We all know that there is never a fixed arithmetic formula between the cost of producing, and transporting, the goods and services sold to us and the prices charged for them … sellers charge what they can get, and if we don’t do a good job of figuring out the true cost, which can be hard to do, chances are they are building in a hefty margin.
But the margin is only one hidden cost. There’s other hidden costs baked into the COGS by the supplier, some of which even they may not be aware of. But if you want to bring costs down, you have to find them. So where do you look?
Start by investigating each of the main production costs:
- raw materials — what are your T1 suppliers paying to the T2 suppliers
- energy — production always requires energy … but there isn’t always one rate
- labour — if there is temp labour / contract labour involved, is it market rate
- overhead costs — facilities, financing, etc. — these could be fixed, or they could not … for example, if the supplier has to borrow to fund operations until they get paid, what interest rate are they paying … and how does it compare to your rate? might be cheaper for you to pay them early in exchange for a discount that exceeds your cost of capital
That’s how you them. So what do you do next?
Come up with a plan to address any costs that look high:
- if material costs are too high, can you buy on behalf of suppliers at a better rate? can you find alternative materials?
- if the market is deregulated, can you help the supplier identify a better option? are energy requirements so large a supplier would do better off with its own plant? should you invest in it if there are multiple suppliers in the region paying absurdly high energy costs?
- should you share labour negotiation and management best practices to help your supplier keep labour costs down
- if suppliers have a high cost of capital, help them out … reduce their cost, reduce yours; maybe you can identify facility upgrades that would save them money
It’s not as easy as it sounds, but it’s not that hard either. Just takes data gathering and analysis.