SI Review: April 2013

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Straight Talk From the Customer

The Cost Factor

Why the industry must work together to ensure the right rates

By Edward J. Ronan

As a strategic sourcing manager with roots in engineering and business, one requirement of my job is to understand the factors or cost components that determine the price of a good or service, or the “should costs.” Determining the “should cost” is important for several reasons. A sales price that is less than our estimate suggests the supplier’s pricing isn’t sustainable or there may be a lack of understanding of what is required. Either situation results in increased costs down the road.

A price that is higher than our estimate could mean more product or service is being provided (over-spec’d) than required, the supplier isn’t efficient (higher costs), and/or the profit is simply too high. Sometimes a higher price results because the suppliers involved aren’t working together as a team. In this situation, each link in the supply chain adds a profit component that in their aggregate makes the product non-competitive or unsellable. When this occurs all opportunity for sales and profit are lost with each potential supplier left searching and working harder to find another opportunity.

Manufacturers of durable goods such as automobiles and washing machines are keenly aware of the effect of compounding costs. Many suppliers contribute to the manufacture of these items; from commodities such as copper, steel and rubber to sub-assemblies including engines and transmissions. These items are assembled, tested and shipped to warehouses and distribution centers, with each touch-point adding an additional cost component to the finished product. Once on the show-room floor, other factors, such as competition, the economy, cash-flow requirements (sales quotas) and floor space influence the final price. Every one of these cost components requires the seller to make a profit; however it cannot come at the expense of the affordability of the finished product.

If the combined individual profits result in a sales price that cannot be supported by the marketplace, everyone loses. In the case of an automobile, if it is considered to be too expensive and cannot be sold it will be discontinued. When this happens, the tire company sells no tires, the transmission maker sells no transmissions, the electric motor manufacture sells no motors, the salesman makes no commission, etc.

In staffing, providers have a significant role in the success of that finished product, your company, the workers you provide and potentially the entire supply chain. Let’s begin with the responsibility of ensuring that your costs of doing business (overheads) are as low as possible. All things being equal, a supplier with the least costs can offer the same product at a lower price, while making the same profit. Suppliers with higher overhead costs are forced to increase their sales price (negatively affecting sales) or reduce their profits to remain competitive. Neither is an enviable situation.

How can the car example apply to the staffing industry? Labor costs that are less than planned provide several favorable options: the supplier can reduce the sales price, placing more pressure on the competition; it can retain the sales price, increasing profitability; or it can put the savings back into R&D to help develop the next new product.

When labor costs exceed plan, only bad things happen: the supplier can reduce profit to maintain sales price and market share; it may increase the price to maintain profitability, but risk reducing sales and earnings; or in the worst cases, when costs become so unfavorable, sales decline, production lines close, facilities may relocate or close altogether. When this occurs, there is no more labor to be provided and everyone loses.

What customers require is for the staffing industry to work together to ensure the price is competitive every time; vendor management systems (VMS), managed service providers (MSP) and the staffing firms need to make unrelenting efforts to be the low-cost provider (reduce the overheads). Further, VMSs and MSPs need to support the staffing firms by keeping program fees to a minimum. And agencies need to provide aggressive, minimum markups to support the customer and need workers to accept a fair wage. When everyone works together, everyone shares in the profit and everyone wins. Look for partners that share in this mindset.

Edward J. Ronan is global category manager for HR benefits and services for Becton Dickinson in North America.

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Dan Struve 04/15/2013 11:52 pm

Interesting concept on the idea of partnering. I wonder where the end user is in this process?


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