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Cost Engineering

Cost Engineering in the Automotive Industry: A Decade of Transformation

Over the past decade, cost engineering has become crucial in the automotive industry, ensuring transparent and efficient pricing, benefiting both buyers and suppliers.

Over the past decade, cost engineering has become a critical function within major automotive companies and their suppliers. This shift marks a departure from earlier practices where tenders were issued without setting target prices, leading to uncertainties about the justification of quoted prices and potential savings. Today, cost engineering departments ensure greater transparency and efficiency in pricing, offering significant benefits to both buyers and suppliers.

The Evolution and Role of Cost Engineering

The primary objective of cost engineering is to calculate target prices (Greenfield pricing) for components. These target prices are then compared with supplier quotations (Brownfield pricing) to evaluate their justification. A justified price typically includes realistic manufacturing costs plus a fair margin for the supplier. This process prevents suppliers from including unnecessary costs and ensures that cost-saving opportunities are identified without demanding unreasonable changes in production processes.

For standard components, the purchasing power lies with the buyer, supported by their cost accounting. However, for specialized components, where patents or unique manufacturing processes are involved, the negotiating power shifts towards the suppliers, allowing them to enforce their pricing more effectively.

Key Objectives and Methods of Cost Engineering

Target Price Calculation (Greenfield)

Cost engineers determine the optimal cost structure for manufacturing components at a Greenfield site, based on the lowest Total Landed Cost (TLC) and the best technology concept.

Analysing and Optimising Costs

By dissecting both their own and competitors' products, companies can uncover potential savings. However, it's crucial to recognize that not all identified savings can be realised, due to patents and proprietary processes.

Early Integration Into Development

Since 80% of a component's costs are fixed post-development, integrating cost engineering early in the development process is vital. This integration can prompt product adaptations that result in cost savings.

Value Engineering

Value engineering compares the added value for customers with the resources used or the price. This ensures that higher costs are justified by the value they add, which varies by market segment (e.g., sports cars vs. small cars).

Challenges and Considerations

Quality and Reliability

Quality control plays a crucial role in supplier selection. Once a supplier is integrated, changing them can be costly and time-consuming, which enhances the supplier's negotiating power.

Supplier Insolvency

The financial stability of suppliers is critical. Automotive companies have sometimes had to support struggling suppliers to avoid disruptions.

Technological Adaptation

Suppliers must continually update their processes to stay competitive. This can be costly and cause delays, affecting integration and efficiency. Ensuring suppliers keep pace with technology is crucial.

Cost Engineering as a Must-have

Cost engineering is a powerful tool in the automotive industry, fostering transparency and driving cost efficiency. By leveraging detailed cost calculations and early integration into the development process, companies can optimise their pricing strategies, ensuring fair and justified prices while maintaining quality and reliability.

For more information about starting out with cost engineering, read our whitepaper: "7 Steps to Elevate Your Cost Engineering". Explore essential steps for effective cost engineering department, driving efficiency, and sustainability. Learn how to optimize costs, reduce carbon footprint, and stay competitive in today's complex market landscape.

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Tset Whitepaper: 7 Steps to Elevate Your Cost Engineering

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