Product cost calculation in the development stage – When target prices determine the optimum

Design-to-cost means that optimum product costs are determined early on already in the development stage to thus secure the competitiveness of one's own product. As simple as that may sound, it takes many departments to play the same tune – as shown by the example of the automotive supplier SHW.

Company SHW was founded in 1365 and thus counts among the oldest industrial companies in Germany. Today, the SHW Group is an automotive supplier whose products significantly contribute to a reduction in fuel consumption and thus CO2 emissions in the automotive area. The price competition in the automotive sector is formidable; and in terms of new developments, SHW must be very careful to take precisely into account the target price to be realized. "For us, the design stage is definitely crucial because 70 to 80 percent of the costs for the component are here specified", says Hans Jensen, Head of Development International at SHW. "This will accordingly decide on a product's success, whether the company will be competitive or not."

To support the developer with consistent figures, a project was started last year with Niklas Panchyrz, Senior Partner at Kerkhoff Consulting. The project was begun with the product cost calculation of a developed prototype to establish cost transparency for all of the parts, materials and production processes which were used for it. Further development was then begun on the basis of these figures. "My claim and demand is that we develop cost-efficient products", Hans Jensen emphasizes. "And for that, one must start very early in the development stage; otherwise, huge potentials will be wasted."
Jensen made all those involved in the process sit down at one table: purchasing staff, designers and colleagues from production. Together with the production engineers from Kerkhoff Engineering, cost drivers were analyzed, reviewed and different value analysis alternatives were calculated for in-house production or for the purchase of parts.

"When a component is broken down according to material costs, according to processing or machining costs, or when you look at how often it must be remounted or reclamped during mechanical processing or machining, that's when we are able to work constructively on individual cost drivers and can also optimize assembly lines", says Jensen. Additionally, target prices for purchased parts were determined and, following that, the list of suppliers and so far realized tender prices were revised again. "Based on the cost calculation performed, we were able to point out corresponding action recommendations and make value analysis calculations in order to simulate – as in this case – alternative, cost-optimized prototypes for SHW," explains Panchyrz. Parts must frequently be purchased additionally at SHW. It was advantageous for the purchasing department when analyses provided increased reliability of calculations and when it was possible to enter into supplier negotiations with these substantiated figures.

Topics there were unit costs as well as cost of logistics. Because with the software, the user is able to access many cost factors. Thus, for example, comparison calculations are offered from 700 different regions, in 33 sectors of the industry and from 9 qualification stages. These figures would otherwise have to be researched manually and preparation of the calculations would be exceedingly slow and difficult.

Jointly to the target price
The interaction of design, purchasing and production then resulted in a prototype optimized to target costs where no expensive cost reduction programs were required for series production. "Especially for us as automotive suppliers, it is vitally important that our price calculation is air-tight", says Jensen. "After all, our product prices will then be locked in and fixed for a whole series and for a period of time of 7 years. So it simply must not happen that, afterwards, we cannot keep the price." Because renegotiations with OEMs would no longer be possible.

An additional benefit is also provided for the international programs: "We frequently have identical components in our works all over the world. With the software from Kerkhoff, we are also able to even determine target prices for these components because parameters for all countries are entered in the software", Jensen explains. These figures are then checked and implemented at SHW by means of a local check of suppliers. "We are thus able to submit, very quickly, a realistic offer for our products on a global scope", says Jensen.

Niklas Panchyrz, Senior Partner of Kerkhoff Consulting GmbH
"The calculation of purchased parts and the analysis via in-house manufactured products or the design- and planning-driven product cost calculation no longer are uniquely instruments of the automotive sector. Cost benefits can be realized and the competitive situation lastingly improved by means of the cross-sector expertise of a team of engineering consultants in combination with the software for product cost calculation. Different production technologies can be compared with each other. A differentiated calculation of costs is possible – for example, costs of materials, wages, energy, machinery, overhead. After preparation of the calculation, other cost analyses will be available – aside from the realized cost transparency. In this respect, companies will gain the desired perspective to be able to establish action recommendations."

Author: Kathrin Irmer