We have all been there when we need to determine various costs and where they come from. We stare at spreadsheets, trying to gather the necessary data, critical and nonessential, and using our calculations to determine how we can lower costs. This approach is not only time consuming, but inaccurate and inefficient, but what are the alternatives?
Clearly, we need quick, simple ways to manage the mundane daily operations of any business. Inefficiency is one of the biggest threats to producing usable and productive data.
The processes of an in-depth should-cost analysis can be labor-intensive, which makes it inherently time consuming. When you add in the complications of the ordinary methods used for evaluting this type of analysis, it doesn’t get any easier. In a large organization, the engineering department typically arrives at a “should” cost for a product. Often this estimate is achieved by reverse engineering to determine the cost of parts. After that the additional costs of labor, materials, overhead and profit margin are added to that estimate.
Should cost models don’t only benefit the company in allowing businesses to determine a fair profit margin, but they benefit the consumer as well. Should cost models can allow companies to determine if they’re being charged fair prices for materials and labor, and can then be used to pass fair costs along to patients and providers of pharmaceutical drugs. Having as much knowledge as possible surrounding business such as this is essential to ensuring that the company is ran effectively.
Why especially now do we need to do this?
Understanding the market and the pricing behind decision making makes the ability to choose the right vendor calculated and responsible. When you have an estimation prepared for what a reasonable cost would be based on data and facts, you gain control of a situation by making sure all parties involved are knowledgeable about the subject at hand. If you have a handle on the material cost, process cost and overall overhead, you can determine what you should pay and where to get it from based on known facts such as prices for comparable services and parts. When you begin to negotiate price, you can focus on what the supplier is asking for Overhead and Profit. After a few negotiations you will understand your market for Overhead and Profit, and then you will be in control of 100% of the cost.
Know the answer before you ask the question.
The cheapest vendor might not be best choice. The ability to drill down into specifics allows you to determine the right path quickly and effectively. Consider all factors when selecting a vendor.
“If a supplier’s quoted price exceeds your estimate, your should cost model sets the stage for future negotiations.” – Tim Reis, SPSM, a Sourcing Manager for Continental Commercial Products
Determining what the cost of your materials and process should be before you even begin can help you make value based decisions from a position of strength. When the Defense Department initially developed share-cost analyses, it didn’t take long to catch on in government transactions. This tactic used for guaranteeing fair pricing was first implemented in the 1980s.
Often materials are your main cost driver at 60-80% of total cost, but if we can understand the cost of the process we can control the process itself. Taking time to fully understand the process can actually lead to steps in determining Utilization Factor (UF), seamlessly running scenarios and ultimately taking steps to optimizing ultimately works towards lowering the ultimate cost.
Although purchasing a car is not the same as drug development, the idea that tools are now in place to make the purchasing of a car easier, less time consuming and more cost effective is nothing new. This same idea can easily can seen in all industries, including the pharmaceutical industry. In the way you aspire to be a smart shopper in your daily life, strive for the same in your professional lives. Both you and I see these commercials all the time and it does make perfect sense — the more you understand about the cost, the more you save. By controlling the guessing game and eliminating it to the best of your ability, you have the ability to control your project and make decisions that better support every step in development, and to eliminate unnecessary costs.
How do you make this goal happen for your company? We know how — because we do this everyday.
Reach out to Rondaxe Pharma and see how we can get you started. Should cost is necessary and we make it easy so you don’t have to.