Cost engineering: A perfect touchdown for costs and benefits

Illustration | Bosch Rexroth AG
Marginal Column

Customer requirements that vary around the globe and pronounced price sensitivity demand a holistic approach to product modification and cost optimization.

 

“You can’t please everybody” is a phrase you are likely to hear less and less in the future. Above all in those companies fighting for survival on the global marketplace. For this is where this old “pearl of wisdom” is turned right on its head. If you want to succeed against global competition, you will have to be in a position to please everyone. The marketplace demands individually modified service packages at individually optimized prices. If a product fails to meet quantitative and functional requirements, your customer will be gone – and the supplier’s image will be severely damaged. If the product is over-engineered, its price will usually be too high and beyond the customer’s means. The high-tech sector in the West, in particular, is encountering the latter more and more frequently.

Not every customer needs technically complicated works of the engineering arts at a premium price. In many countries “just enough” is all that’s needed – concepts that contain no superfluous performance reserves, but also permit no compromise in handling key tasks. “Our target is to fulfill customer requirements in terms of functionality and quality, and to do that at prices the customer is prepared to pay,” is how the renowned German professor of economics, Horst Wildemann, defines the order of the day.

This target is by no means a new one. Offering the right product at the right price is part of the basics every company should know. In today’s globalized environment, this is increasingly turning into a complex equation, frequently with several unknowns. What are the key technical functions needed to break into the Brazilian market? Is a purchase price of $ 2,356.50 really the best one for component X? What labor costs can be expected in the Chongqing region in the coming year? This complex range of tasks is aggravated by transferring ever more work to the target markets. “Local content” is key here.

Countries such as China, India or Brazil are no longer simply places to which work is farmed out, but economies striving for their own share of world trade. For many multi-national corporations, this means walking a fine line between standardization and individualization. The cost-reducing economies of scale and learning effects associated with standard products are pitted against the necessity to source products, services and processes locally. Yet another challenge is the volatile legal and commercial environment in many countries. Raw materials prices, wages, customs duties and rates of exchange tend to fluctuate and thus are targets that are hard to hit.

Cost engineering: comprehensive cost molding instead of cutting expenses reactively

Cost engineering can help as a comprehensive “navigation system” to achieve a spot-on landing in terms of costs and benefit to the customer. Cost engineering describes tailor-made management of product costs throughout the entire product life cycle. The target is to achieve the greatest possible benefit for the customer while simultaneously minimizing costs. This entails not only wielding the proverbial red pencil, but also an array of methods and techniques drawn from the fields of benchmarking, controlling and operations management. This approach is aimed at shaping costs actively, consistently and comprehensively.

Its concrete duties include preparing cost forecasts (defining target costs, for instance), planning product cost at the component level (target cost splitting), designing to cost, controlling and minimizing planned product costs during the development phase, controlling actual product costs during product development, as well as continuously optimizing products and processes during the product’s entire life cycle.

Cost Engineering …

...creates a factual base of information on market requirements, competitors’ offers and one’s own achievement potentials.

...increases the precision of cost and time forecasts by means of effective cost models.

...creates cost transparency throughout the product’s life cycle by means of consistent cost and time monitoring.

...minimizes product cost and development times by continuously optimizing costs and processes.