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 Goforth has developed a top-ten list of cost cutting tips for companies to consider. 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.

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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 and profitability 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 goals.

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