“It’s important to achieve a balance between costs and customer value”
How companies can benefit from cost engineering
Mr Altpeter, Mr Schumacher, you are – among other things – experts in the field of cost engineering. Could you briefly explain what this term means exactly?
Altpeter: With cost engineering, our goal is to analyse in detail both the costs and the value of our customers’ products and to use the information we have obtained to arrive at specifically targeted measures for improvements. Or, in other words: we consider the target costs of a product in comparison to the price that the customer is prepared to pay for it.
This goal is nothing new. Offering the right product at the right price is, after all, a basic premise for any company’s operations. Why is it that so many companies require support with cost and value engineering?
Schumacher: We tend to come across two basic types of customer in cost engineering. One is focused on the manufacture of a product which may perhaps involve the use of new technology. In such cases, we often find that the manufacturing process used for the product, the associated costs and the customer benefit generated are not understood in sufficient detail. This is why our clients look to external experts like us, who are in possession of a wide, cross-industry network of contacts, to determine and analyse the necessary information. In particular with the manufacture and procurement of new types of electronic components or, for example, with the purchase of software applications, we regularly encounter this type of customer.
The other type of customer we come across does possess the necessary knowledge with regard to the use of emerging technologies and the manufacturing processes of their supplier. But, as one of the direct results of ever shorter development cycles, they simply do not have the manpower to carry out the necessary calculations in the desired level of detail and by the target deadline. In cases such as these, our team are able to relieve customers of this task and can provide accurate calculations for use in negotiations using attractive price models.
I presume this must also have an impact on purchasing and on the suppliers?
Altpeter: Absolutely. A typical question that our customers ask us concerns products from their suppliers. For example, a manufacturer would like to know which real costs arise on the supplier’s side, so that they can gain a better understanding of how the price for their externally procured components is made up. Here at umlaut, we see ourselves as a mirror for suppliers and we create transparency and comparability of quotes for our customers. They can then make direct use of this knowledge in their negotiations.
How does this come about?
Schumacher: As a result of digitisation, for example, more and more products – in particular in the automotive sector, but also elsewhere – are being supplemented or even replaced by software functions. Yet the traditional departments for cost engineering and purchasing have specialised chiefly in the provision of support for mechanical or electronic goods. In this case, software functions – such the automatic linking and display of content from our smart phones on the infotainment screen – represent a new kind of problem. These departments often lack the necessary knowledge to determine the target costs for these kinds of products or to draw up technical or economic comparisons of quotes.
Could you give us an example from actual practice?
Altpeter: Of course. A customer from the music and theatre industry recently requested a special software solution for their warehouse logistics with the aim of bringing some order to the chaos that had arisen and achieving optimal utilisation of their warehousing space. There was no question of using an off-the-peg solution. A further factor of relevance was that, up until this point, the company had hardly given this theme any attention at all. It was therefore very difficult for our customer to evaluate the quotes and proposed solutions of potential suppliers and to come to a decision.
In this case we were able to unite our expertise from both software development and cost calculation. In accordance with this, the customer’s individual requirements were described in technical terms and assessed in terms of their benefit and the cost of implementation. Incoming quotes from potential suppliers could then be objectively understood and discussed. We were therefore able to ensure that our customer got exactly the product that they actually needed and, at the same time, that they were in a good position to be able to make a direct comparison between the various suppliers with regard to the prices quoted for the fulfilment of each particular requirement, and were able to negotiate on the basis of facts.
Is there an industry or an area that has a particular need to catch up in this respect?
Schumacher: At this point, it would make sense to return to the two customers used as examples. In particular in medium-sized companies, it is often the case that companies don’t have their own cost engineering department. It is therefore difficult for them to assess new technologies in terms of costs and benefits. In such cases, we are always pleased to be able to integrate the cost engineering approach directly into our customers’ organisations by means of practice-based projects and to see it consolidated in the long-term as a result of our first joint successes.
If we now consider large companies who have their own cost engineering departments – as is mostly the case in the automotive sector – we find that we can usually offer assistance rather from the point of view of short-term capacity expansion. It is precisely here, however, that we see a great need for advice when it comes to preparing the existing organisation – with its usual way of approaching things – for the redistribution from hardware to software roles. Germany is after all rather lagging behind in this area. This is why we at umlaut have made an early start on preparing our traditional consulting areas – which include cost engineering – for the influence of new kinds of technology and on developing them in a carefully targeted way.
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