"What If" Relocation Simulation

Analysis of potential savings for product groups relates closely to the question of the right supplier. However, if a relocation makes sense, is not apparent at first glance due to many side effects. In such situations, an analysis software like NLPP helps to find out what the price effect of a relocation would be and if it makes sense to consider it.

We all know those questions that come up when we think about relocations: "What if we move products from supplier A to supplier B?", "Would we save money if we source our parts in the region X?", "Would it be advisable to source only two variants instead of many?". 

To answer such questions, you can get different quotes and try to model & analyze the differences between your actual and desired situation with Excel sheets, etc. This approach generates, however, even with a few part numbers a tremendous effort and the used "assumptions" will influence your result massively.

It is better to simulate the effects of relocation with the help of software like Non-Linear Performance Pricing (NLPP). The pure mathematical approach ensures that it is objective and not biased by personal preferences. Further, it is taking your actual situation into account and not any "general hype" that relocation always gives -10% or so.

NLPP Predicts Target Prices

NLPP is an efficient and accurate method for simulating relocations. The basic idea is to use parts properties (weight, length, quantity, durability, etc., and price) to derive a target price formula. Then this formula is used to calculate the target price for the considered parts to see what the effect of a relocation would be.

Please read our other posts to get an idea how NLPP gets to the price prediction formula.

Since the NLPP methodology is universal, the trick is to calculate a target price formula based on a subset of the parts data. This universality is the key to the "What if" - simulations.

Example 1: Switching Suppliers

Note: I stripped the significant places on all numbers to keep things readable. NLPP uses 15 digits internally. You can calculate the examples with Excel but you will get slightly different results because of the missing digits.

After doing an NLPP analysis of our complete product portfolio, we see that the parts from supplier A are too expensive and those from supplier B have a good price/performance ratio.

The price predicting formula for supplier A is: should-cost = EXP (2.784 + 0.002 * Diameter [mm] + 0.014 * Torque [Nm] + 0.052 * Width [mm])

The part we use as an example has the following property values: Diameter = 710mm, Torque = 70Nm and Width = 42mm

Let's assume the current price for the part is 2201.00. The price predicting formula for supplier A suggests that the price should be 1982.94. Which is a small potential saving when we stay with supplier A.

We now want to simulate what effect the transfer of parts from supplier A to B would have. Since we do not want to get quotes, we use NLPP to predict the prices for the parts from supplier A.

We calculate a "supplier B target price formula" based only on the part numbers of supplier B. This price formula then predicts supplier B prices for all kind for parts.

Here is the formula for supplier B: should-cost = EXP (2.875 + 0.003 * Diameter [mm] + 0.014 * Torque [Nm] + 0.010 * Width [mm])

This formula predicts a price for our example part of 855.67, which is -61.12% lower than the actual supplier A price of 2201.00. That's the potential savings benefit for a relocation from supplier A to B.

Using this idea, it is now easy to calculate "What-If" target prices for all parts of supplier A.

NLPP shows the differences between the actual prices of supplier A and the "What-If" target prices of supplier B graphically. The effects, for which part number would we pay less / more, and the total effect on the parts of the portfolio are immediately apparent.

So, the "Relocation Simulation Workflow" consists of 3 simple steps:

1. Calculate target price formula for Supplier B
2. Use this target price formula on products from supplier A
3. Analyze the effects on actual & target prices to see if it makes sense or not

Example 2: Relocation To Another Region

The Same procedure applies when simulating the relocation to another region. The only difference is step 1, where we now take the parts of our target region into account instead of our target supplier.

Considering Qualitative Factors

When simulating relocations, it is necessary to consider qualitative factors (risk, delivery times, etc.) too. NLPP can handle such cases as well and finds out if and how such factors impact the target price. All that is necessary is that you take those parameters into account and collect the information for your parts.

NLPP shows you any effect of a possible relocation in monetary terms. It shows whether the saving effect exceeds other effects. NLPP simulations deliver detailed & valuable insights fast and with small effort. Feedback from our users shows that the simulation results were very close to the finally realized relocation prices and effects.

If you are interested to see this approach applied to some of your data, please contact me.