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Professional Development Learning Event – 30th April 2008 Controlling Those Costs ! Presenter Graham Bailey Cost Control Manager Tesla Motors Inc.

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Presentation on theme: "Professional Development Learning Event – 30th April 2008 Controlling Those Costs ! Presenter Graham Bailey Cost Control Manager Tesla Motors Inc."— Presentation transcript:

1 Professional Development Learning Event – 30th April 2008 Controlling Those Costs ! Presenter Graham Bailey Cost Control Manager Tesla Motors Inc. http://www.teslamotors.com/ PLEASE NOTE the web links contained within this presentation can only be opened whilst you are in ‘SLIDE SHOW’ mode

2 Professional Development Learning Event – 30th April 2008 PRESENTATION OUTLINE ● Why challenge? ● What’s to be challenged? ● Methodology ● The benefits 1

3 Professional Development Learning Event – 30th April 2008 WHY CHALLENGE ? The majority of companies send out RFQ’s to a number of potential suppliers when looking to place business However, once responses are received, and provided all other selection criteria are more or less equal, how many customers spend time determining if the company offering the lowest price: 1. has room for further improvement (and which cost elements should be focused on during negotiation) or, more importantly: 2. is attempting to ‘buy’ business (by offering un-realistic material prices or un-sustainable recovery rates) 2

4 Professional Development Learning Event – 30th April 2008 WHY CHALLENGE ? I’m sure you’ve all seen many examples of suppliers who have won business by meeting or beating a cost target or their competitors prices, when it’s later been demonstrated that by spending a little more time validating the costs provided within their, sometimes very detailed, supporting Cost Models, that there would have been significant scope for further price reduction prior to order placement 3 The risks are especially high with new suppliers It often doesn’t matter what the contract T&C’s say When a supplier comes back to you, often some time after receiving a PO ( usually just after you’ve introduced their product on line ) and presents you with an unjustifiable price increase, you’re often in no position to argue Resourcing will only mean additional costs so, more often than not, you end up paying the higher price simply to maintain production

5 Professional Development Learning Event – 30th April 2008 WHAT’S TO BE CHALLENGED ? This session will look at some of the ways that you can confirm, validate or challenge the quotes and cost models submitted by your suppliers for goods and services 5 Whilst the Buyer should always insist on a breakdown from the supplier to support their quote, more often than not this either does not happen or it’s not closely analysed Don’t forget to interrogate the NRC’s (tools, R&D or capital equip./ facilities) Don’t be put off by the statement, “ We don’t give breakdowns ! ”. If you push enough, even the largest suppliers will start to open up, providing the basics from which you can start to construct a cost model for their product A supplier who can’t or won’t provide a breakdown in support of their quote has to be treated with some suspicion

6 Professional Development Learning Event – 30th April 2008 WHAT’S TO BE CHALLENGED ? 6 However, the supplier needs to trust that any information they divulge to you will be treated in the utmost confidence This can be supported by not showing them information from their competitors or even allowing sensitive files to be lying around on your desk. For suppliers to your industry, it’s a very small world and word does and will get back to them We may not like or agree with the breakdown a supplier provides. If, for example, a supplier shows they’ve added a 30% margin to their costs, don’t immediately jump down their throats (it may well be that case that this % mark-up is made up of overhead elements in a manner different to others, or maybe this is the norm for their industry peer group and their competitors will be recovering similar margins, but have presented these elsewhere within their cost models) Focus on the make-up of claimed manufacturing costs. On occasions, it may even be the case that you can agree to ‘ring-fence’ a reasonable profit value, in return for reducing the base costs Analysis of even the most basic of cost models can highlight areas of doubt concerning supplier assumptions / pricing integrity or simply opportunities to eliminate waste and non-added value during negotiations

7 Professional Development Learning Event – 30th April 2008 METHODOLOGY 9 1.Market Information 2.Market Intelligence 3.Material Costs 4.Process Costs Earnings Overheads 5.Some Examples

8 Professional Development Learning Event – 30th April 2008 In order to generate ‘best value’ cost estimates or to establish credibility of a quoted price, there is value in understanding what the global market has to offer Do you know which areas of the world or indeed which regions of the UK (subject to governing sourcing strategy), can offer the technical capability, quality and logistics requirements necessary for your particular products or services? MARKET INFORMATION 10

9 Professional Development Learning Event – 30th April 2008 MARKET INFORMATION Such information may already exist within your company. Do you know if it does? If so, is the information up-to-date and relevant ? If not, why not gather your own market information ? Do you set cost targets based on UK manufacture, Low Cost Country manufacture or manufacture somewhere else? How flexible is your system? 11

10 Professional Development Learning Event – 30th April 2008 MARKET INFORMATION Once you’ve identified regions of relevant expertise, evaluating the economic variances for these regions is a relatively simple task Such information can add significant value to your Cost Estimating / Cost Engineering services, allowing you to generate tighter, more competitive cost targets and provide advice to the purchasing team as to which economic regions meet the criteria for achieving them Go on, provide your purchasing staff with a challenge ! 12

11 Professional Development Learning Event – 30th April 2008 MARKET INTELLIGENCE – some useful sources of information http://www.corporateinformation.com/Report-Information.aspx http://www.marketing-intelligence.co.uk/resources/index.htm https://www.cia.gov/library/publications/the-world-factbook/ https://www.uktradeinvest.gov.uk/ukti/appmanager/ukti/countries http://www.mas.dti.gov.uk/ http://www.armedforces.co.uk/index.php http://www.jigsaw.com/ http://cost.jsc.nasa.gov/economic.html http://country.alibaba.com/profiles/index.htm CORPORATE INFO MARKETING INTELLIGENCE CIA UK TRADE INVEST DTi ARMED FORCES JIGSAW NASA Alibaba 13

12 Professional Development Learning Event – 30th April 2008 MARKET INTELLIGENCE – for example: Trade directories: QIMTEK ► http://www.qimtek.co.uk/default.aspxhttp://www.qimtek.co.uk/default.aspx Automotive On-line ► http://www.automotive-online.com/suppliers-directory.htmlhttp://www.automotive-online.com/suppliers-directory.html Economic / Statistical Data (including): Financial Data (including): Graydon► http://www.graydon.co.uk/UKContent/UKPublicHTMLPages/About.html http://www.graydon.co.uk/UKContent/UKPublicHTMLPages/About.html Dun and Bradstreet ► http://www.dnb.co.uk/About/DNB_Database.asp http://www.dnb.co.uk/About/DNB_Database.asp Experian► http://www.experian.com/corporate/index.html http://www.experian.com/corporate/index.html Bureau van Dyke► http://www.bvdep.com/en/Company%20data%20-%20international.html http://www.bvdep.com/en/Company%20data%20-%20international.html Equifax► https://www.econsumer.equifax.co.uk/consumer/uk/sitepage.ehtml?forward=gb_cs_about https://www.econsumer.equifax.co.uk/consumer/uk/sitepage.ehtml?forward=gb_cs_about Moodys ► http://www.moodys.com/moodys/cust/AboutMoodys/AboutMoodys.aspx?topic=intro http://www.moodys.com/moodys/cust/AboutMoodys/AboutMoodys.aspx?topic=intro Hoovers► http://www.hoovers.com/global/hoov/companies/index.xhtml?pageid=16184 http://www.hoovers.com/global/hoov/companies/index.xhtml?pageid=16184 Hemscott► http://www.hoovers.com/global/corp/index.xhtml http://www.hoovers.com/global/corp/index.xhtml Companies House► http://www.companieshouse.gov.uk/ http://www.companieshouse.gov.uk/ FT.com► http://markets.ft.com/ft/markets/researchArchive.asp http://markets.ft.com/ft/markets/researchArchive.asp RGE Monitor ► http://www.rgemonitor.com/http://www.rgemonitor.com/ D A S A ► http://www.dasa.mod.uk/ http://www.dasa.mod.uk/ NationMaster► http://www.nationmaster.com/index.php http://www.nationmaster.com/index.php The World Bank► http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/0,,menuPK:476823~pagePK:64165236~piPK:64165141~theSitePK:469372,00.html http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/0,,menuPK:476823~pagePK:64165236~piPK:64165141~theSitePK:469372,00.html OFNS► http://www.ons.gov.uk/about/our-statistics/index.html http://www.ons.gov.uk/about/our-statistics/index.html OECD ► http://www.oecd.org/document/42/0,3343,en_2649_201185_38616362_1_1_1_1,00.html http://www.oecd.org/document/42/0,3343,en_2649_201185_38616362_1_1_1_1,00.html 15

13 Professional Development Learning Event – 30th April 2008 Sources of information – Metals (include) : MATERIAL COSTS 16 LME http://www.lme.co.uk/http://www.lme.co.uk/ Base Metals http://www.basemetals.com/http://www.basemetals.com/ UK Steel http://www.uksteel.org.uk/Download/uk%20steel%20stats%20guide%202006.pdf http://www.uksteel.org.uk/Download/uk%20steel%20stats%20guide%202006.pdf About.com http://metals.about.com/od/unitedkingdom/United_Kingdom_Metal_Suppliers.htm http://metals.about.com/od/unitedkingdom/United_Kingdom_Metal_Suppliers.htm Metals Forum http://www.metalsforum.org/print.htmhttp://www.metalsforum.org/print.htm Stockholders (for example): http://www.sesmetals.co.uk/http://www.sesmetals.co.uk/ http://www.apollometals.com/ Recycling Int’l http://www.recyclinginternational.com/markets/nickel_stainless.aspx http://www.recyclinginternational.com/markets/nickel_stainless.aspx Directories (for example): http://www.1800miti.com/links/wholesale/metal/service-centers.html http://www.1800miti.com/links/wholesale/metal/service-centers.html http://www.powersourcing.com/sf/cobalt.htm

14 Professional Development Learning Event – 30th April 2008 Sources of information – Plastics / Rubber (include) : MATERIAL COSTS 17 IDES http://www.ides.com/resinprice/resinpricingreport.asphttp://www.ides.com/resinprice/resinpricingreport.asp LME (Plastics)http://www.lme.co.uk/plastics_links.asphttp://www.lme.co.uk/plastics_links.asp Polymer Age http://www.polymer-age.co.uk/prices.htm#polyethylenehttp://www.polymer-age.co.uk/prices.htm#polyethylene Plastics Technology http://www.ptonline.com/dp/pt/resins.cfmhttp://www.ptonline.com/dp/pt/resins.cfm GlobalSpec http://materials.globalspec.com/Industrial-Directory/resin_price http://materials.globalspec.com/Industrial-Directory/resin_price COMPOSITES WORLD http://www.compositesworld.com/sb http://www.compositesworld.com/sb Stockholders (for example) : http://www.chesterfield-plastics.co.uk/catalogue.phphttp://www.chesterfield-plastics.co.uk/catalogue.php http://www.resinexgroup.com

15 Professional Development Learning Event – 30th April 2008 National Statistics http://www.statistics.gov.uk/cci/nugget.asp?id=285http://www.statistics.gov.uk/cci/nugget.asp?id=285 NBER http://www.nber.org/oww/http://www.nber.org/oww/ OECD http://www.oecd.org/document/0/0,3343,en_2649_34637_34053248_1_1_1_1,00.html http://www.oecd.org/document/0/0,3343,en_2649_34637_34053248_1_1_1_1,00.html LABORSTA http://laborsta.ilo.org/ http://laborsta.ilo.org/ ASHE http://www.statistics.gov.uk/StatBase/Product.asp?vlnk=14203 http://www.statistics.gov.uk/StatBase/Product.asp?vlnk=14203 PROCESS COSTS - EARNINGS Sources of information 19 DON’T FORGET: Newspapers Employment agencies Business Link: Reports (eg. KeyNote) BBC Job centre Plus: ttp://www.jobcentreplus.gov.uk/Internet/setLocale.do?country=GB&language=en&page=/initialise.do ttp://www.jobcentreplus.gov.uk/Internet/setLocale.do?country=GB&language=en&page=/initialise.do Job Title PRINTED CIRCUIT BOARD ASSEMBLY OPERATOR Location WIGSTON, LEICESTERSHIRE Hours 40 PER WEEK MONDAY-FRIDAY 7.25AM-4PM Wage £5.52 PER HOUR DEPENDING ON EXPERIENCE + BONUS Work Pattern DAYS Employer XXXXXX Pension PENSION AVAILABLE Type PERMANENT ONLY Description Previous experience is essential. Duties are to place components onto printed circuit boards, some hand soldering experience required, training will be given. We are open from 7:25am - 7pm, part time hours available to suit applicant.

16 Professional Development Learning Event – 30th April 2008 Median gross weekly private sector earnings in Eastern Europe (February 2006) Country Weekly pay in euros † Index: Germany = 100 Bulgaria375 Croatia18225 Czech Republic14520 Estonia10414 Hungary13519 Latvia689 Lithuania8912 Poland14720 Romania669 Slovakia11316 Slovenia24734 Source: FedEE http://www.fedee.com/PayChartEg.shtml Median gross weekly private sector earnings: alternative production centre's (February 2006) CountryWeekly pay in euros † Index: Germany = 100 India (directly employed regular workers) 223 China (urban workers)345 Russian Federation568 Brazil (Rio de Janeiro)8512 South Korea47566 Source: National statistical offices and economic agencies Notes: † Pre-tax pay expressed in euros, based on a five-day week of 40 hours. All figures rounded to nearest euro. * Eastern Europe has been taken to include eight of the states that joined the European Union on May 1st 2004 plus the EU accession states, Romania and Bulgaria, and the EU candidate country, Croatia. ** Pay in Europe is published annually and contains benchmark pay tables with hourly rates for 32 standard job positions in 48 European countries and territories.. 20 PROCESS COSTS - EARNINGS

17 Professional Development Learning Event – 30th April 2008 Energy & Utilities (include) : Eurostat http://www.eustatistics.gov.uk/themes/environment/datalinks/index.asp http://www.eustatistics.gov.uk/themes/environment/datalinks/index.asp http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&language=en&pcode=er02c2&plugin=1&tableSelection=1&footnotes=yes&labeling=labels BERR http://www.berr.gov.uk/energy/statistics/publications/prices/tables/page18125.htmlhttp://www.berr.gov.uk/energy/statistics/publications/prices/tables/page18125.html GFD https://www.globalfinancialdata.com/ https://www.globalfinancialdata.com/ OFGEM http://www.ofgem.gov.uk/CustomPages/Pages/Results.aspx?k=priceshttp://www.ofgem.gov.uk/CustomPages/Pages/Results.aspx?k=prices Energy Information Administration http://www.eia.doe.gov / http://www.eia.doe.gov / PROCESS COSTS – Other Overheads Sources of information 21

18 Professional Development Learning Event – 30th April 2008 EUROPEAN ELECTRICITY PRICES 2006 Source: Eurostat Industrial Users (Latest Data) Deregulation of electricity supplies in the UK has resulted in lower prices and improved service for businesses. Electricity prices in the UK are among the most competitive in Europe. Euro per kWh 22 PROCESS COSTS – Other Overheads

19 Professional Development Learning Event – 30th April 2008 Source: Ofcom 2004 (Latest Data) NB. The EU country figures are based on a three-minute business call to New York, and the North American figures are based on a three-minute business call to London. US cents/3 minutes 24 COST OF INTERNATIONAL TELEPHONE CALLS PROCESS COSTS – Other Overheads

20 Professional Development Learning Event – 30th April 2008 INTERNATIONAL COMPARISON OF BUSINESS COSTS 2006 Source: KPMG Competitive Alternatives Report 2006 The eight month research programme covered more than 2,000 individual business scenarios in 121 cities throughout Australia, Canada, France, Germany, Italy, Japan, The Netherlands, the UK and the USA. The basis for comparison is the after-tax cost of start-up and operations for 12 specific types of business, over a ten-year time horizon. Advantage Disadvantage % Cost Advantage/Disadvantage Relative to the United States of America 4.4 4.3 Japan UK Netherlands Germany 25 Other Info ?

21 Professional Development Learning Event – 30th April 2008 Other Info – Fuel ? April 2008 Averages http://www.theaa.com/motoring_advice/fuel/ Source: The AA http://www.theaa.com/allaboutcars/a dvice/advice_rcosts_diesel_table.jsp See also: 27

22 Professional Development Learning Event – 30th April 2008 Better Prices ! Message to suppliers that you expect quotes to have integrity from day one Clearly highlights areas of cost variance at the supplier selection stage Provides objective data when analysing future QAF’s, negotiating new prices or challenging Price Increase Claims Builds confidence in your own estimates Supports development of a cost history database and cost trackers Sorts ‘those who do’ from ‘those who don’t’ when it comes to the ‘OPEN BOOK’ issue THE BENEFITS OF CHALLENGING SUPPLIER COSTS 29

23 Professional Development Learning Event – 30th April 2008 Be clear and direct with your suppliers as to what you want, why you want it and what the benefits will be for all Don’t be afraid to ask and to keep asking Maintain good records Maintain confidentiality at all times Request a breakdown in the suppliers own cost model format, before you present them with your ‘Standard’ QAF form. You’ll often get far more information than you realise Provide feedback to those suppliers who are unsuccessful, yet provided sufficient cost breakdown, so as they may also gain from sharing information with you. This need only be a generic benchmark positioning to their ‘un-named’ competitors LESSONS LEARNT 30


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