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Controlling Those Costs !

Controlling Those Costs !. Presenter Graham Bailey Cost Control Manager Tesla Motors Inc. http://www.teslamotors.com/. PLEASE NOTE the web links contained within this presentation can only be opened whilst you are in ‘SLIDE SHOW’ mode. PRESENTATION OUTLINE. ● Why challenge?

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Controlling Those Costs !

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  1. Controlling Those Costs ! Presenter Graham Bailey Cost Control Manager Tesla Motors Inc. http://www.teslamotors.com/ PLEASE NOTE the web links contained within this presentation can only be opened whilst you are in ‘SLIDE SHOW’ mode

  2. PRESENTATION OUTLINE ●Why challenge? ● What’s to be challenged? ● Methodology ● The benefits 1

  3. WHY CHALLENGE ? • The majority of companies send out RFQ’s to a number of potential suppliers when looking to place business • However, once responses are received, and provided all other selection criteria are more or less equal, how many customers spend time determining if the company offering the lowest price: • has room for further improvement • (and which cost elements should be • focused on during negotiation) • or, more importantly: • is attempting to ‘buy’ business • (by offering un-realistic material prices • or un-sustainable recovery rates) 2

  4. WHY CHALLENGE ? I’m sure you’ve all seen many examples of suppliers who have won business by meeting or beating a cost target or their competitors prices, when it’s later been demonstrated that by spending a little more time validating the costs provided within their, sometimes very detailed, supporting Cost Models, that there would have been significant scope for further price reduction prior to order placement The risks are especially high with new suppliers It often doesn’t matter what the contract T&C’s say When a supplier comes back to you, often some time after receiving a PO (usually just after you’ve introduced their product on line) and presents you with an unjustifiable price increase, you’re often in no position to argue Resourcing will only mean additional costs so, more often than not, you end up paying the higher price simply to maintain production 3

  5. WHAT’S TO BE CHALLENGED ? This session will look at some of the ways that you can confirm, validate or challenge the quotes and cost models submitted by your suppliers for goods and services Whilst the Buyer should always insist on a breakdown from the supplier to support their quote, more often than not this either does not happen or it’s not closely analysed Don’t forget to interrogate the NRC’s (tools, R&D or capital equip./ facilities) Don’t be put off by the statement, “We don’t give breakdowns ! ”. If you push enough, even the largest suppliers will start to open up, providing the basics from which you can start to construct a cost model for their product A supplier who can’t or won’t provide a breakdown in support of their quote has to be treated with some suspicion 5

  6. WHAT’S TO BE CHALLENGED ? However, the supplier needs to trust that any information they divulge to you will be treated in the utmost confidence This can be supported by not showing them information from their competitors or even allowing sensitive files to be lying around on your desk. For suppliers to your industry, it’s a very small world and word does and will get back to them We may not like or agree with the breakdown a supplier provides. If, for example, a supplier shows they’ve added a 30% margin to their costs, don’t immediately jump down their throats (it may well be that case that this % mark-up is made up of overhead elements in a manner different to others, or maybe this is the norm for their industry peer group and their competitors will be recovering similar margins, but have presented these elsewhere within their cost models) Focus on the make-up of claimed manufacturing costs. On occasions, it may even be the case that you can agree to ‘ring-fence’ a reasonable profit value, in return for reducing the base costs Analysis of even the most basic of cost models can highlight areas of doubt concerning supplier assumptions / pricing integrity or simply opportunities to eliminate waste and non-added value during negotiations 6

  7. METHODOLOGY • Market Information • Market Intelligence • Material Costs • Process Costs • Earnings • Overheads • Some Examples 9

  8. MARKET INFORMATION In order to generate ‘best value’ cost estimates or to establish credibility of a quoted price, there is value in understanding what the global market has to offer Do you know which areas of the world or indeed which regions of the UK (subject to governing sourcing strategy), can offer the technical capability, quality and logistics requirements necessary for your particular products or services? 10

  9. MARKET INFORMATION Such information may already exist within your company. Do you know if it does? If so, is the information up-to-date and relevant ? If not, why not gather your own market information ? Do you set cost targets based on UK manufacture, Low Cost Country manufacture or manufacture somewhere else? How flexible is your system? 11

  10. MARKET INFORMATION Once you’ve identified regions of relevant expertise, evaluating the economic variances for these regions is a relatively simple task Such information can add significant value to your Cost Estimating / Cost Engineering services, allowing you to generate tighter, more competitive cost targets and provide advice to the purchasing team as to which economic regions meet the criteria for achieving them Go on, provide your purchasing staff with a challenge ! 12

  11. MARKET INTELLIGENCE – some useful sources of information http://www.corporateinformation.com/Report-Information.aspx http://www.marketing-intelligence.co.uk/resources/index.htm https://www.cia.gov/library/publications/the-world-factbook/ https://www.uktradeinvest.gov.uk/ukti/appmanager/ukti/countries http://www.mas.dti.gov.uk/ http://www.armedforces.co.uk/index.php http://www.jigsaw.com/ http://cost.jsc.nasa.gov/economic.html http://country.alibaba.com/profiles/index.htm CORPORATE INFO MARKETING INTELLIGENCE CIA UK TRADE INVEST DTi ARMED FORCES JIGSAW NASA Alibaba 13

  12. MARKET INTELLIGENCE – for example: Trade directories: QIMTEK ►http://www.qimtek.co.uk/default.aspx Automotive On-line►http://www.automotive-online.com/suppliers-directory.html Economic / Statistical Data (including): Financial Data (including): RGE Monitor►http://www.rgemonitor.com/ D A S A►http://www.dasa.mod.uk/ NationMaster ►http://www.nationmaster.com/index.php The World Bank ►http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/0,,menuPK:476823~pagePK:64165236~piPK:64165141~theSitePK:469372,00.html OFNS ► http://www.ons.gov.uk/about/our-statistics/index.html OECD ►http://www.oecd.org/document/42/0,3343,en_2649_201185_38616362_1_1_1_1,00.html Graydon►http://www.graydon.co.uk/UKContent/UKPublicHTMLPages/About.html Dun and Bradstreet ►http://www.dnb.co.uk/About/DNB_Database.asp Experian►http://www.experian.com/corporate/index.html Bureau van Dyke►http://www.bvdep.com/en/Company%20data%20-%20international.html Equifax►https://www.econsumer.equifax.co.uk/consumer/uk/sitepage.ehtml?forward=gb_cs_about Moodys►http://www.moodys.com/moodys/cust/AboutMoodys/AboutMoodys.aspx?topic=intro Hoovers►http://www.hoovers.com/global/hoov/companies/index.xhtml?pageid=16184 Hemscott►http://www.hoovers.com/global/corp/index.xhtml Companies House►http://www.companieshouse.gov.uk/ FT.com►http://markets.ft.com/ft/markets/researchArchive.asp 15

  13. MATERIAL COSTS Sources of information – Metals (include): • LME http://www.lme.co.uk/ • Base Metals http://www.basemetals.com/ • UK Steel http://www.uksteel.org.uk/Download/uk%20steel%20stats%20guide%202006.pdf • About.com http://metals.about.com/od/unitedkingdom/United_Kingdom_Metal_Suppliers.htm • Metals Forum http://www.metalsforum.org/print.htm • Stockholders(for example):http://www.sesmetals.co.uk/ • http://www.apollometals.com/ • Recycling Int’l http://www.recyclinginternational.com/markets/nickel_stainless.aspx • Directories (for example):http://www.1800miti.com/links/wholesale/metal/service-centers.html • http://www.powersourcing.com/sf/cobalt.htm 16

  14. MATERIAL COSTS Sources of information – Plastics / Rubber (include): IDES http://www.ides.com/resinprice/resinpricingreport.asp LME (Plastics) http://www.lme.co.uk/plastics_links.asp Polymer Agehttp://www.polymer-age.co.uk/prices.htm#polyethylene Plastics Technologyhttp://www.ptonline.com/dp/pt/resins.cfm GlobalSpechttp://materials.globalspec.com/Industrial-Directory/resin_price COMPOSITES WORLDhttp://www.compositesworld.com/sb Stockholders(for example):http://www.chesterfield-plastics.co.uk/catalogue.php http://www.resinexgroup.com 17

  15. PROCESS COSTS - EARNINGS Sources of information Job Title PRINTED CIRCUIT BOARD ASSEMBLY OPERATOR Location WIGSTON, LEICESTERSHIRE Hours 40 PER WEEK MONDAY-FRIDAY 7.25AM-4PM Wage £5.52 PER HOUR DEPENDING ON EXPERIENCE + BONUS Work Pattern DAYS Employer XXXXXX Pension PENSION AVAILABLE Type PERMANENT ONLY Description Previous experience is essential. Duties are to place components onto printed circuit boards, some hand soldering experience required, training will be given. We are open from 7:25am - 7pm, part time hours available to suit applicant. • National Statisticshttp://www.statistics.gov.uk/cci/nugget.asp?id=285 • NBERhttp://www.nber.org/oww/ • OECDhttp://www.oecd.org/document/0/0,3343,en_2649_34637_34053248_1_1_1_1,00.html • LABORSTAhttp://laborsta.ilo.org/ • ASHE http://www.statistics.gov.uk/StatBase/Product.asp?vlnk=14203 DON’T FORGET: Newspapers Employment agencies Business Link: Reports (eg. KeyNote) BBC Job centre Plus: ttp://www.jobcentreplus.gov.uk/Internet/setLocale.do?country=GB&language=en&page=/initialise.do 19

  16. PROCESS COSTS - EARNINGS Median gross weekly private sector earnings in Eastern Europe (February 2006) Median gross weekly private sector earnings: alternative production centre's (February 2006) Source: National statistical offices and economic agencies Notes: † Pre-tax pay expressed in euros, based on a five-day week of 40 hours. All figures rounded to nearest euro. * Eastern Europe has been taken to include eight of the states that joined the European Union on May 1st 2004 plus the EU accession states, Romania and Bulgaria, and the EU candidate country, Croatia. ** Pay in Europe is published annually and contains benchmark pay tables with hourly rates for 32 standard job positions in 48 European countries and territories. . Source: FedEE http://www.fedee.com/PayChartEg.shtml 20

  17. PROCESS COSTS – Other Overheads Sources of information • Energy & Utilities(include) : • Eurostathttp://www.eustatistics.gov.uk/themes/environment/datalinks/index.asp • http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&language=en&pcode=er02c2&plugin=1&tableSelection=1&footnotes=yes&labeling=labels • BERRhttp://www.berr.gov.uk/energy/statistics/publications/prices/tables/page18125.html • GFD https://www.globalfinancialdata.com/ • OFGEMhttp://www.ofgem.gov.uk/CustomPages/Pages/Results.aspx?k=prices • Energy Information Administrationhttp://www.eia.doe.gov/ 21

  18. EUROPEAN ELECTRICITY PRICES 2006 PROCESS COSTS – Other Overheads Euro per kWh Source: Eurostat Industrial Users (Latest Data) Deregulation of electricity supplies in the UK has resulted in lower prices and improved service for businesses. Electricity prices in the UK are among the most competitive in Europe. 22

  19. INTERNATIONAL COMPARISON OF BUSINESS COSTS 2006 Other Info ? 4.4 4.3 Advantage Japan Germany UK Netherlands % Cost Advantage/Disadvantage Relative to the United States of America Disadvantage Source: KPMG Competitive Alternatives Report 2006 The eight month research programme covered more than 2,000 individual business scenarios in 121 cities throughout Australia, Canada, France, Germany, Italy, Japan, The Netherlands, the UK and the USA. The basis for comparison is the after-tax cost of start-up and operations for 12 specific types of business, over a ten-year time horizon. 25

  20. April 2008 Averages Other Info – Fuel ? Source: The AA http://www.theaa.com/motoring_advice/fuel/ See also: http://www.theaa.com/allaboutcars/advice/advice_rcosts_diesel_table.jsp 27

  21. THE BENEFITS OF CHALLENGING SUPPLIER COSTS • Better Prices ! • Message to suppliers that you expect • quotes to have integrity from day one • Clearly highlights areas of cost variance at • the supplier selection stage • Provides objective data when analysing • future QAF’s, negotiating new prices or • challenging Price Increase Claims • Builds confidence in your own estimates • Supports development of a cost history database and cost trackers • Sorts ‘those who do’ from ‘those who don’t’ when it comes to the • ‘OPEN BOOK’ issue 29

  22. LESSONS LEARNT • Be clear and direct with your suppliers as to what you • want, why you want it and what the benefits will be for all • Don’t be afraid to ask and to keep asking • Maintain good records • Maintain confidentiality at all times • Request a breakdown in the suppliers own cost model format, before you present • them with your ‘Standard’ QAF form. You’ll often get far more information than you • realise • Provide feedback to those suppliers who are unsuccessful, yet provided sufficient • cost breakdown, so as they may also gain from sharing information with you. This • need only be a generic benchmark positioning to their ‘un-named’ competitors 30

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