Originally Published on: SpendEdge | Augment Your Negotiation Skills with Cost Modeling

According to senior management professionals, cost modeling is the most effective purchasing technique. Cost modeling enables purchase managers to ascertain the actual cost of producing a product and to comprehend the fundamental cost components and cost drivers. By utilizing cost modeling, procurement and purchase managers obtain an advantage in developing negotiation strategies, as it enables them to identify and comprehend the costs involved from the supplier's perspective. The bottom line is that cost modeling enables procurement professionals to improve their negotiating skills, thereby driving business profitability.

Cost modeling is the process of analyzing the costs associated with manufacturing a product or service and determining its optimal cost of production in order to achieve a predetermined profit margin. Actual cost is determined by factoring in material costs, production costs, labor costs, research and development costs, sales and administrative expenses, and profit margin. A cost modeling tool enables the consumer to comprehend what exactly goes into the production of a product, comprehend the pricing strategy of the supplier, and identify cost-cutting opportunities for the organization. It also facilitates collaboration between the supplier and the customer, which not only aids in cost optimization but also enables material design enhancements and provides supplier insights. But how can cost modeling improve the negotiation skills of management and enhance negotiation strategies? This is how.

Top procurement managers have identified negotiation skills as one of the most essential skills for procurement professionals. It is an essential characteristic that enables the buyer to negotiate or bargain with suppliers over the costs of supplies and materials. Negotiation is the process of finding a common ground between two or more parties, such as buyers and suppliers, in order to reach an accord or settlement that is beneficial to all parties. An effective cost modeling tool enables organizations to comprehend the supplier's pricing strategy and identify the factors that influence final product pricing, including basic materials, labor, the production process, logistics, and many others.

Cost modeling enables purchasers to negotiate the best possible price with suppliers and reduce profit margins. This allows them to negotiate the terms and conditions of the supplier and challenge his cost model. Frequently, suppliers are required to back up material prices with actual cost data, which helps procurement professionals comprehend the product's true manufacturing costs. It improves negotiation skills, thereby generating opportunities for cost reduction and increased profitability. It identifies each cost component of the product and identifies the most expensive components or portions that require management's attention.

SpendEdge provides organizations with cost modeling and procurement intelligence solutions that help them reduce costs, increase profitability, and create a competitive advantage based on actionable insights.
To learn more about cost modeling, negotiation strategies, business negotiation, predictive modeling, and the advantages to your organization, click here.