cost model. Primarily interviews were conducted with managers while emails were used to communicate with their respective purchasing staffs. The managers’ thoughts on the should-cost training course were generally positive. All of them believed that their staff needed additional training in regards to the production processes and methods used in the manufacture of the components. In addition it was noted by all that their employees needed further development in their negotiation skills and that the training and the model gave them the tools to negotiate with their suppliers with more confidence since their arguments were based on facts and not simply a demand for a price reduction. In fact one manager noted that simply the belief, on the part of the supplier, that a detailed SCA conducted was sufficient to negotiate a price reduction with a supplier. Manager C the production and supply chain manager for a divisional unit elaborated:
“My staff and I are extremely busy and lacked time to do a proper should-cost
analysis….instead we solicited three detailed bids from our suppliers and took the lowest cost in each category and presented this price to the suppliers as the cost breakdown from our should-cost analysis. We asked them to explain their price and if the explanation was not sufficient we would start to look for a new supplier…the end result was that the supplier accepted the should-cost based on benchmarks as the new contract price” (Manager C, personal interview, February, 24 2014).
47 Another manager commented that the training not only gave his staff greater insight into the production process but it presented to him a fresh manner in which to approach price
negotiations with a supplier. Here the supervisor was considering switching from a European based supplier to one based in China. The part was comprised of 10 smaller parts and a SCA was performed on all 10 sub-components. The analysis revealed that the Europeans suppliers cost and the should-cost were almost identical and further price reductions could not be achieved.
However, in regards to the Chinese supplier, 8 of the 10 sub-component prices matched the prices derived from the model while 2 parts differed greatly in price. During the negotiation process the 8 correctly priced sub-components were accepted while the vendor was asked to explain the cost difference in the remaining units.
The end result was that a price reduction was negotiated with the supplier. The manager later commented that “that typically we would have attempted to negotiate a reduction in price based on the unit as whole …now by breaking the price down in greater detail based on the should-cost we can concentrate our efforts on the sub-components based on facts” (Manger I, personal interview, February 17 2014), (Manager E, personal interview, February 15 2014). For these reasons the respondent added that he intends to introduce the requirement that his staff must present at least one should-cost example at the unit´s monthly meetings.
On the negative side and common to all to interviewees was the belief that they and their staffs did not have the time to conduct the should-cost reviews. All felt that while the method was potentially valuable in terms of education and cost reduction it was not necessary to use it on all the parts purchased and that do so would be incredibly time consuming. Some respondents added that the model itself was time consuming to use and that staff had also made similar comments. However, one supervisor later admitted that although the model, initially, seems complex that after using it several times it became easier to use and time devoted to using it decreased rapidly. In addition, all felt that the model was lacking in many regards and provided suggestions as to remedy the flaws in model. A common complaint was that not all the processes, involved in the production of some of their parts, were found in the model. Furthermore it was noted that certain elements in the calculation process such as currency rates, labor rates, and raw material prices would need to be updated frequently and they did not feel that they or their staff had the time to update the model. Another manager commented that “ that some of the assumptions seemed to
48 simplistic…for example SG&A varies greatly between producers …aluminum manufacturers have higher SG&A levels than bulk steel producers and it varies between regions producers in China have lower levels than European and American producers” (Manager C, personal interview, February, 24 2014).
Responses via email from the individual purchasers were similar to those of their supervisors. Almost all indicated that using the model not only helped them understand the production
process better but also gave them a better understanding as to how this method could be used in a negotiation situation. Lack of time was again the greatest issue with tool. Nearly all that
responded commented that they were not convinced that the tool was necessary for all purchasing situations. Issues with the model were also similar. Typical responses were “the model does not have the production process I need to do the analysis”, “the model does not account for minimum order quantities”, “and an estimate of 15-20 percent for gross margins seems too low for my supplier”. Most emails were answered promptly however; some received no reply while others suggested another staff member who was more qualified to answer the questions regarding the model.
A final common element that emerged during this portion of the research was the subject of sourcing in China. Many respondents expressed that they felt uncertain about what was the true price of the products that they were sourcing form China. Other expressed doubt regarding the abilities of their staff in China. A few even went so far as to suggest that at the best some staff were merely incompetent and at worst possibly dishonest. On the whole almost all felt that they were “leaving money on the table” as one senior manager commented. As this theme occurred more often the author discussed the subject with his supervisor at main office to gain further insight into the issues regarding sourcing in China. The supervisor confirmed that these issues were a concern to management.