Supplier Cost Assessment

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Supplier Cost Assessment

• By Dave Reuss B.Sc, M.Sc, C.Eng, F-ACostE

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Background

• When a customer (an OEM) sends out Requests for
  Quotation to Suppliers, rather than relying on
  three-quote system, how many of them use
  Quotation Analysis Forms?
• Do they understand the power it can give to the
  Buying team, assisting negotiation?
• How many first tier Suppliers flow the principal
  of the QAF onto their supply-chains?
• Clearly there is an aversion by some, in
  disclosing such detailed breakdown of their
  costs. Trouble is that these are often the
  suppliers who either do not understand their own
  true costs or who are blind to recognising the
  benefits of working collaboratively with their
  business partners in this way.
• Benchmarking exercises have often shown that
  those who join-in and learn, benefit far more in
  the long run than those who choose not to take
  part.
• This presentation will show examples of Quotation
  Analysis Forms from a generic point of view and
  discuss the benefits of their use.

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Supplier Cost Analysis

• Getting the right deal involves more than simply
  asking a supplier to quote.
• The quotation has to be properly understood
• Sourcing Decision Support Inc.

Its about getting Best value for money Common
sense
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• Quotation Analysis Form gt8 different users form
  seen over years
• Component Cost Breakdown x1
• Proposal Submission Sheet x1
• Component Cost Worksheet x1
• Essentially all doing the same thing !

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What a QAF is!

• Quotation Analysis Form what the Supplier
  fills in.
• Customers preferred pro-forma when receiving
  Supplier bids on Parts, Assemblies, or Services.

• Helps Customers to compare bids from different
  sources.
• Supplier Selection aide.
• Helps Buyers to get to the True cost drivers
• Commercial and Technical by looking in detail
• Helps Vendors to explain why parts cost what they
  do.
• Helps both parties understand and communicate.

• What a QAF is not
• Its not a project costing tool, or LCC tool,
• Not high level Parametric algorithm based (more
  ABC)
• Its not the only tool in the box,

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So what does one look like?

• Typically spread-sheet based,
• Summary sheet,
• Supplier name,
• Part description P/No.
• Listing of
• Procured parts,
• Raw Materials,
• Processing costs,
• Tooling costs,
• Other costs Margin (profit),
• Logistics costs.
• Assumptions (validity, PO qty)

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So what do others look like?

• Reviewed a reasonable number of different QAFs
  as applied within Automotive and Aerospace
  manufg industry.
• Conclusion
• They all do about the same,
• Only one from seven was different.
• In very similar format,
• Very similar terminology,
• Virtually same content and scope.

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• Some insist that a Supplier QAF be completed
  prior to all contract negotiations.
• Some only want them being tabled at the
  negotiation.
• Others believe it essential that you have your
  own solid estimation available before entering
  any negotiation
• Establishing their own view on what is value for
  money, or
• Working out what their most desirable out-come
  (MDO).
• Not everyone uses QAFs
• They may have supplier agreed models in place,
• Others because they have yet to here of them or
  understand their benefits

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Logic check

• Have all pages of the QAF been completed?
• Is the correct Part Number Issue level being
  quoted?
• Is the manufacturing process descried to
  expectation?
• If reference to Tooling is made, have separate
  Tooling QAFs been completed?
• Is there an economic level and stability period
  quoted?
• What minimum order quantities have been quoted
  (why)?
• Although these points are obvious, errors and
  omissions do occur

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Procured Parts (BOF) - interrogation

• Procured (BoF) parts information should be
  subject to in-depth study.
• Are sub-tier supplier details available?
• Have VA/VE activities been explored?
• Have sub-tier costs been interrogated?
• Are all sub-tier mark-ups, overheads, logistics
  costs etc justifiable?
• Where high value parts are procured - are they
  covered by separate QAF?

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Raw Materials - interrogation

• Who are the suppliers?
• Are there any price escalators / exchange rate
  controls in place?
• Is the material price in-line with market prices
  or other quotations obtained?
• Are quoted supply volumes optimised?
• Have VA / VE activities been explored?
• What is the reclaim strategy?

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Manufacturing Process - interrogation

• Have Non-Added Value activities been
  eliminated?
• Are Set-up times optimised? well apportioned
  over Batch sizes?
• Is the processing equipment over-specified?
• Is the process flow logical well defined?
• Have existing processes been used?
• Are parts per hour (cycle times) acceptable?
• Are manning levels acceptable (multi-machine
  manning)?
• What are the machine / man-power Utilisation?
• How was the process time calculated?

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Scrap Rework - interrogation

• What is considered to be Scrap?
• How is scrap measured / calculated?
• Can scrap be recovered / reprocessed / sold?
• Has waste been included as scrap?
• Has the timing of where scrap typically occurs
  been correlated to Purchases?
• What ideas exist to make process capability
  improvements?
• The should be no mark-ups on scrap!
• What is considered to be rework?
• How is rework calculated?
• Is rework cost-effective?

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Cost Rates (recovery rates) - interrogation

• Whats included in the Labour Rate?
• How is the Labour Rate calculated?
• How are consumable costs recovered?
• What shift pattern is the quote based on?
• Is manual vs. automated operation optimised?
• How is manufacturing overhead calculated?
• Are machine tool / equipment depreciation cost
  realistic?
• Do recovery rates reflect industry norms?

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Logistics costs - interrogation

• Is the supply condition quoted as required?
• What packaging has been costed?
• What dispatch quantities have been quoted?
• What shift pattern is the quote based upon?
• Do the delivery rates reflect industry norms?

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Profit Margin - interrogation

• Is there double accounting on Profits?
• Do quoted profits reflect industry norms?
• Are there any unjustified costs that will add to
  supplier profits?
• No profits should be made on material costs
• suffice for reasonable Handling Charge.
• No profit should be made on Scrap or Handling
  Charge.
• Waste should be included within gross material
  content.
• Check on how Profit was calculated
• Return-on-Sales calculated profit yields higher
  returns than Return-on-Costs.

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Tooling - interrogation

• Whilst the previously mentioned questions can
  also relate to Tooling QAFs, the following also
  apply
• Does the Tooling quoted reflect the identified
  process?
• What assumptions were made in the Tooling cost
  build-up?
• Is there an anticipated Tooling life?
• Have the sustained costs associated with long
  life Tooling been catered for?
• Is it possible to reduce the number of Tools /
  inserts?
• Does the Tool design incorporate Poke-Yoke
  principals?
• Is the Tooling interchangeable with other Users?
• Do the Tool costs reflect industry norms?

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Comparative Analysis method

• List elements of comparators on a spreadsheet /
  whiteboard.
• Perform a logic check against previous known cost
  breakdowns for similar parts.
• In participation with Supplier, use questions
  identified above (in this .ppt) to question any
  anomalies.
• Gather support from multi-disciplined team (e.g.
  Cost Engineers, Estimators, Manufacturing
  Engineers, Design Engineers, Laboratory process
  experts, QAE and even Purchasing)

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Key Points

• Ensure you have a sufficiently detailed elemental
  breakdown of the quotation before you attempt to
  analyse otherwise you will end up wasting time
  guessing at blank figures to justify breakdown.
• If in doubt ask!
• Challenge all submitted costs, ask for evidence.
• If still in doubt, visit production site to
  validate claimed costs.
• During supplier discussions, record all supplier
  actions for re-costing of identified elements.
• Review revised QAFs to ensure all actions have
  been addressed satisfactorily and establish if
  further opportunities exist.

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Summary

• Purchasing must take responsibility for the value
  chain.
• Open and collaborative partnerships need to exist
  with a number of set suppliers.
• Product development will be assisted by healthy
  supplier relations providing the benefit of
  supplier knowledge.
• Purchasing need to be commercially challenging /
  astute.
• Buyers need to draw upon skill-sets of Cost
  Engineers / Analysts and Estimators to help
  accelerate this process of Supplier Cost
  Assessment.
• Dont forget, ACostE EMC have built a generic QAF
  free for anyone to use, accessible via
• ACostE web site, and
• On free 1Gb pen drives.
• Thank you.

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Acknowledgements

• John Henson (Westland Helicopters)
• John Paskin (Stadco)
• Alan Caddy (Ford Motor Company)
• Rolls-Royce plc (SupplierManager-Online)
• David Greves (ESA)
• Graham Bailey (Lotus Cars)
• Greg Maidwell (Eaton Aerospace)
• Permission was obtained from Stadco to show their
  QAF during the actual presentation. Permission
  obtained did not cover copying it, hence it not
  being visible within this distributed pack.
• Like-wise, Rolls-Royces CCW has not been copied
  into this pack, although it is currently
  accessible over the internet (and so is in the
  public domain) via http//www.suppliermanager-onl
  ine.com/sabre/topics/bus_req.htmlbus_req