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06/10/2014

Cost Calculations Made Simple

Savings through Targeted Product Cost Analysis

One of the most important questions to be answered by purchasing again and again is that about the right price. Kerkhoff Cost Engineering has developed a software that can precisely analyze all product costs. Included are tools for product cost calculation and analysis as well as for indexed price developments. This enables the precise calculation of product prices and the identification of cost drivers in products and services. Basis of the software are comprehensive benchmarking data from all regions of the world which are compiled in a database. Tools and data are used daily by engineers and consultants and can thus be permanently validated, expanded and optimized.

In an interview with Beschaffung aktuell, Godo Lange-Hilmers, Managing Director of Kerkhoff Software GmbH, described the exact mode of operation of the software and explained why the instrument of product cost analysis has not yet arrived in many companies.
 
Beschaffung aktuell: Mr. Lange-Hilmers, what is the measurable added value for a company when it uses the instrument of cost analysis for its purchasing?
 
Godo Lange-Hilmers: The added value lies in the answer to the question "What does it cost?" – which has always been in the nature of trading. [nicht seither, sondern "seit jeher”] We are asking automatically for the quid pro quo – and we want the most precise possible answer. This characteristic question by every buyer can now be answered in detail.

Only starting with a specific degree of details can any results in price negotiations become measurable and thus bring about concrete savings. In that aspect, primarily the knowledge about the exact costs of the pertinent product presents the basis for the successful results. The developing cost transparency will provide the required feel for assessments and strategic decisions. For instance, a buyer trained in the way of costs will thus know which arguments to watch for or which ones to do without, what factors will drive costs, what of them must be negotiated and which ones, in turn, may be negotiable, i.e. debatable during negotiations.
 
Beschaffung aktuell: How does that actually work?
 
Lange-Hilmers: By means of a so-called green field approach, costs can be estimated on the basis of comprehensive benchmarking data. This will work without detailed supplier data. Should this estimated calculation be very much below the purchase price, more precise calculations will be recommended – this time with concrete supplier information. After that, the "right" price will be defined and negotiated.
Especially in practice, it is important that the software is clearly structured and sufficiently abstract to be easily understood and also able to be used directly in negotiations. It thus is a software which simplifies any estimate calculations, post calculations and initial cost calculations – without losing in precision. It will supply clearly processed results which can subsequently be presented and negotiated.
 
Beschaffung aktuell: Which data is included?
 
Lange-Hilmers: The software comprises all data that is necessary for a calculation. It includes, on a worldwide basis, the regionally specific, industry- and qualification-specific wages, overhead factors, costs of materials and price developments, costs of machinery, currency rates and country-specific factors, such as costs of electricity and premises, etc. At any point in the calculation, the user will be "assisted" with these proposed values to be able to make a statement as swiftly and safely as possible.
 
Beschaffung aktuell: And how do suppliers react to that?
 
Lange-Hilmers: In general, suppliers will react with tolerance because – to cite Robert Frost: "Tolerance is the uncomfortable feeling that the other fellow might be right after all."
We recommend to go as team players into the negotiations. Success should be jointly worked on – based on mutually transparent, fact-based and thus fair costs or prices, respectively. As of a certain point, open-minded collaboration will also be extremely exciting for the supplier – for instance, when it comes to the optimization of cost drivers, such as costs of materials or also in the adjustment on the part of design and production.
 
Beschaffung aktuell: For what sectors of the industry or for what companies is that kind of cost analysis particularly promising?

Lange-Hilmers: It might be said that any manufacturing company and thus any product is analyzable: From one-off production to series production, whether on a components level or on the level of complex assemblies. However, success should not primarily be measured by savings. It's much rather important to foster an understanding of costs in a company and raise the employees' awareness in this respect. This will have far-reaching consequences on the development, on design and construction, on work scheduling, sourcing considerations and, of course, on strategic purchasing.
 
Beschaffung aktuell: A few years ago, you conducted a study that showed that 80 percent of German companies actually want to reduce costs, yet only one fifth of them will use product cost analysis to realize more transparency in its costs? How do you explain that?
 
Lange-Hilmers: We are in a period of change. Meanwhile, even small and medium-sized businesses want to have precise evaluations of their procurement costs. Cost analysis is used both for defending one's own prices and for fending off the deterioration of prices.
In this respect we can often see that, on one hand, there is actually the courage to try something new, but on the other hand, there are uncertainties of how to go about it. Value and cost analysis is increasingly gaining in viability and, with many clients, it has already resulted in separate departments being setup. These, in turn, have the function of liaison offices – virtually as in-house service providers for the specialized departments of development, purchasing and procurement, controlling, sales and distribution. Even the creation of just one permanent post will provide clearly measurable results for smaller companies.
Another obstacle is the frequently dreaded additional burden on buyers who now even have to prepare cost calculations. In terms of this, the market still holds on to the erroneous belief that this methodology could be integrated just "in passing" as one of many instruments. Then, this approach will frequently fail and as a result will only be shabbily treated from then on. But the approach must go hand in hand with the corresponding resources planning and qualification assessments. This is the only way to guarantee long-term success. Because buyers should feel enriched in their work when they are using this approach; they shouldn't be burdened additionally, e.g. with the creation of new permanent posts which supply purchasing with the necessary cost information.
For any company, the cost and value analysis will be an important investment into the future – and with high returns to wit: Savings results that are based, in-house, on this method will not only have a cost coverage effect with all our clients but will also create long-term returns.

Beschaffung aktuell: Thank you for your information, Mr. Lange-Hilmers.
Questions for Beschaffung aktuell were asked by Ms. Ulrike Dautzenberg.