In part 2 of the 5 part series on Manufacturing & Direct Material Sourcing we saw how leading manufacturers are beginning to factor a total cost understanding into sourcing strategies. In part 3 of the series we delve into the third key tactic – Total Cost Visibility – Total Cost Modeling at the Center of Buying and Supply Chain Activity.
Total cost modeling is an increasingly important and integrated strategy for category managers and procurement executives alike. Whether it’s the total cost roll-up of a bill of material for a new product introduction or the total cost implementation of a broader category inclusive of all the charges that go into a cost model on a global basis (see below, for select elements), total cost increasingly becomes the modus operandi for leaders in manufacturing procurement. Tracking the total cost of direct materials should always involve a continuous process, rather than just coming at a defined point in time following a sourcing event (although it is also critical to have this understanding when examining award scenarios). Organization must track a range of total cost elements depending on commodities involved, categories, reporting requirements, sourcing/contractual arrangements, etc. It is also suggested to track total cost inputs (raw materials) as well as other inputs (e.g., country GDP, housing starts, PMI) that go into forecasting models for commodities and raw materials that can then roll-up into forecasts for finished parts and components.
Specific total cost models will vary based on industries, categories, commodities, financing and geographies. But in the next decade, leaders will truly get on top of their direct spend categories on a total cost basis (e.g., for steel, stainless steel, aluminum, energy, base metals, rare earth metals, packaging, transportation, plastics, chemicals/ingredients, industrial MRO). And increasingly, organizations that do this in a tool like Zycus iCost as an integrated component of broader sourcing, spend analysis and contract management applications, are likely to better nail not just the planning of total cost on a global basis, but sourcing execution and ongoing savings management, budgeting and booking as well.