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07/29/2011

External data give away internal cost drivers

PRODUCT COST ANALYSIS: Quite legally obtained external data allow buyers to gather their suppliers' internal production and unit costs. That kind of knowledge will strengthen a buyer's position in price negotiations. Using such benchmarks, production managers can trace cost drivers.

The supplier reduced prices by 3 % – instead of increasing them by 3 % as originally planned. So after a first customer talk already, the investment in database access had paid off for Dirk Reimann, member of the extended management board of Trox. Dirk Reimann is responsible at Trox for worldwide purchasing. According to the company's own information, Trox is Europe's market and technology leader for components in indoor air systems such as air conditioning, fire and smoke protection, volume flow control, sound control, and filtration.

The company has its headquarters in Neukirchen-Vluyn in the Lower Rhine area, and its buyers are certainly not suspiciously eyed by suppliers as costs crushers. Reimann: "It's nice to be successful in reducing costs. But the main point is to identify cost drivers early on and make risk assessments via the supply chain." For example, Trox buyers were able to show how a change of one eurocent per kWh would affect the end price of the product or how the manufacture of changed lot sizes – two-months versus one-month demand –– was able to reduce machine setup times and thus lower costs.

Trox sells and produces on all five continents. The company also does its purchases there: From steel to electronics components. In 2011, the purchasing volume will amount to approx. 40% of sales of € 400 million, generated with a workforce of 3,300. Ambitious goal: € 500 million in sales in 2015.

"When we first used the software, we were really surprised about how precise the benchmarks were for machine operation and parts costs, for overhead and social security costs", remembers Dirk Reimann. "For example, a total of 16 collective bargaining districts was even listed for Romania." Only one-fifth of German enterprises are using the product cost analysis tool to provide significantly increased cost transparency of its purchased products and own manufactured goods. And that although about 80 % of the companies want to lower their costs. That has been the result of a joint study by the Institut für Demoskopie (Institute for Public Opinion Polls and Research) in Allensbach, the University of St. Gallen and by Costdata Cost Engineering, a consultancy specializing in product cost analyses. Automotive vendors are trailblazers: A total of 44 % of vendors in the automotive industry have a so-called cost breakdown tool; the total is even 61 % for companies with sales of over € 50 million.

The picture is quite different with German machine manufacturers: Only one in five uses the product cost analysis; in companies with less than € 100 million sales, it's just one in ten. These are figures from Frank Weinert, founder and managing director of the Düsseldorf-based Costdata Cost Engineering.

"Would you please calculate what this part may cost me at the most?" That's the sort of question that will usually start research and consulting projects for Frank Weinert. About 15 million data records are supposed to be in the databases which are updated by him and his staff of 35 employees.

After having worked for ten years at Ford, the production engineer Weinert founded his company Costdata GmbH in 1997; he developed a software and database with thousands of article price components. Three years later, Weinert set up the company Costdata Cost Engineering, together with the Düsseldorf-based consultancy Kerkhoff Consulting. The new company consults clients in the area of cost analysis and, to this end, it accesses the software of Costdata GmbH.

At Costdata, six researchers are constantly monitoring where in the world new data are to be found. "All data records are updated every three months at the latest", says Managing Director Frank Weinert. A selection thereof is then sold to major accounts, e.g. in the automotive industry. These companies will then match their know-how with the bought-in information. Other clients buy licenses for database access.

"Our service definitely pays off for companies as of a purchase volume of € 500,000 per year", touts Weinert who does consulting for industrial buyers as well as for suppliers. "Our reference models show that costs can usually be reduced between 15 % and 20 %."

According to the provider, Costdata databases provide information about production and unit costs of 65 manufacturing technologies in about 1,100 regions – from Baden-Württemberg to China, from industries such as machine engineering, semi-conductors or breweries. And no longer any secret are supposed to be: Wages/salaries, non-wage labor costs, costs of machines and materials, energy prices and infrastructural expenditures, overhead costs and many others more.

Weinert: "For non-wage labor costs for example, we don't just simply slap on a percentage to wages, e.g. 14.75 % – instead, we calculate the data according to regions. If wages are increased in a region, we update our data.”

In their search for the best production location and optimum product costs, consultants enter the desired area or the area to be compared into their laptop database, indicating industrial sector or the material most used, the product and expected sales. Any results shown will be analyzed, compared and costs of parts calculated. Consultants and databases both do not just name any suppliers. Weinert: "We don't have any supplier database."

The databases know nothing about the seller's soft skills, nothing about whether supplier and buyer are a good match mentally, or about the supplier's affinity for production and quality and how quickly and willingly the supplier will react to change requests by the customer. Entrepreneurial decisions must remain a matter between buyers and general management.