Costing/

Value Discovery

Aaron Dibble

2018/04/18

Aaron DibbleCost Analyst

▪ Experience

Aaron drives global purchasing strategy and helps create value for internal

and external customers. His extensive manufacturing knowledge helps create

and realize cost saving opportunities. He covers a wide variety of

commodities and provides active purchasing negotiation support.

Prior to joining AGCO, Aaron was a Manufacturing Engineer for several

years.

▪ Education and Credentials

- Iowa State University- BS Agricultural Systems Technology

- Iowa State University- BS Industrial Technology

- SIG University- Certified Sourcing Professional

About AGCO

▪ AGCO is a global agricultural manufacturer of tractors,

combine harvesters, hay and forage equipment, seeding

and tillage implements, grain storage and protein

production systems.

▪ AGCO is built around five core brands– Challenger

– Fendt

– GSI

– Massey Ferguson

– Valtra

Agenda

▪ Costing Overview

▪ Strategic Sourcing

▪ Future of Sourcing

▪ Detailed Cost Breakdowns

▪ Total Cost of Ownership

▪ Link to Business Objectives

Why do we need cost information?

▪ To develop an effective transparent purchasing process

to continuously improve customer satisfaction and lower

total cost.

▪ Evolving from transactional to strategic sourcing

▪ Key benefits include:– Cost savings

– Improved supplier performance

– Minimizing risk

Strategic Sourcing

Advantages

Cost Savings

Increased Quality

Standardization

Improved Efficiency

Improved Partnerships

Shared Best Practices

When should we examine cost?

▪ Verifying price structure

▪ Cost Increases

▪ Considering new contracts (high value)

▪ Trying to achieve price reductions

▪ Using sole sourced supplier

▪ Assessing a new supplier

Sourcing is Evolving

Traditional Purchasing

•Transactional

•Focus: Price

Strategic Sourcing

•Focus: Spend consolidation, standardization, total cost of ownership

•Technology: Auctions, eSourcing, Basic optimization

Global Supply Management

•Focus: Enabling product innovation, maximizing shareholder value

•Highly collaborative across all sites globally

Analyze Spend

Identify Requirements

Analyze Market

Develop Strategy

Manage Negotiations

Award & Contract

Implement Strategy

Strategic Sourcing

Strategic Sourcing Traditional Procurement

Future of Purchasing

Strategic OperationalFutureof Purchasing

Value Management

Organization/ProcessTechnology

Employees

Full data visibility will enable

unique decision making

processes by adopting to the

prediction of future trends.

Supply management professionals

know everything, from the

manufacturing, to the economics, to the

laws and politics of their supply markets

on a global scale.

Buyer-supplier relation will evolve

into integrated supplier

networks enabling greater

coordination of innovation

roadmaps across supply industries.

While enterprise-level spend

management shrinks, more

supplier-facing positions being created

at high levels in the strategic lines of

business.

Sourcing Practice

▪ Standard Template

Sourcing Practice Best in Class

Pricing Cost Plus

Cost visibility Required for all

Frequency of competitive

bidding

Every six months

Supply Base Low cost country sourcing

(Mexico, India, China)

Quantity No sole suppliers

(if possible)

Cost Breakdown

▪ Cost breakdowns can vary in level of detail

Materials Materials Materials

Manufacturing

Add-on Production

Cost Processing &

Labor

Packaging

Overheads

Margins Margins

Increasing level of detail

Cost Transparency

Market price

range

Lowest Cost Level

Supplier A Supplier B Supplier C

$

Margin

Material

Manufacturing

Supplier D

Example of a transparent cost structure in relation to quotation. How do we discuss pricing

effectively without knowing the costs?

Goal is healthy, sustainable suppliers!

Cost Breakdown

▪ Cost breakdowns can be used for:– Piece Parts

– Tooling

– Freight

– Packaging

▪ Why should we use cost breakdowns?– Allows for better transparency

– Excellent quote comparison tool

– Easier to identify cost gaps

Cost Breakdown

▪ Example TemplateSelection Tab

Supplier and

Part Information

Cost overview

from inputs

Costing Example

▪ Pen Cap Example

Raw Material

- HDPE (High Density Polyethylene)

- Weight of Cap: .05 lbs

Manufacturing

- Injection Molding

- Cycle time: .167 min/10 parts

SG&A/Profit

$0.62/lb X .05 lbs = $0.03

Material Cost Part Weight Raw Material Cost

.167 min/10/60 X $100/hr = $0.03 Cycle Time Machine &

Labor Rate

Processing Cost

60 min/60 X $100/hr = $0.02

5,000 parts

20%

Setup Cost

$0.02

SG&A/Profit

$0.10

Total Cost

RM + Manufacturing + Margins =

Raw Material

Raw Parts

Overheads (General, Sales & Administration; R&D …), Logistics and Profit

ManufacturingStep 1

ManufacturingStep 2

ManufacturingStep 3

ResidualManufacturing Overhead Costs

MaterialOverhead Costs

MaterialOverhead Costs

- Personnel

- Process

- Machines

Manufacturing Parameters

- Tools

- Set-up

- Personnel

- Process

- Machines

- Tools

- Set-up

- Personnel

- Process

- Machines

- Tools

- Set-up

Manufacturing Parameters

Manufacturing Parameters

ResidualManufacturing Overhead Costs

ResidualManufacturing Overhead Costs

Detailed bottom-up calculation

- Margins

- Overheads

- Packaging/

Logistics

- Processing &

Labor

- Raw material

Total Cost of Ownership

▪ Total cost of ownership relates to all costs that may be

impacted by a sourcing initiative

▪ Effective for piece part vs tooling comparison

TCOModel

Purchase Price

Transportation

Tooling

MaintenanceInstallation

Packaging

R & D

How do we execute?

▪ Make/Buy, Outsource/Insource

▪ Generate options

▪ Evaluate suppliers’ performance

▪ Total cost of ownership

▪ Utilize costing tools

Ask questions!

Category Team

▪ Sourcing should involve a network of cross-functional team

members who are accountable for driving performance in

cost, quality, and delivery.

▪ Led by a sourcing professional who ensures active

participation, and good communication

▪ Focused on improving results

CEO:

I want all of this!

Marketing:

Having it in this color will be worth

the price

Supply Chain:

We need 100% on-time delivery with no excess

inventoryFinance:

We should buy the cheapest

option

Supplier Relationship

▪ 3 steps to every relationship– Create a relationship

– Build a relationship

– Maintain a relationship

▪ When working with suppliers– Be knowledgeable

– Be honest

– Be transparent

– Ask questions!

Continuous Improvement

Update Category Strategy

Total Cost Analysis

Forecasting

Spend Analysis

Market Analysis

Competitive Analysis

Supplier Business Model Mapping

Assess Strategy Maturity

Measure Impact

Evaluate Changes

Adjust Strategy Plan

Continuous

Improvement

Strategy

Index

CEO Objective

Corporate Objectives

Functional &

Business Objectives

Link to Business Objectives

Increase Profitability

Increase Volumes Increase Prices Lower Cost

Increase Sales Increase Margins

Questions?