Your Customer Quote Prices Can Be Back-of-the-Envelope Math or Based on Actual Costs
A new, exciting request comes in for a product you’ve never made before. How do you evaluate the cost of designing, producing, and delivering this order? And how do you do it quickly?
Well, if you’re like most organizations, you do what you’ve always done. You jump right into action and open a state-of-the-art Excel template. And by “state-of-the-art,” you mean the same one you’ve used for the last ten years.
You may log in to your ERP system and export material and labor cost values to get the data needed.
Then you piece together the different data sets in Excel, make a few tweaks to account for changes in yield and batch size, and voila! You’ve calculated the cost to produce the new item for your customer! You set a price, get the quote signed, and it’s time to rock.
But, if you’ve been around the cost accounting world, the above likely has you scratching your head. And for those with even more experience, you can count the times you’ve heard this scenario pitched before but failed to play out in reality.
What’s going on?
Take a few steps back and analyze the process; you’ll see that many areas are missed when using Excel templates. There are real problems with using Excel to calculate costs, along with the usual spreadsheet problems like manual data entry, limited system integration options, problems with incomplete or missing data, and maintenance problems.
Let’s explore some challenges of calculating costs for manufacturing newly quoted products and learn how to establish Cost-Based Quoting (CBQ) programs to prevent them and improve overall costing processes.
Excel Inputs and Formulas Often Remain Unchanged for Months or Years
Using accurate product costs and Excel templates to develop new price quotes can be challenging for both small businesses and finance teams with a lot of experience.
In many Excel templates, the inputs and formulas remain the same for extended periods, making it challenging to keep up with changing market conditions and leading to inaccurate data that cannot accurately reflect the current cost of goods or services. Additionally, manual calculations using Excel templates are labor-intensive and prone to human error.
Even worse, it’s easy for spreadsheet costing templates to become overly complicated, so debugging and mapping how they work becomes entangled like a bowl of spaghetti. When this happens, quoting or financial teams often default to plugging in a few inputs and accepting whatever output the spreadsheet generates.
To ensure accurate and up-to-date pricing calculations, businesses may benefit from specialized product costing software that supports Cost-Based Quoting (CBQ) activities instead of traditional Excel templates. These tools give more accurate cost estimates in seconds and cut down on the need for manual quoting.
If you start by building current products in an appropriate cost-quoting tool, all inputs are identified, understood, and controlled – increasing accuracy, flexibility, and visibility. This makes it easier for you to handle more complex scenarios and give your business a solid foundation for growth. You can also use this product quoting tool to track changes over time, identify areas where profits are made, or create additional value.
Cost-Based Quoting software can centralize input and labor cost data to update pricing and quotes quickly in response to changes in market conditions or unique customer requirements. The most up-to-date cost data gives you the necessary insights to make informed spending decisions and enable cost-effective processes.
Many Organizations Calculate Quote Costs in Excel While Costing Data is Inside the ERP System Because Marrying the Two is Complicated
One of the biggest challenges with developing cost estimates is accessing information at the right granularity level to determine the project’s actual cost. Finance teams typically struggle to calculate cost estimates because they lack a way to centralize relevant cost information effectively.
No matter what, extracting data from complex systems like ERPs into Excel templates means losing a degree of context critical to understanding the cause-and-effect relationships. Integration can lead to errors in price quoting and incorrect cost estimates.
A Cost-Based Quoting system can provide organizations with the ability to accurately create price quotes by combining data from disparate systems into a single platform. Providing real-time access to cost data means organizations can improve their quoting accuracy and reduce human errors that could lead to costly mistakes or customer dissatisfaction.
Additionally, access to reports and analysis on the effectiveness of different quote strategies enables organizations to make better-informed decisions about pricing to improve their operational efficiency and profitability.
How Do You Accurately Estimate the Costs of Different Variables of Custom Orders?
A challenge when costing new products is determining the cost structure when no exact setups are already in place. Manufacturing organizations have long struggled to accurately determine the price for custom orders, especially when factors such as different sizes, ingredients, yields, labor requirements, and machine usage are considered.
A new process may require additional labor, training, new machines, and techniques the manufacturing team hasn’t encountered before. While each of these items might seem like simple replacements with new SKUs and configurations, the reality is often more challenging than that; this is where new costs are misunderstood.
For many finance teams, the Excel templates and processes they use to develop cost estimates don’t incorporate these points. Excel spreadsheets can only go so far before they become too big and complex. In many cases, quoting and finance teams settle for a rough, “good enough” estimate based on what they know and can see at the time and use that information to calculate prices.
Fortunately, with the emergence of Cost-Based Quoting solutions, those in the manufacturing sector can more efficiently calculate accurate prices for custom orders. This approach allows you to create sophisticated yet user-friendly models that simultaneously consider all the necessary factors and deliver the correct result quickly and easily. CBQ reduces the potential for errors that could lead to costly mistakes and ensures consistent pricing across multiple variations of products.
Another focus of CBQ programs is making historical quote data available to copy and modify, establishing a more efficient way to calculate prices for new items. It enables you to quickly leverage current cost structures and knowledge for similar items, saving time and resources. This approach also ensures that all necessary cost components are accounted for when creating pricing estimates.
Beyond cost calculations, Cost-Based Quoting programs also include the ability to calculate how costs will fluctuate with different volumes or product specifications so that customers can make better-informed decisions about their projects.
In addition to providing accuracy and speed, these solutions offer detailed insight into the cost of each order to create a more transparent quoting process.
Excel Can’t Perform Comprehensive “What-If” Analysis
While Excel can do many things, what is lacking in capabilities is sharing how small changes can cascade across an entire organization.
- If labor increases by $2/hr in the next 12 months, how will that affect the cost estimate?
- What does that mean if utility rates decrease by 30% for electricity but increase by 20% for gas in the next 6 months?
- If the organization needs to buy a new machine vs. using what is already on site, how do those options increase or decrease the total cost?
The considerations above matter; if you use Excel templates to estimate product cost, there is no way to have an accurate, quick answer – especially for organizations that produce many products, including custom products, and have various functions, locations, and business models.
“Without a way to test the cost impacts of marketplace changes, your organization’s profits are at risk with every project or quote you win.”
Again, generating quotes and analyzing potential scenarios and costs can help you make sound decisions around sourcing, conversion, prices, or any other variables that impact the overall profitability of the product.
How Do I Solve the New Business-Quoting Problem?
Excel templates are a popular tool for cost estimates, but unfortunately, they often lead to shifting assumptions and inaccurate results. To avoid this problem, organizations should use Cost-Based Quoting tools like ImpactECS to establish a robust costing and pricing process.
A product costing system that systematizes the quoting and pricing process and integrates with other systems makes it possible to provide accurate and timely customer quotes and reduce the risk of errors.
By understanding the actual costs associated with producing and delivering your product or service and calculating a fair price that reflects its value to customers, you can create customer quotes that are both attractive to buyers and profitable for your business. With this knowledge, you can start setting prices to help grow your bottom line while ensuring a positive customer experience.
Conclusion
With the correct cost-estimating tool, you can make informed decisions tailored to your business’s needs and goals. These tools give you confidence that your costs are well controlled while allowing for flexibility as market conditions change.
Cost-Based Quoting processes help businesses reduce risk and increase efficiency by appropriately allocating resources to suitable projects, ultimately leading to increased customer satisfaction, greater profitability, and sustained growth.
Learn more about how ImpactECS helps organizations establish Cost-Based Quoting Programs at https://www.3csoftware.com/solution/cost-based-quoting/.