READ THE REPORT HERE
There is a lot of good work being done by global brands and retailers in relation to improving their costing practices, but some buyers’ practices continue to place financial pressures on suppliers, and could actually be making things worse, according to new research published today by Better Buying Institute.
‘Suppliers’ Perspectives on Solutions for Better Costing’, a Supplier Roundtable report based on data collected from suppliers through interviews and focus groups, and a follow-up microsurvey with a larger group of suppliers, shares suppliers’ perspectives about the costing solutions being deployed, and promoted by brands, multistakeholder initiatives and other key stakeholders.
Data from the 2024 Better Buying Purchasing Practices IndexTM, published earlier this year, underscored that costing, as currently practiced by global brands and retailers, is not generating acceptable results. Fewer than half of suppliers (48.9%) reported that all orders are priced for compliant production (meaning that the prices paid covered everything the buyer was asking for and allowed the supplier to earn a profit). Of those in the majority whose total costs were not covered, more than eight out of 10 (81.9%) indicated that the prices paid by their buyer failed to cover basic production costs, including costs of raw materials, component parts, and labor for producing the order.
The supplier roundtable results found that cost models that do not include accurate information for all cost variables result in too low estimates for what a product should cost. Use of supplier-provided information about their own detailed costs is sometimes used in nefarious ways that pit suppliers against each other and result in too low prices. In addition, the practice of ‘ring-fencing’ labor costs within cost models, currently required by some buyers and multi-stakeholder initiatives, was seen by suppliers as unnecessary and unrelated to the payment of better living wages, which is dependent on the total FOB price being paid, not simply labor costs.
The practices most often cited by suppliers as the most effective ways of reducing costing pressures included good communications and dialogue, a willingness to compare suppliers with multiple similar characteristics, reducing price pressures, better forecasting, and costing in the context of long-term business relationships.
Dr Marsha Dickson, President and Co-Founder of Better Buying Institute, comments: “The solutions of buyers and stakeholder initiatives are well-intended and hold promise for better outcomes for workers.”
“But suppliers’ input on these solutions has been limited, and with core competencies in manufacturing and the importance of fair costing to their businesses, they are critical stakeholders whose expertise and concerns should be brought to the table.”
“This supplier roundtable report should be consulted by buyers and other stakeholders working with suppliers on costing. Cost modeling, open-book costing, and ring-fencing labor costs must be carefully managed, with guidelines and rules around their use to avoid negative consequences for suppliers.”
