Many companies no longer want to continue to make their decisions while flying blind. Every single business decision is subject to constant cost pressure not to jeopardize the company's future profit margins. The conditions are difficult: Suppliers are expected to produce close to their customers' locations and with just-in-time production processes. Additional cost pressure from customers is ever present due to extended payment terms, risk liability, ‘quick savings’ or ‘pay to play’ schemes.
Most of the companies ask the same question: How can we adapt processes and IT structures to improve speed and accuracy in costing and quoting?
Cost Engineers are key contributors to provide answers. Starting with the development of components and products, through production to sales, the Cost Engineer helps to keep manufacturing costs competitive and to produce products in such a way that they are customer-focused and economically viable. We recommend three steps to secure business success.
- Reinforcing the common view of the product or project
- Establishing a cost engineering function
- Leveraging the value contribution for a solid relationship with customers
1. Reinforcing the common view of the product or project
There is often a disconnect between the various departments involved in the costing and quoting activities: Controlling, Purchasing, Research & Development, Sales and lastly the Management. They believe to be aligned by working for the company's product/project. However, through an individual understanding of costs, their own goals and the use of disconnected or bespoke IT solutions, calculations, and reports, they move away from the goal of creating cost transparency for more profitability.
Read in our white paper why Enterprise Product Costing is the path to profit-oriented enterprise. Click here.
Cost Engineers facilitate an integrated corporate culture supporting collaboration on enterprise-wide costing and quoting activities. Costs are considered as a central aspect from the beginning of product development.
2. Establishing a cost engineering function
As simple as it may sound: Management must first determine the general business goals and agree on clearly defined corporate guidelines: Which goals should be reached by when? What priority do they have? How do we achieve our goal?
The departments involved should be aware of these goals. It is necessary to secure their commitment, e.g., through workshops in small groups. Collaborating on reliable profitability and growth targets requires a standardized, enterprise-wide approach to total cost management such as Enterprise Product Costing (in short, EPC). A fully integrated cost management method for standardized
product costing is independent of location and department and based on three pillars:
- Standardization of the costing methods,
- Cost tracking and cost optimization throughout the entire life cycle,
- Enterprise-wide IT systems integration of all cost-relevant data.
The EPC costing approach encompasses all key areas of the company, from development / value engineering to purchasing and sales, along the entire supply chain, to controlling and management. The method enables companies to control costs at an early stage and in every phase of the product life cycle.
The road ahead to greater profitability: Implementing an enterprise-wide costing software
is the only way to integrate and keep track of the large volumes of data. Whether CAD, ERP, PLM, or BI tools, each of these applications can be used to manage and map cost data. But the collaborative quoting and cost estimation path is not sufficient, and only possible indirectly. Let me give two examples: PLM tools are primarily designed for the technical perspective. Cost-relevant factors can be entered, but ultimately the system can only add up individual costs. ERP systems, on the other hand, are transaction-oriented and have a focus on historical data. It is not possible to take future parameters into account.
3. Leveraging the value contribution for a solid relationship with customers
A cost engineering approach not only bring departments within a company closer together, but also build a solid relationship with external suppliers and customers. Cost Engineers shall be involved in collaborative costing. Comprehensible costing is the building block for presenting sound arguments and effectively conducting price negotiations.
Let me speak about two examples which are often relevant to our customers.
Example 1 - Cost calculations for existing customers
If your company has completed projects for a customer in the past, then the newly calculated price should correspond with previous quotes. If the new quote differs too much from previous calculations, the sales representative is expected to explain the difference. The solution includes a reliable and mutually comprehensible presentation of costs, where, for example, investments in tools and machines are directly evident. It should be possible to track cost development at each stage and quickly identify changes for existing cost differences. This includes the impact of customer change requests that require renegotiation.
Example 2 - Open book accounting
The pressure to disclose costing through 'open book accounting' is now a common yet controversial practice, especially in the automotive industry. There is a risk that the customer will discover errors, inconsistencies and most importantly ways to cut costs, which could ultimately be used against the supplier to lower the price. It is the responsibility of management to use open accounting to their advantage. We know from our experience that price discussions can be conducted more objectively. The focus is on individual components instead of talking in blanket terms about final prices.
The benefits of a cost engineering approach are best realized with an enterprise-wide approach and the appropriate software. Uniform standards and full transparency on development, product, and manufacturing costs ensure more profit and growth.
The article was first published on the Society of Cost Engineers blog.
Do we have your interest? Read more about profitability in costing and quoting.
- Blog: Strategy for cost management. Learn more on how to avoid burning money in times of crisis. Click here
- Blog: How businesses can quickly calculate solid quotations. Read now how to win the race for orders. Click here
