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Von Michael Dörfler

HE ISN'T EASILY FOOLED. Jochen Beck knows immediately what's what – and even more accurately and far more than his counterpart in negotiations would actually want. The expert with the job title of Price Analysis Strategic Purchasing at the plastics processing company Peguform has already frequently been able to surprise participants in price negotiations with his very detailed numbers.

Generally, a supplier's sellers come up with Excel sheets which are to justify their margins because of increased costs for labor and material. "They often provide figures which are not consistent or understandable for us. Then, I'll present my price analysis", says Beck. What follows is a sparkling display of data where he splits up, in minutest detail, all costs of his counterpart's product. He'll calculate per piece of production: Wages and social security contributions, setup times and materials, tools, logistics, distribution, administration. Beck even knows profits on materials, purchased parts and production. "Sometimes, the other side in the negotiations will admit that I know their production better than they do." Of course, Beck did not engage in industrial espionage; he just uses an ingenious and sophisticated analysis software. What's behind it is an extensive and permanently updated database.

X-ray view of the costs

Such information helps the Costdata CE program to determine the costs for the manufacture of products at any step of the value-added chain and over the entire life cycle of a product. "There are no products and goods whose manufacturing costs we cannot make transparent", says Frank Weinert. The general manager of Costdata CE sets experts onto all possible components. "At our workshop, manufacturing specialists take apart all products – from gearboxes to complete cars to identify the individual costs of assemblies and subassemblies." The information thus obtained is then entered in the database. Cost drivers can thus be detected and strategies developed of how to eliminate them.

Most of the time, buyers cannot assess what the manufacture of products really costs. They have to rely on their suppliers' information. Yet, too much trust in their statements will not really help buyers. They cannot use their full bargaining power. When it comes to the supplier's margins, the buyer must take a guess. Procuring people understand little about technology and cost accounting. "At best, estimates can be made, and they are not always on target", says Weinert. But when it comes to calculating the product costs of their suppliers, it's not only the customers who will be in the dark, but even the sellers as well. And it also happens that Weinert talks with heads of companies who are able to say that they actually have monthly losses of € 100,000 but are unable to track down which of their three products makes them write red figures. Or perhaps it's just the change of material containers simply taking too long in practice.

Retrospection is useless

According to Weinert's experience, the standard business management software affords a very deceptive feeling of security. Users fail to see that they are always looking at the past with this program. Companies are heading for this dead end when they use management ratios from the  ERP system because, on the basis of such data, they want to reduce their production costs fast because of a low rate of capacity utilization. But when capacity use decreases, setup times will increase, and interruptions multiply because of the belief that goals can be reached even at half speed. What helps against such deficit are precise product cost calculations which reckon up that the negative development can only be balanced out if loss-making production capacities are throttled. Aside from the cost driver analysis, simulations can also be made, for example, with changed overhead allowance rates. Every single change in the availability of the plant, in wages, in materials, in purchased parts can be calculated according to regions and sectors of the industry.

Taking emotions out of negotiations

What's left for a seller in the way of arguments when he's dealing with a buyer who'll see through every one of his steps? "We want to use data and facts to make price negotiations more objective and less personalized", says Weinert. The supplier sees its own cost data like in a mirror. It's not a matter of taking away the margin from the seller, but of achieving product optimization. He will thus realize how, for example, material utilization and production can be improved in his own company. In such cases, Jochen Beck can assist with his analysis. After all, he is very interested in the collaboration with strategic partners who could not be so easily replaced for Peguform. "When I can see that business partners are working with low coverage prices and that they'll soon run against the wall, the analysis will not only provide a warning but also an accurate presentation of the wrong development."

Tough haggling

Beck exposes even classical arguments where suppliers justify their prices with the high costs of purchased parts. If a seller indicates an OEM component at € 1.50 which however, based on the cost analysis, is actually shown at only € 0.79 in the catalog, the buyer will propose to pay half the price. Otherwise he would gladly advise the manufacturer of the purchased part just how much price potential he still has for his product. But there are even more obvious bluffs exposed. When the counterpart in negotiations contends that its margin would be a mere 10 percent but, in fact, it's shown to be 40 percent in calculations, this will also contribute to more objective negotiations. Or the upset party in the talks will break off the deal.