier have contracts we could access to cut cost?

are theoretically easy to answer (but not always easy to answer in practice due to the poor state of contract management in many organizations)

questions like:

  • What is the thing made of and what is happening in the market for that material?
  • Where are the cost drivers in these goods or services?
  • How can you buy that material most effectively?

are a little harder to answer.

You need to understand how to perform market intelligence, you need to understand how the goods are assembled (using virtual modelling environments like those offered by Apriori) or the services delivered, and you need to understand what innovative new technologies or processes could be applied to reduce those costs. And that’s more than you’re going to get from a purchase-price, open-book, or total absorption cost analysis. You have to start with a true Total Cost of Ownership and then dive in on each cost.

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