Cost analytics - let's get to the hard facts!

Cost analytics - let's get to the hard facts!

Economies in virtually every corner of the globe have experienced several supply shocks in recent years (e.g. energy raw materials, electric cars from China), and more are ahead (e.g. rare earth export limits from China, trade tariffs and trade wars). The pressure to optimise costs, remain competitive and ensure continuity of supply is increasing every year. In addition, the use of increasingly better algorithms and artificial intelligence in business dramatically increases the dynamics of events. The answer is purchasing analytics, which accurately identifies sources of costs and pinpoints specific areas for optimisation.

The hard facts of the last three years:

• Average increase in global energy costs: World Bank energy price index increased by a total of 29% between 2022 and 2024 (World Bank Commodity Markets Outlook - IV 2025).
• Average wage dynamics in the EU: according to Eurostat, hourly labour costs increased by a total of around 13% (Eurostat Euro-indicator, 19 III 2025).
• Asia → Europe container freight cost: The FBX11 rate at the end of Q1.2025 was still more than double the average 2019 level. (Freightos Baltic Index, 28 I 2025).

Cost breakdowns key to effective analytics

A thorough breakdown of the cost structure of a product or service makes it possible to identify the areas with the greatest potential for improvement, but also with a highest residual risk. A company that cares about the future should monitor such risks and, on the basis of continuous improvement, become increasingly familiar with the cost structure of its suppliers, their suppliers, right down to the suppliers of the underlying raw materials. 

Minimum wage increase and the cost of providing security services

Wages form the largest part of the cost of many services, including cleaning, grounds maintenance and physical security. Any change in the statutory minimum wage quickly translates into a price offer from suppliers. If the minimum wage increases by 20%, the hourly rate for security guarding can increase by as much as 12-18%, depending on the share of wages in the price structure. The simplest solution for the supplier is to pass on the effects of the statutory change to its customers. This is where well-organised purchasing comes into play to guard the cost and find solutions. An innovation or change in the way things are done forced, or agreed, with the supplier can give cost and quality benefits to the service provision.

Innovation to reduce labour costs - remote monitoring towers with AI video analytics

A good example is the analysis of the cost of security services in the context of the increase in the statutory minimum wage. More and more security companies are deploying surveillance towers equipped with PTZ cameras, speakers and image analytics based on artificial intelligence. The device replaces the physical night patrol: the camera detects movement, classifies the event (e.g. intruder vs. animal) and the operations centre can remotely issue a voice message or call for intervention.

Example of PTZ-based automation implementation:

• installation 4 360° towers allowed the number of security guards to be reduced from six to two per shift,
• the total cost of protection has fallen by35% despite the increase in the minimum wage,
• ROI investment in the system was 14 months.

For the buyer, this means that instead of accepting a linear increase in hourly rates, they can negotiate a „technology + remote operator” model with the provider, where the share of labour cost decreases and the quality of protection remains high.Understanding the total cost of ownership (TCO) of a service is key - only by looking at the full lifecycle and all direct and indirect costs can truly profitable purchasing decisions be made.

Increase in OEE at the supplier vs. reduction in component costs at the component supplier

Another strong cost leverage is the total efficiency ratio (OEE - Overall Equipment Effectiveness) on the supplier's side. Improved OEE on its production lines - better machine availability, higher productivity and higher part quality - translates directly into lower unit costs. For example, raising the OEE from 70% to 85% can reduce the price of a component by up to several per cent by reducing downtime and material losses. This indicator is crucial for cost analytics and generating savings in industry.

Linear price-performance in purchasing practice

Buyers, thanks to the convenience of AI, are increasingly using the linear price performance (LPP) model to quickly assess whether a supplier is offering competitive terms with varying product parameters. Until three years ago, large consultancies based their client projects on this model. Projects worth several million dollars.Let's assume that you are buying aluminium profiles with different cross-sections, where the price should increase linearly with the weight of a running metre.

1. Collect data - ask your supplier for a sheet showing the unit prices and weights of the individual profiles.
2. Price vs. weight chart - create a dot plot and adjust the trend line.
3. Identify deviations - Profiles above the trendline are overvalued; those below may be an opportunity or a mistake.
4. Start negotiations - focus on the largest deviations, asking for cost justification (e.g. non-standard alloy, additional processing) and aiming to align prices to the trend line.

Our experience shows that using such a model, whose pricing equation is determined in milliseconds by artificial intelligence, such as ChatGPT, makes it possible to achieve 5 - 10% savings in the value of the entire contract without changing the material specification. The selection of the product group for such an analysis is key.