What are Cost Drivers in Purchasing?

Cost drivers in purchasing describe which factors influence the purchase price for parts and services. The cost drivers in purchasing vary greatly depending on the product group as well as the type of product group. It makes sense to initially differentiate between categories from indirect purchasing and direct purchasing when conducting cost driver analyses.

In direct product groups, it is initially the raw materials that could play a special role as cost drivers. They, in turn, “drive” the costs of the semi-finished products to be purchased, etc. In this way, the manufacturing costs of a component are established along the value-added chain of external procurement materials. In addition to the raw materials and the semi-finished products or components, the currency effects to which a supplier’s own purchasing is subject to play a role. Exchange rates are also potential cost drivers.

A further cost driver is labor in addition to factor prices for the resources used and for currencies. Just like for raw materials and semi-finished products or other goods or even currencies, there are market prices and price trends for “labor” that can be made measurable via an index. The labor index can, for example (and if available), be the development of wages or a general inflation rate (as a proxy) in case no detailed indices that represent the cost drivers from individual supplier countries are available. The last cost driver category that needs to be mentioned is the price for money – the interest rate.

It is possible to benefit from the knowledge about individual cost driver for supplier materials or services in purchase controlling, for example to prepare for negotiations, in order to comprehend and make plausible the argument for a supplier’s possible price increases. Other reasons include alternative calculations for make or buy decisions, etc.

Progressive analyses within the scope of procurement controlling continuously measure correlations between purchase prices and their cost drivers as represented by diverse indices for raw materials, semi-finished products, exchange rates, labor costs, etc. The blog article on predictive analytics and price forecasts demonstrates how cost driver analyses can be meaningfully employed outside of the straightforward bottom-up cost calculation.

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Read blog articles about spend management, initiative management and data management in procurement, or other articles from our experts.

4 Steps: Predictive Analytics in Procurement
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