Developing and Using Open Book Cost Models
for Metallic Commodities
Robert Maks, Vice President, Cost Engineering
Developing and Using Open Book Cost Models
for Metallic Commodities
Robert Maks, Vice President, Cost Engineering
Background
The financial crisis of 2008 lent credence to the adage that “only the strong survive.” The balance of
power between customer and supplier shifted to become more equal. The notion of annual price reductions baked into contracts was challenged. The concepts of early upfront business awards and increased
collaboration between supplier and customer started to become a reality.
Today, purchasing organizations at the OEMs are led largely by individuals with engineering/manufacturing backgrounds. OEMs expect their Tier I suppliers to have cost standards/cost models to guide their
business relationship and accelerate focus on continuous improvement.
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What is “Open Book Cost Modeling”?
Simply put, Open Book Cost Modeling is a
collaborative effort between a customer and a
things – most of which will eventually become
bad (for example, you will experience unexpected price increases or even have your
supplier to do the following:
supplier go out of business).
• Understand a supplier’s true cost structure to
ing? Let’s look at the simple example below,
determine price
• Enhance transparency between customer
So how does this relate to Open Book Cost-
assuming that price is represented by the
height of bars A & B:
and supplier
Assuming quality, delivery,
and payment terms are
equal, traditionally
Supplier A would be
selected.
• Determine/form long-term relationships
• Identify risks and opportunities
Open Book Costing’s main goal is to facilitate
cost-related discussions between customers
and suppliers around material, labor, burden,
SG&A and profit that are data/fact driven. Open
Book Models become the baseline for current
and future pricing-related discussions. Additionally, Open Book Modeling serves as a
valuable tool to help identify and eliminate
waste.
Using a traditional approach to sourcing, the
business in question would be awarded to
Supplier A. However, Open Book Modeling
would provide cost transparency into Supplier
B that would lead to a different decision.
Why Use Open Book Cost Modeling?
thinner margins
To a supplier, inaccurate costing is the equivalent of “death by a thousand cuts.” If you are
going to market with products that are not properly costed, you will tend to win business that
you have under-costed, and lose out on
business that you have over-costed. Over time
this will drive down profitability.
To a customer, the impact of dealing with a
supplier that has inappropriately priced the
goods you buy can mean a great number of
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The message here is that better visibility leads
to better cost management and better decision-making.
Open Book Modeling is the
fastest path to the most savings while maintaining, or even increasing, profitability.
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Is Open Book Cost Modeling for
Everyone?
Open Book Modeling for the commodities
one. To understand why Open Book is not
sure to choose your opportunities carefully.
below that has been populated with some
the right tool for the job; “don’t use a hammer
This doesn’t mean that you can’t engage in
Open Book Cost Modeling is not for every-
that fall into the other three quadrants - just be
for everyone let’s look at the bubble chart
The best analogy that comes to mind is to use
sample data:
to install a screw.”
Getting Started with Open Book
Cost Modeling?
As just discussed, choosing the right com-
modity for Open Book Cost Modeling is
critical. Strong spend and the ability to realign
the supply base are paramount in attracting
suppliers to engage. Buyers need to engage
suppliers who have the right capabilities and
who meet the proper quality, delivery and
financial criteria. Tying in strategic/preferred
Looking at the chart, the horizontal axis
represents the number of suppliers that exist
in the market (many suppliers to the left and
few suppliers to the right). The vertical axis
represents the impact on a buyer’s business
(low impact toward the bottom and high
supplier status and offering the opportunity to
be involved in early sourcing activity are excellent enticements to grab the attention of
suppliers.
Some additional elements that are key to
consider as you get started with Open Book:
impact toward the top).
• This is a cooperative process – both sides need to
quadrant (many suppliers exist with high
• Models cannot go below the supplier’s costs
The commodities listed in the upper left
impact on the buyer’s business) would be
considered the sweet spot for Open Book.
The buyer has many suppliers from which to
purchase, while having high impact on the
business. Stated differently, the buyer has
the ability to change suppliers fairly easily
when the appropriate business rationale
exists (i.e., savings, improved quality, etc.).
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have input to the process
• Supplier must have final approval of the cost model
• The model must be based on actual costs
Summary
Open Book Cost Modeling is the fastest path
to the greatest sustainable savings. Both
buyer and seller will benefit if done in a
collaborative manner. Choosing the right
commodities,
identifying
the
proper
partner(s) and focusing on correct long-term
business rewards will ensure success.
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About APD, the Purchasing Authority
Advanced Purchasing Dynamics (APD), the Purchasing Authority, provides manufacturers with market-leading
solutions to streamline all facets of procurement and purchasing operations. Companies partnering with APD benefit
from six service components: ProcureForce purchasing software, cost engineering, training, placement/recruitment,
consulting and Service Delivery & Optimization of purchasing processes. APD’s ProcureForce cloud software solution
and precision cost engineering services deliver a real-time assessment of supply chain operations and identify ways to
streamline processes and lower costs. Manufacturers gain value through APD by “should be” cost modeling, and
automated purchasing analytics and reporting, resulting in improved decision-making. With the Purchasing Authority,
enterprises decrease costs and improve bottom lines. Visit apurchasingd.com for more information.
About the Author
Robert Maks, Vice President, Cost Engineering
Bob leads the Purchasing Authority’s cost engineering group with an extensive
background in purchasing in the manufacturing sector. For more than 18 years, he
has developed, led and implemented procurement/sourcing strategies across
direct and indirect commodity segments including: polymers and resins,
stampings, seating components, capital and tooling, MRO, purchased services
and travel.
Bob lends his expertise to implementing the major cost models used by the
Purchasing Authority: true cost modeling, knowledge-based market testing,
benchmark and teardown analysis and attribute modeling. Using true cost
modeling, APD’s cost engineers walk the plant floor to map labor, overhead, and
material costs. Buyers can then use ProcureForce software to easily compare
supplier quotes to should-be cost models. Working with the cost engineers, Bob
uses knowledge-based market testing to develop quotation frameworks to obtain
critical information about manufacturing processes and costs. ProcureForce
completes
the
analysis
and
optimizes
the
quotations
to
develop
knowledge-based cost models.
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its affiliates or licensors. All rights reserved
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