Cost Engineering: 3 Common Challenges in Its Implementation

The control of procurement costs has always been a priority for businesses; a fundamental activity of Supply Chain Management. One of the most powerful tools available to companies in this regard is Cost Engineering, which, however, many companies still struggle to implement today.

Let’s look at the main challenges and some possible solutions for the correct implementation of this important and, relatively, underutilized tool.

Cost Engineering: What It Is and Why It’s Important

Cost Engineering, also known as Cost Breakdown, is a process that analyzes the value of a product in detail by dividing it into three main components:

• Material cost: the raw material used.
• Transformation process cost: the necessary processing.
• Overhead costs: general expenses, both direct and indirect.

This breakdown allows for estimating the actual production costs and evaluating the supplier’s margin. Through Cost Engineering, companies can optimize:

• procurement, which can use the analysis results to evaluate supplier margins and initiate negotiations for cost reduction, in addition to gaining awareness of the cost structure, both of suppliers and of the goods purchased from them;
• the technical area, which benefits from the data to improve its cost estimates during the design phase, making it easier to scout for suppliers that align with the costs hypothesized in the project.

The benefits of structuring a Cost Engineering process are therefore significant.

Let’s now delve into the 3 main challenges a company may face in its implementation.

First Challenge of Cost Engineering: A “Know-how Intensive” Process

The first challenge related to Cost Engineering is that it is a process that intrinsically requires a high level of expertise on two fronts: technical and cost-related.

On the one hand, performing a breakdown analysis requires a significant knowledge of the product being analyzed and the techniques needed to produce it. There is a need to estimate a production cycle (with its related technologies) and to be able to evaluate processing times. This is often a major initial obstacle for companies that do not have this kind of expertise internally.

However, a second aspect should not be underestimated: the correct cost evaluation (of material, for example, or transformation processes in €/hour) also requires specific skills. Frequently, companies rely on values considered “market values,” taken from generic sources or based on the experience of the analyst, making significant errors and approximations that can lead to inconsistent results.

Second Challenge: The Need for a Shared Method for Cost Engineering

A second point, often critical even for companies already practicing Cost Engineering, relates to defining the analysis and calculation method.

Indeed, it should be:

• shared among all involved company stakeholders, to facilitate simple interpretation of results;
• flexible, to adapt to supply chains with very different characteristics;
• rigorous in its calculation steps, to be solid in discussions with suppliers.

The method is a key aspect for the comparability of analyses performed and, above all, for the continuity of the costing process.

Unfortunately, it is not uncommon for companies to rely entirely on the experience of their analysts, without seeking to structure the analysis process. This choice entails significant risks, such as:

• the loss of accumulated know-how over time, should an analyst leave the company;
• the non-comparability between analyses by different analysts using different methods and tools;
• the missed opportunity to leverage data and experience accumulated over time.

A clear and shared method, conversely, creates the opportunity to digitalize the process, fostering data sharing and structuring, unifying the calculation process, and simplifying the analyst’s work.

Third Challenge in Introducing Cost Engineering: A Cultural Shift

Finally, the most important aspect of all: introducing Cost Breakdown logic into companies requires a strong cultural change, especially within Procurement organizations.

Indeed, the implementation of these types of processes necessitates a maturation on the part of the buyer, who must be able to “reinvent” their approach to discussions with suppliers: from a purely negotiation-based one to a technical one, based on objective elements.

This important evolutionary step in the buyer’s growth must necessarily be accompanied by a growth in skills, necessary to prepare complex, fact-based negotiations with strong technical content. This is not a foregone evolution; it requires a certain predisposition from the personnel involved, who must be given the necessary time for this transition.

Therefore, there are several obstacles on the path of a company that wants to implement a Cost Engineering process; however, the results obtained once it is fully operational far outweigh the efforts made.

So, how can these challenges be overcome, and how can one benefit from the results that Cost Engineering can bring? The key rule is not to improvise, but to build, step by step, competencies and methods with the support of those who master the subject and can set the process on solid foundations.

Makeitalia: A Partner for Cost Engineering Implementation

Makeitalia, a company whose core business has been Supply Chain and supply chain management for over 13 years, can be your ideal partner for implementing Cost Engineering.

Alongside our clients, we have supported various companies in Cost Breakdown projects, both in the Assessment phase and in the executive phase, achieving the set results together and realizing ideas.

Furthermore, we offer companies a dedicated training course specifically on Cost Breakdown analysis, with the aim of deepening this analytical methodology that allows for understanding, in detail, the cost structure of a specific component or product and identifying the correct market price.

If you need to delve deeper into the topic for business and/or training needs, contact us without obligation through the dedicated page of our website, available at the following link Contact Us.

We will be happy to listen to your needs, chat with you, and present our various solutions.