Learn about the importance of cost transparency in procurement and how it leads to better supplier relationships and negotiation outcomes.
Cost transparency helps buyers look beyond the price, providing insight into the underlying costs that shape it. This understanding allows for fact-based discussions focused on key cost drivers rather than just prices, supporting fairer, more sustainable agreements with suppliers.
Procurement transparency
Most buyers work with hundreds of suppliers, making it a major challenge to keep business dealings professional, honest, and transparent. To make the right choices, buyers need fact-based insights into their suppliers’ performance, both at operational and commercial levels. This is what we call procurement transparency. When it comes to understanding prices, extraordinary things still happen. We, as buyers, mostly do business based on quotations. An experienced procurement professional knows better than anyone how this works in practice. The offers that a buyer receives are crucial for the perception of prices. If you receive four offers between 100-120, your brain automatically interprets this range: 120 is very expensive, but if I can buy below 100, I have a good deal. You then enter negotiations and close low in the 90s, completing the circle: you feel you’ve achieved a great result but without any genuine procurement transparency.
The “Priceberg” concept
Think of price as just the tip of the iceberg. What you see is only a fraction of the total cost structure beneath it, which we’ll call the “priceberg.” This hidden part includes elements such as material costs, labor costs, overhead costs, energy costs, component costs, and also margins. For a buyer, transparency means looking beyond the visible price and understanding these underlying costs, which together make up the larger, submerged part of the priceberg. Doing this gives you valuable insight into the factors driving your supplier’s pricing, allowing for more constructive negotiations and stronger relationships.
Cost transparency
A vital part of procurement is paying a competitive but also fair price. To assess this, a certain degree of cost transparency must be strived for. Without this insight, you’re operating in the dark. If “small” price increases (what’s 3%, after all?) occur in the future, they are often accepted, stemming from the apparent sharp negotiation at the time. When competitive suppliers appear, the process of cognitive dissonance occurs. We then tend to defend our choice and distrust lower offers with arguments such as poor quality or that the supplier is far away and unknown.
The alternative to this process is working with cost transparency. Don’t negotiate based on price—negotiate based on costs. Create, possibly together with your supplier, a cost breakdown so that the conversation is focused on real content. Once you understand how costs are structured, you can form an opinion about these cost drivers. The negotiation shifts to key cost drivers: materials, direct labor, and overhead.
Price transparency software
In today’s rapidly changing market, it’s virtually impossible to uncover and manually track all cost facts on your own. Price transparency software is a useful addition here. Cost analysis can be done in two ways: bottom-up or top-down. For bottom-up, you start from scratch and gather the information yourself. This requires both economic and technical knowledge, and software such as aPriori (https://www.apriori.com/) and Cleansheet (https://www.mckinsey.com/capabilities/operations/how-we-help-clients/cleansheet) can support this process. This method is usually used by (technical) manufacturing companies. Companies with less time and resources often choose top-down price transparency software, like WTP (What’s The Price) https://www.buynamics.com/products/whats-the-price/, which allows for simulations. The result isn’t perfect, but it doesn’t need to be. The power lies in the dialogue that arises between buyer and seller, shifting the focus from reducing the quoted price to a substantive discussion about the actual cost of a product. This is the essence of cost transparency. Once you agree on that, you also have a strong blueprint for future price changes.
I dare say that focusing on cost transparency is the only way to purchase honestly, professionally, and constructively in the long run.
