'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 customers in cost engineering. The first is focused on the manufacturing 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. Our clients look to external experts like us, who possess a wide, cross-industry network of contacts, to determine and analyse the necessary information. We regularly encounter this type of customer in cases where new types of electronic components are to be manufactured and/or procured, and even more recently, in the case of purchasing software applications.
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 within increasingly tight deadlines. Here, our team is able to relieve customers of this task and can provide accurate calculations for use in negotiations, which we are able to provide by offering 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 determined. Here at umlaut, we see ourselves as a mirror for suppliers and, with our approach, we are able to 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 digitalisation, 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 – e.g. the automatic linking and display of content from our smart phones on an in-car infotainment screen – present a new kind of problem. These departments often lack the necessary knowledge to determine the target costs for these kinds of products, due to their reliance on software functions, and struggle 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 both bringing 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. Additionally, up until this point, the company had hardly given this topic 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. We worked closely with our customer to describe individual requirements in technical terms, which were then assessed in terms of their benefit and the cost of implementation. Incoming quotes from potential suppliers could then be objectively understood, compared and discussed. Ultimately, we were able to ensure that our customer got exactly the product that they needed and, at the same time, were in a good position to make a direct comparison between suppliers based on the prices quoted for the fulfilment of each requirement. Moreover, with this approach, we enabled our customer 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 medium-sized companies, it is often the case that these 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 often do 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 transition and/or redirection from hardware to software roles. Germany is, after all, rather lagging in this area. This is why we at umlaut have gotten an early start on preparing our traditional consulting areas – which include cost engineering – for the influence of these new kinds of technologies and on developing them in a carefully targeted way.
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Sr. Manager, Cost-& Value Engineering
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