Gaining competitive advantage in downturns and beyond
Empowering supplier negotiations with digital cost-engineering
As companies race to build digital businesses, they’re purchasing more public and private-cloud equipment than ever. Spending on servers, enterprise storage and Ethernet switches has just eclipsed traditional IT spending for the first time, having increased by 34.4 per cent year over year in the second quarter of 2020. Beyond cost and capabilities, however, it’s challenging for organisations to robustly compare technology and understand if they’re overpaying for it.
Our product cost transformation experts developed an approach that enables companies to gain greater control and visibility, positioning them to seize new value stream and technical optimisation opportunities. We used our Perfect Cost Grid methodology to enable a multinational technology company to identify key levers it could use to drive supplier negotiations. We delivered an immediate saving of €100K Euros and identified significant cost savings for years to come.
Developed an innovative approach that challenges the traditional product cost analysis process, identifying cost discrepancies and identifying opportunities
Applied manufacturing expertise to analyse processes and identify ways to optimise solution designs
Provided the ability to predict the profitability of new product launches, avoiding costly manufacturing overages that harm revenue and shareholder value
Demonstrated the value of a should-cost mentality that aligns spending with value and increases competitiveness in the marketplace
When companies purchase IT equipment or other solutions, procurement teams are put to the test. They typically seek multiple bids, enter into negotiations and may seek cost concessions of two to ten per cent from vendors. Depending on firm size and annual spend, they could be leaving anywhere from hundreds of thousands to millions of dollars on the table.
We saw an opportunity to challenge the conventional cost analysis process, enabling organisations to gain cost transparency. Our team developed the Perfect Cost Grid – the market’s first web-based benchmarking and digital cost-engineering platform. The tool gives our clients’ purchasing, cost engineering and development teams timely online access to the comparative data and costing tools they need to optimise the entire product lifecycle, achieving significant savings in material and software costs and minimise investment.
It can also help teams remove cost and waste without harming value. Cost savings created with the Perfect Cost Grid could provide much-needed liquidity during market or socioeconomic crises such as COVID-19, fuel innovation initiatives, be allocated to other equipment, fund dividends for shareholders – and much more.
We’ve used the tool with customers in the consumer products, medical devices, technology, telecommunications and transport industries, among others. It’s most suitable for analysing products that have a high degree of engineering complexity, provide significant value and are consumed in large volumes. Companies, on average, identify potential savings of 27 per cent with the Perfect Cost Grid methodology and reap savings of 16 per cent by implementing several findings.
PA has applied the Perfect Cost Grid methodology across more than 350 initiatives. We can help buyers understand the ‘should costs’ of what they’re spending, so that they can drive cost out of their business with data-backed negotiations.
Working with a multinational technology company, we leveraged the tool to identify cost savings and increase their overall competitiveness. The organisation purchased 10,000 x86 servers per year, allocating spend among four vendors. Since x86 servers represent 87.1 per cent of all server spend, by drilling into the details of how they are manufactured, we could provide rich strategic and cost insights the organisation could use to focus negotiations.
We called on our team at our Global Innovation and Technology Centre to provide expertise in mechanical, electronics and systems engineering; product design; and cost estimating.
We began the price-to-cost journey with a detailed cost study to uncover value stream opportunities among suppliers. After gathering this information, we performed an in-depth document review and conducted a structured disassembly and reassembly of the servers. This involved a detailed specification analysis to understand assembly processes and the cycle time. This helped us identify technical optimisation opportunities by reverse-engineering hardware and improving software. We were then able to develop ‘should cost’ versus ‘as is’ cost comparisons.
Next, we helped projects leaders prioritise cost-savings initiatives so that they can drive maximum value. We presented our findings and key areas of opportunity into a data-driven report, breaking down our technical findings into clear actionable insights. We found that reengineering electronic components, adopting a simpler structure and using a lower-cost fan in a server design may strip more cost from an x86 server design.
We also identified cost discrepancies of 40 to 44 per cent across vendors and developed a quick win of €100,000 by identifying cost savings with RAM cards. The quick win not only proved the worth of the methodology, but also funded the initiative.
As companies develop digital supply chains, understanding ‘should costs’ across a wide range of product types can help companies gain greater control and visibility, positioning them to seize new opportunities. For example, having a detailed understanding of solution designs and component costs make it easier to predict the true cost of new solutions and uncover the best vendors to build them. Taking the approach, firms will be better able to predict the profitability of new product launches, avoiding costly manufacturing overages that harm revenue and shareholder value.
Companies that deploy the Perfect Cost Grid in-house develop a cost-out mentality that aligns spending with value. They can train procurement teams to save millions of dollars, increasing their competitiveness in the marketplace.