Factor-cost Analysis
Who has not read about the low cost of labor in China or India, which despite recent surges is still only a fraction of what is being paid in the US or in Western Europe? The costs for the resource “labor” obviously differ greatly across the world; in extreme cases, labor costs amount to only one-fiftieth of those in the United States. But the costs of land, rent, waste disposal, and energy can also differ widely in price.
The aim of factor-cost analysis is to render these differences visible and allow them to be exploited. The analysis starts with identification of the resources required by the existing supplier to make a product. This information is supplemented by cost-driver data—for example , set-up times, productivity, machine-hour rates, or alternative prices for the principal materials. The data is then compared with that of other suppliers or other regions in order to develop strategies for optimizing the cost structure in a targeted fashion; the aim is to create a basis for choosing measures to be implemented by the supplier. For example, measures for cutting the costs of materials could include providing one's own sub-suppliers, or (if the share of staff costs is high) even suggesting the possibility of relocation.