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Improving Subcontractor Cost Performance
With the beginning of every New Year, we make resolutions to
abolish bad habits and replace them with smarter
alternatives. While you accountants are working off those
extra holiday pounds with 10-key machine exercised, you
should also take a moment to consider some resolutions to
improve the performance of your cost management
organization. Business writer Candace Gofirth has developed
a top-ten list of cost cutting tips for companies to
consider in 2006. While many of the ideas were the usual
suspects – maximize efficiency, seek employee input and
freeze hiring – one of the most promising tips for
manufacturing companies is to review vendor contracts and
standing relationships. Many times, profits are hidden
inside the supply chain and a more-transparent costing
process will provide the insight you need. If your company
is plagued with uncertainty around subcontractor costs, then
come up with a workout plan to improve your subcontractors’
performance.
Many companies hire vendors and subcontractors to perform
some, or all, of the manufacturing activities to deliver
finished goods for the consumer. The costs associated with
managing inventories throughout the supply chain can be
difficult to pull together because of delays from invoicing,
adjustments in vendor pricing, and limited data integration.
Some companies can only measure subcontractor performance by
tracking invoices that were received from the vendor. With
this incomplete view of how much it costs to actually
produce goods for sale, manufacturers are missing
opportunities to improve their cost position and increase
manufacturing profits.
In order to tackle this complicated task, a centralized
approach to vendor cost management is required. A
subcontractor pricing engine that models vendor costs as
they occur in the manufacturing process will give a
step-by-step view of how costs are accumulated. Developing
subcontractor standard costs and spending requirements that
meet operational guidelines are the basis to compare actual
billing to immediately identify variances with vendors. Then
integrating this information with in-house production data
provides detailed product cost data that can be used to
improve budgeting, negotiate vendor pricing, value inventory
or make other business decisions. Cost managers and finance
leaders can develop vendor budgets and forecast performance
based on variables like changing market conditions to
improve overall profitability.
One leading semiconductor manufacturer has implemented a
subcontractor pricing engine within Impact:ECS, allowing the
company to track and analyze vendor spending by lot for its
production locations worldwide. The level of detail
available by including vendor costs allowed the company to
better understand how inventory moved through production and
where there cost bottlenecks occurred. The integration of
subcontractor pricing with its existing Impact:ECS
production costing models gave the company a 360-degree view
of process for the thousands of SKUs it sells.
So if your company is resolved to get control of your
vendors, be sure to include the costing process in your
plans to expose important vendor cost information vital to
meeting your 2006 goals. |
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