Jul 122013
 

Today we are reposting the article we wrote this week for ENGINEERING.com.  The original article is here and our announcement of our partnership with ENGINEERING.com is here.  Enjoy!

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One of the most frustrating things for many engineers is understanding the quotes they receive from their suppliers. They want to know how these quotes compare to their own internal estimates. Unfortunately, most engineers are not skilled at getting the right answer.

Strangely, engineers are typically very good at this in their personal lives. Let’s say you’re going to buy a new stereo receiver. In a matter of minutes you have the following options laid out:

  • Option 1 – Amazon ($300) + Shipping ($0) + Squarespace extended Warranty ($50)
  • Option 2 – Amazon vendor ($270) + Shipping ($15) + Squarespace extended Warranty ($50)
  • Option 3 – Stereo Shop ($320) + No Shipping ($0) + Included Extended Warranty ($0)

In your personal life, you not only outline how much costs are, but where they are. That is, in which cost bucket does each dollar reside? So why is this so hard when dealing with a part quote at work? The answer is: it shouldn’t be!

Don’t ask what, ask where

The first step to unraveling quotes is to put the numbers aside – what matters first is to decide into which cost buckets each dollar should go. To illustrate this, let’s consider buying a lightly machined casting.

CastingFirst ask, what resources go into delivering this casting to your shipping dock? Take a look at the figure below. On the top line in orange blocks, we show the various cost buckets for the casting. These include the raw material that is melted, the various processes that are applied, the machining, any painting, and then margin and logistics.

Hiller Associates Matching Estimates and Quotes

CLICK TO ENLARGE

Start with your estimate

We suggest that your starting point should be your own internal cost estimate from your cost expert, your spreadsheet, or from a third party Product Cost Management calculation tool.

It’s likely that the level of detail in your calculation method will be deeper than what you receive from suppliers. Even so, your tool or spreadsheet may not provide a number for each bucket of cost. In our casting example, our initial estimating method did not provide margin and logistics. Becaues these are real costs we will list them, noting that we don’t know what numbers to use for those costs at this point.

 Lay out what you know from the Supplier Quotes

Now, it is time to match up your supplier quotes. We show three different quotes in the casting example. Your purchasing department may give you more quotes or less quotes. However, in our experience, three shall be the number of the quoting, and the number of the quoting shall be three. (If you don’t get that reference, please see the attached video).

The quotes you receive probably won’t line up exactly with your estimates. Suppliers, as in example Quote 3, rarely provide a detailed breakdown. Regardless, it’s important to know which costs are included in the $23.00. Are any costs included missing?

But what if I am missing a cost bucket?

It’s common to not have an estimate for every cost bucket from one single tool or spreadsheet. Thankfully, there are several methods to triangulate to a better estimate.

  • Look at past part quotes for similar parts.
  • Ask an expert. For example, your shipping department may know what it would cost to ship similar casting parts.
  • Use a different estimation tool that does include the missing cost bucket.
  • You can also surgically lift and triangulate cost buckets from the quotes themselves. For example, you could average the cost for logistics between Quote 1 and Quote 2, so your internal estimate of logistics cost becomes $1.50.

The benefits to you and your company

You may think that this exercise is just about whether you should be paying $23.00 for this casting or $20.00. That is an important question, but there are other big benefits to this method.

  1. Missing Buckets – One of the biggest advantages to accounting for cost buckets is to identify any misunderstandings between your company and the supplier. It is better to find out now that the supplier has not included the shipping costs than to find out later.
  2. Your time to shine in front of management – regardless of the final cost that you negotiate, if there is a question later from your management about why you paid what you paid for a part, you have a ready-made, easy-to-understand management slide prepared.
  3. Negotiation power – deep understanding of costs is very useful when talking to the supplier with whom you decide to negotiate. Of course, you cannot show them the numbers from other suppliers’ quotes, but there is nothing wrong with showing your internal should-cost estimates.
  4. Learning by doing – after you go through this exercise several times, you will start to develop an intuitive feel for what drives cost in a commodity class. In our example, you will start to understand the relative magnitude of machining vs. casting cost vs. raw material for lightly machined castings.

They say that “It’s not about the destination; it’s about the journey.” The good news is that with part quote evaluation, both the journey has value (as shown by the four points above) and the so does the destination (e.g. paying $20, rather than $23 for a casting). Enjoy both!

  5 Responses to “Comparing Quote Apples with Estimate Oranges”

  1. Moderator re-posting comment from Linkedin group here:
    http://www.linkedin.com/groupItem?view=&gid=1841351&type=member&item=256933535&commentID=150567815&report%2Esuccess=8ULbKyXO6NDvmoK7o030UNOYGZKrvdhBhypZ_w8EpQrrQI-BBjkmxwkEOwBjLE28YyDIxcyEO7_TA_giuRN#commentID_150567815

    David Oney SAYS:

    Biggest problem I see with casting quotes is that no one seems to take into account the cost of quality. Constantly I see a new job come through, FMEA’s are written, specs on the prints, and yet once production starts, then the customer always comes back requesting added handwork or additional processes, even when the parts are in spec to the quote.

    • @David

      I see that as a failing of the Supplier Sales Department, not a cost of quality modeling failure. I.E. the sales dept. should be saying to the customer, “Oh, I am sorry that the parts are not meeting your needs. We looked into it and the parts are exactly what was spec’d and contracted. We can meet your new requirements, though. Here is a new quote based on the expanded set of requirements that you now have.”

      Once this happens a few times, the customer will get the picture and the failure, whether that is in their purchasing or engineering will start to be mended. Obviously, the supplier can also aid this by developing a spec survey that they check against the customer RFQ. E.G. “Mr. Customer, thank you for your RFQ. You have given us information to answer 40 of the 50 most comment spec questions. I have highlighted the ones that are in questions. Can you answer them to help us protect you for unexpected costs?”

  2. Moderator re-posting comment from Linkedin group here:
    http://www.linkedin.com/groupItem?view=&gid=1841351&type=member&item=256933535&commentID=150567815&report%2Esuccess=8ULbKyXO6NDvmoK7o030UNOYGZKrvdhBhypZ_w8EpQrrQI-BBjkmxwkEOwBjLE28YyDIxcyEO7_TA_giuRN#commentID_150567815

    George Spiller SAYS

    When I first started in engineering, companies who wished to purchase items with significant engineering content had to hire consulting firms to create the detailed specifications to obtain competitive quotes. Yes, if the supplier community has independently wealthy staff who not not need charge for their time to earn a living, donating
    time to correct every quote request that is issued is a workable system Otherwise, this would be the most efficient process if companies only wished to request a quote from a single supplier. The season has changes and many of the abusers are dismayed in the current climate when they are unable to obtain quote responses. This is one of the few ways that the customer “gets the picture”

    • George, I am not sure I understand your objection. I think you’re saying that you advocate for a single source relationship between OEM and supplier? That seems like a good idea, but people have tried it for the last 20 years, trying to imitate the Japanese. However, American companies just don’t have that kind of discipline. They always think they’re getting cheated and need to get their three quotes.

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