Cost Engineering
In an industry where every cent counts, cost engineering has emerged as a pivotal practice, reshaping how manufacturing companies manage expenses and enhance profitability. 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.
What is Cost Engineering?
Cost engineering is the practice of managing and controlling project costs through activities such as estimating, cost control, cost forecasting, investment appraisal, and risk analysis. It ensures financial efficiency and profitability by optimizing resources across the product lifecycle.
The role of cost engineers extends beyond simple cost-cutting; they provide data-driven insights to balance cost, quality, and performance. With the rise of electrification, regulatory demands, and fluctuating raw material prices, cost engineering is more relevant than ever.
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.
Analyzing and Optimizing 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 in Cost Engineering
As cost pressures increase, manufacturers must navigate several key challenges that impact their ability to manage costs effectively. Addressing these obstacles requires a combination of technology, data-driven strategies, and collaborative supplier relationships.
1. Data Silos & Lack of Digital Integration
Cost data is often fragmented across spreadsheets, ERP, and PLM systems, making real-time cost tracking and decision-making difficult. Without a centralized system, cost engineers struggle to maintain transparency, leading to inefficiencies and miscalculations. Implementing cost management software helps consolidate data and automate calculations.
2. Unpredictable Raw Material Costs
Fluctuations in raw material prices due to inflation, supply chain disruptions, and geopolitical instability create challenges in cost predictability. Without proactive should-cost analysis, companies risk inaccurate pricing and profit erosion. Advanced cost engineering tools can help model price variations and build more resilient cost structures.
3. Supplier Cost Transparency & Negotiation Leverage
Many suppliers resist sharing detailed cost breakdowns, making procurement costing and price negotiations difficult. Without accurate visibility into supplier costs, companies struggle to identify cost-saving opportunities. Using should-costing tools allows manufacturers to challenge supplier quotes with data-driven insights and achieve better pricing.
4. Quality and Reliability of Suppliers
Maintaining supplier quality while controlling costs is a constant challenge. Once a supplier is integrated, switching can be costly and time-consuming, increasing supplier leverage. Ensuring rigorous cost engineering practices and evaluating suppliers based on both cost and quality helps mitigate risks and maintain long-term reliability.
The Future of Cost Engineering: What's Ahead?
As the manufacturing industry evolves, several key trends are shaping the future of cost engineering:
1. Transparency in Supply Chains
Increasing regulations are prompting companies to analyze production costs and risks within their supply chains more meticulously. This heightened scrutiny aids in identifying and mitigating inefficiencies, ensuring more accurate cost assessments.
2. Digitalization and Automation
The integration of digital technologies enables precise calculations, cost analyses, and forecasts. Automation accelerates data collection and processing, reducing errors and enhancing efficiency.
3. Integrated Software Solutions
Platforms that consolidate various aspects of cost management facilitate seamless collaboration across teams and departments. By accessing centralized databases, these solutions streamline processes and improve decision-making.
4. Cloud-Based Collaboration
Cloud technologies simplify access to cost engineering tools and promote collaboration within and between companies. This accessibility fosters real-time data sharing and more agile responses to market changes.
5. Emphasis on Sustainability
Cost analyses increasingly incorporate environmental impacts and sustainability considerations. Evaluating eco-friendly production processes helps reduce resource consumption and CO₂ emissions, aligning with global sustainability goals.
By embracing these trends, manufacturers can enhance efficiency, reduce costs, and contribute to a more sustainable future.
Learn more about the future trends in cost engineering.
How Tset Helps Optimize Cost Engineering
Tset’s product costing software empowers manufacturers to overcome cost engineering challenges by providing data-driven insights, automation, and transparency.
With a centralized platform, companies can efficiently manage costs, improve supplier negotiations, optimize design efficiency, and meet sustainability targets. By leveraging advanced cost optimization software, manufacturers can:
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Reduce time spent on manual cost calculations by automating cost breakdowns and eliminating reliance on spreadsheets.
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Streamline should-costing and procurement strategies to ensure stronger supplier negotiations based on accurate cost data.
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Leverage a cloud-native, evolving SaaS platform that integrates seamlessly with ERP and PLM systems.
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Structure data and create centralized knowledge by consolidating cost insights across multiple projects and sharing across organization.
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Access expert support and a customer-first approach with a dedicated team providing guidance and solutions tailored to industry-specific challenges.
See how Tset simplifies cost engineering in just 5 steps! Watch now.
Conclusion
Cost engineering is a powerful tool in the manufacturing 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.