Leaders feel constant cost pressure while making business decisions, whether in sourcing or logistics. This pressure is a result of the narrow approach they follow. For example, many focus only on saving costs on raw materials while ignoring the role of other factors like cross-team collaboration. They should have a whole-lifecycle perspective to gain larger profit margins and reduce the cost pressure. This perspective also brings transparency and accountability while delivering quality products and services.
Cost engineering is a way to do this. It is more than just cutting expenses and implementing the right techniques and strategies to produce economically viable and customer-centric products.
What is Cost Engineering and Its Key Components?
We call it the science of managing project costs throughout the product life cycle, from stage zero, i.e., product planning, to the final stage of delivery. Analyzing costs at each stage helps find cost-saving opportunities that would otherwise be overlooked with a narrow approach.
However, cost engineering covers both financial and technical aspects, including several key elements like life cycle cost analysis (LCA), cost-benefit analysis (CBA), and value engineering.
Let’s understand a few in brief.
The Valuable Parts of Cost Engineering
These are the foundation elements of cost engineering. Understanding them means you can step forward in the right direction to your goal.
Cost Estimation: Setting budgets for your product is a strategic approach. It helps in making decisions on cost flow across the different departments and setting targets for profitability. The estimation, however, includes clear cost factors and hidden cost drivers.
Value Engineering: Though reducing manufacturing costs is the end goal, manufacturing a high-value product is implicit. Value engineering helps understand how a certain product can be made more useful for the end customers without violating industry standards.
Cost Control and Management: The actual expense can be much higher than initially planned. Cost control and management help find these deviations and ensure the product and budget meet the initial estimations. They include various techniques used throughout the product life cycle to find the gaps, such as cost variance analysis and cost baseline. They also help find the right technique to optimize the cost at each stage.
Cost Analysis: This element of cost engineering tells how different scenarios or alternatives will impact your budget and product. For example, a cost engineer may help compare whether a new design will yield more benefits or upgrade the existing one. The goal is to make the best choice under different scenarios with less risk.
You Need More Than Fundamentals
Cost reduction engineering is more than understanding the basics. You may understand it well, but you may need help with implementation. That is because of internal inefficiencies and a lack of a clear mindset to apply cost engineering throughout the organization. Problems may arise if your organization is following the same path:
- Not considering TCO: Too much focus on one aspect can increase the cost elsewhere. For example, purchasing cheap raw materials might reduce procurement costs but increase logistics and maintenance costs.
- Limited Team Involvement: Cost reduction engineering requires complete collaboration from the various departments. With their input, you and your product might succeed.
- Overcomplicated Analysis: Sometimes, perfection can lead to failure. The time and effort you spend creating the ideal cost-saving models can delay your savings. Simple estimates can also be effective with the right insights.
- Short-Term Approach: Treating cost engineering as a one-time fix limits benefits. Companies must embed cost engineering practices as an ongoing part of operations, with tools and training in place.
- Scaling Issues: Cost engineering should be applied organization-wide, but it can be challenging without the support of leaders and a thoughtful strategy.
Key Strategies for Cost Engineering Success
There are some strategies to follow to overcome the above issues and reduce costs.
1. Align Your Departments
Every department has its cost estimation and goals. Though they all aim to improve the company’s financial goals and profits, working in silos can create larger gaps in the shared goal. Manufacturing leaders must bring every department, finance, procurement, and engineering, on the same page to bring transparency and prevent missteps.
Key Actions:
- Collaborative Cost Mapping: Implement value stream mapping across departments to highlight cost drivers and opportunities.
- Enterprise-Wide Tools: Give them tools like Enterprise Product Costing (EPC) software to share standardized costing data. Such software also gives them real-time visibility into how their decisions will impact others at the same or different stages of the product life cycle. It will also keep the cost as a central element of the product from the beginning.
2. Centralize Cost Engineering Function
Every manufacturer has a cost analysis capability, but only some have prioritized it. Cost optimization is a reactive approach for many departments, failing the efforts of another. Standardizing methodologies will prevent this mismatch and keep expenses predictable and manageable.
Key Actions:
- Dedicated Roles: Appoint dedicated persons for important tasks like routine audits, assessing supplier performance, and budget control.
- Standardizing Metrics: Define KPIs (like cost-per-unit or lifecycle costs) and standardize them for each department that matters in cost engineering.
3. Strengthen Supplier Partnerships through Transparency
Collaboration with departments is not enough. You must bring together suppliers, stakeholders, and customers for a comprehensive costing. This collaboration will bring transparency and give more space for negotiation. We have an example to illustrate this.
Example 1
When you propose products to customers, the new pricing should align with previous quotes. It should clearly show the costs of tools or equipment to help them understand how the final cost was estimated. It also helps to know how costs changed at each stage, including those resulting from customer change requests. Any differences in the new pricing should be explainable and justifiable, making negotiation easier and transparent.
Key Actions:
- Strategic Collaboration: Include shared risk arrangements and mutual cost-saving goals in your contract with the suppliers.
- Data-Driven Negotiations: Use accurate cost data to negotiate deals that benefit both parties.
4. Create a Cost-Conscious Culture
True success with cost engineering is only achievable when cost efficiency is a cultural priority. Executives can set this tone from top to bottom, encouraging everyone to think critically about efficiency and proactively seek cost-saving opportunities.
Key Actions:
- Employee Training: Train your employees to make decisions that impact your cost efficiency. A cost awareness program and training can help build that ability.
- Recognition Programs: Reward them for proposing effective cost-saving ideas or identifying inefficiencies that can impact the overall goal of saving.
Conclusion
Cost engineering is a way to reduce costs in every sector. However, many see it as a financial exercise rather than a framework for growth. By integrating it fully across different levels of an organization and using standard technologies, business executives can adapt to the market and save significant profits. The above strategies of cost engineering will further help them navigate cost pressures confidently and secure sustainable growth.
