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07/02/2014

Product costs in a nutshell

The calculation of purchased parts, analyzing in-house manufactured products or the design- and planning-driven product cost calculations no longer are solely the instruments of the automotive sector. We talked with Godo Lange-Hilmers, Managing Director of Kerkhoff Software GmbH, about the implementation by means of a calculation software.

 

You are offering a software, which facilitates product cost calculations for buyers. What's the idea behind it?

Lange-Hilmers: Since the 1980s, product cost calculations have been a focal point for purchasing especially in the automotive area. At that time, the purchasing costs of bought-in parts were illuminated to find out how much such components actually might cost in reality. During the last few years, this has increasingly become a topic in other sectors of the industry as well. Product cost calculations and value analyses are used for a cost-specific optimization of components. We here established a problem – namely, that the subject is very difficult for many companies because they are lacking the knowledge know-how. Classical purchasing is undergoing changes and the purchasing activities are supposed to be extremely supported by cost calculations.

A problem for many purchasing departments?

Lange-Hilmers: In parts, this subject had long been on our clients' desks; and they tried their own parts calculations, but they really didn't know how to implement this. Just a software alone cannot really have any effect with regard to such a comprehensive and complex subject. Important is the knowledge transfer into the purchasing departments which we provide in companies by means of training sessions with our specialized experts. It is our concern to have clients gain courage in this respect and implement the systematic procedures at their company so that product cost calculation will become a fixed feature in the purchasing analytics.

Which components do you put under the microscope?

Lange-Hilmers: We analyze not only drawing-based components of which we have CAD data but we also analyze products, which we break down in our test laboratory. Basically, it's first of all a matter of creating transparency regarding the costs of component parts and how they are distributed within this. Once we find out whether it's a wage-driven or material-driven component, we are able to find out the greatest leverage in costs and optimize them.

And then…?

Lange-Hilmers: Once the levers are ascertained, thus the cost drivers are identified, we suggest to our clients to use alternative materials or design possibilities, like optimizing the thickness of a wall. Or we are looking principally into the manufacture of these components to think in new ways about the individual manufacturing steps and processes.

Calculation is thus the basis for further decisions?

Lange-Hilmers: The subjects resulting from product cost calculation are manifold. Especially in the producing trade, the product is the focus – it's the base, so to speak. All other analyses will build up on it – whether those are global sourcing considerations, target costing considerations or make-or-buy decisions. Only when the calculation has been properly set up, other decisions can be made.

For that matter, is the department of development always actually included in the processes from the start?

Lange-Hilmers: That will depend on what the particular client wants; he decides the point in time X as of which the product's life cycle will be considered. There are examples where life cycle considerations start very early already. This is where – during the design and development stage already – cost meetings are held every four weeks to compare costs and targets just to be on the safe side. Because once a component is finished and will go in series production, any changes to that component will be very cost intensive.
Then again, there are also other clients whose products are not so much in the innovative area, where stock products are modified. These are products where you need not reinvent the wheel every day; it's more a matter of optimizing the components.

Are you also looking at the buyers' markets in that respect?

Lange-Hilmers: That's the initial question in cost calculation. Whether a part is manufactured in the Far East or in Eastern Europe will have a major impact on its price. If a component is a material-driven part, it can be purchased at moderate prices even in Germany because the productivity is high enough so that wage costs will hardly have any negative effect. In this respect, a trend towards backward sourcing can be detected. The more I'm in control of the technology, the more I'll be able to do innovative work. And that's where nearby production facilities will be a major advantage.
Important will be the implementation of such methodology, and it's also important to show how other companies in this sector of the industry are already working with it and are being successful. The software components are merely tools in that respect. Humans who are doing the calculations in the end will be the experts after all.

Could you explain that on the basis of a practical example?

Lange-Hilmers: Let's assume that you have on your desk a component being scanned by a PC, which will determine a price of EUR 8.45 for that part. It might certainly be chic and beautiful and fast, but our big problem would be that we have no knowledge whatsoever about how this component was actually manufactured. And later, in negotiations with the supplier, nobody would be able to explain how that price had come about. However, when I talk about figures, I must also be able to go in depth – starting with prices of materials, going over manufacturing techniques and all the way to the unit labor costs on file. We want to establish this kind of understanding and appreciation with our clients.

What is the practical implementation like?

Lange-Hilmers: The software will provide the user with the maximum possible number of good suggestions regarding the level of costs in the various selected areas. Let's take labor costs: Comparison calculations are offered in 700 different regions, in 33 sectors of the industry and in 9 qualification stages. These are figures which are accurate in every detail and which otherwise would have to be manually researched, thus rendering any calculation tremendously slow and incredibly difficult. For example, up to 20 to 25 percent of the product costs are overhead costs. And suppliers often use these indirect costs to hide a few other cost items. This is no longer possible with calculations that are laid out in the open, that's where they can be refuted and proven wrong.

Will this cause supplier relationships to suffer?

Lange-Hilmers: That's a very sensitive subject which is discussed with our clients. We might see relations which are already biased or on the brink; but there might also be relationships that are extremely good and perhaps even of a private nature. This is where a strategy meeting before the supplier talks will be of utmost importance. As a rule, we will accompany 90 percent of price negotiations so that our engineers – with their specialized know-how and their calculations at the ready – will assist the buyer when talks will come to manufacturing details, for example.

So you will then support purchasing with your transparent figures?

Lange-Hilmers: We normally try to go into price negotiations with an aura or image of sympathy; but we take along the complete calculation system and present the price which, according to our findings, would be right for the component. We will then ask the supplier to help us with the transparency. Such systematic measures will prevent any discussion of sensitivities, and the meeting will proceed on the firm ground of facts. And this might bring about that such calculations are even done hand in hand, and the supplier will possibly be able to optimize its own manufacture and also benefit from it. This is quite different from the times of Lopez where suppliers were pinned against the wall – now, we will rather see the development of a collaborative process. Because nobody can afford any longer that production lines would stop as a result of shortages of supply or supply bottlenecks.