On the trail of prices

Purchasing consultants help companies to significantly lower their purchasing costs. Their procedure: By creating competition among suppliers and through renegotiations, new, lower market prices result which are accepted on both sides. But what purchasing consultants cannot see: What is the maximum cost of products – on the basis of a precise itemization of individual costs. These questions will be answered by the manufacturing and cost professionals of the Düsseldorf-based consultancy costdata Cost Engineering.

The armchair is still in one piece – but the upholstered chair is being taken apart, bit by bit, by means of saw, hammer and screwdriver wielded by employees of Frank Weinert and Adrian Schuster. Weinert is the founder of costdata Cost Engineering; and he explains the assignment: "A furniture manufacturer from Europe has this armchair completely produced in Asia, and only sticks his logo on in the end. We are to find out what the armchair actually costs in production." Until now, the buyer from Europe has been paying a price which is not transparent for him. Weinert: "Our client wants to know: What is really his supplier's margin?“

A classical situation for Weinert and his co-managing director Adrian Schuster who, prior to taking over this function, had been project manager with the purchasing consultants of Kerkhoff Consulting. Time and again, costdata Cost Engineering is commissioned to precisely calculate margins or to identify cost drivers in products for its clients. "It's basically not a matter of putting the supplier in a worse spot", says Schuster. "Much rather, the joint search for cost drivers in a product also enables joint cost reduction. That way, buyer and supplier jointly realize competitive advantages." One example: The Asian armchair supplier buys the springs for it from a subcontractor and then mounts them on its own on the frame of the armchair. Schuster: "We can calculate precisely whether the manufacturer's own installation is more expensive than having the subcontractor do the installation."

The expertise of Weinert and Schuster is certainly no witchcraft but, in Germany, it's been unique so far. How do the cost specialists proceed? Weinert: "Well, the armchair is broken down into all conceivable component parts. And then we break down these components into their individual pieces. And that's how it goes on until the armchair is really broken down completely." After that, costdata Cost Engineering calculates the costs of every individual part, split up into numerous individual costs. "An armchair leg has a more complex cost structure than would be assumed at first glance", says Weinert. "We calculate the material costs, the costs of personnel assignment, logistics costs, marketing costs, production costs and so on. Only when you break down a product into a great many different price categories, you'll get a realistic impression of its value."

Prices are taken by costdata Cost Engineering from a database which Weinert has been feeding data for 15 years already. The engineer from Rhineland had originally been a buyer with the American car manufacturer Ford, but then he became independent and self-employed with the smart business idea. "At that time, automotive suppliers called fantasy prices. As a buyer, I was very frustrated when I had no true arguments in price negotiations", says Weinert. That's why he designed the model of product cost analysis: He broke down Ford products bit by bit, cost parameter by cost parameter, and thus provided new latitude in negotiations. Weinert: "Buyers will profit incredibly when they are suddenly able to face their suppliers with genuine arguments. They will have an excellent basis for negotiations when they know precisely what products really cost in manufacturing. Otherwise, they would just haggle over market prices, frequently argue in a vacuum, or have to rely on estimates." While become independent and self-employed, Weinert also advanced into other sectors of the industry: Thus, he calculated mailboxes for the German Postal Service (Deutsche Post); also driver's cabs for a commercial vehicle manufacturer, or the cost price of a package of frozen gyros for a German food discounter.

All that data went into the comprehensive costdata database which today contains wage and salary data, workplace and machinery data as well as overhead cost structures from more than 20 sectors of the industry and in 1,100 regions worldwide and is updated every 3 months. "At the push of a button, we are able to say how wage costs will change if production is transferred to a different country", says Weinert. "But at the same time, we can also determine immediately how the change of one component will affect the total cost structure."

In the furniture and household goods industry, Weinert, Schuster and their team not only calculate complete products. "Frequently, furniture manufacturers obtain all individual parts from different factories and afterwards only take over the assembly", says Adrian Schuster. "Then we calculate: What precisely do these individual parts cost? And of course: Does own assembly make sense really?“ Unexpected: "We also have clients who want us to calculate their own products. Believe it or not: Many companies cannot say for sure what an individual product really costs in production. That's where we can help."

Recently, the purchasing consultancy Kerkhoff Consulting acquired an interest in costdata Cost Engineering. CEO Gerd Kerkhoff is one of the best-known buyers in Germany. "I was enthusiastic when I saw, for the first time, the approach by the production specialists and their software", says Kerkhoff. "That's exactly what our consultants had been missing until now. In negotiations, they can finally argue based on facts and no longer need to come up with their own estimates."

Three questions to Frank Weinert

Mr. Weinert, companies don't know what their own products cost? How is that possible?

Weinert: Today, the manufacture of goods – in this case furniture – takes place in a complex supply chain. Components are coming from all regions of the world; they are transported by different means and pre-assembled at different locations. That's how transparency is lost fast – in terms of which costs are really incurred, and especially which costs may be incurred. That's how the cost-optimized control of their supply chain will slip away from companies.

You offer support to companies in providing such transparency. Are companies unable to ascertain these costs themselves?

Basically, companies are able to determine these costs themselves; after all, we aren't talking about rocket science. But fact is: Only few companies have the corresponding data records to fill any cost calculation with worldwide data. Fact is also: Especially small and medium-sized companies – which are characteristics for the furniture industry – in most cases don't' have the personnel resources to carry out a so-called cost breakdown themselves.

In your day-to-day operations, what's the role of your collaboration with consultants from Kerkhoff Consulting?

Weinert: Kerkhoff Consulting's stake in costdata Cost Engineering was a carefully considered idea. Kerkhoff consultants are distinguished cost specialists; but frequently, however, they can also only rely on estimates to derive actually incurred production costs and thus the margin. We now help these consultants to improve that estimate to 95 percent precision. That's why Kerkhoff Consulting even recommends us to its clients today.