Category Cost Estimation : Improving Cost Estimation Process

Abstract

Having a competitive proposal is fundamental for a company in order to increase its sales and market share. However, developing an accurate cost estimation for the proposal brings a challenge for the company since it requires extensive knowledge and skills to understand both company and suppliers’ capability. On the other hand, purchasing is the function that has the biggest contact to the supplier which is related to the supplier price information and cost management. In fact, the purchasing involvement in the cost estimation process in the sales phase does not seem to be comprehensively discussed in the literature. The objective of the thesis is to investigate how the case company estimates its category costs and develop a method to improve cost estimation process. This was done by analyzing the current practice of performing category cost estimation in different technology units and understanding its relation to the cost variances. The identified cost variance root causes and common challenges to perform the estimation were taken into considerations to propose some recommendations in improving cost variance. In addition, the proposed method to improve the process was developed by analyzing the strategic importance of spend analysis, exploring price evaluation sourcing levers for category based on its portfolio and characteristics, and suggesting these outputs to be utilized and centralized in the cost estimation practice. Findings of the thesis offer the case company a new insight on the importance of close collaboration and information sharing between purchasing and cost estimation function in order to improve the quality of category cost estimation in the sales phase. The prerequisite of having updated, evaluated, and accurate category cost data is needed, and further continuous assessment of price evaluation lever of the category cost data and supplier’s price information are also required. In addition, this becomes valuable input for purchasing negotiation process in the implementation stage to achieve the cost reduction objective.