Cost Engineering in procurement – The (negotiation) evergreen

Costing, Value Engineering, Target Costing, Design-to-Cost are just an extract of many (wrong) descriptions for a task in procurement, which is called: Cost Engineering. We want to tell you about the six major steps for integrating Cost Engineering in your next sourcing case.  While a commercial only sourcing case or negotiation has its place in the sourcing world, most of the cases done for production material in the manufacturing industry need the support of an internal, technical counterpart. That counterpart is often the cost engineer. 

The six-step approach of Cost Engineering to nominate a supplier

Integrated into the Source-to-Contract process, a cost engineering approach is often done in six steps: Coming from an initial cost benchmark to the CE-backed negotiations. 

1. Setting the benchmark – Best Practice Greenfield Analysis 

“Creating a perfect world” is the most used description of a Best Practice Greenfield Analysis. A plant producing only one component, with optimal efficiency, three or four shift models with an occupation of 100 percent. 

While it is not reached in 99 of 100 sourcing cases, it provides guidance. Like the polestar – and we haven't heard of a 17th century sailor travelling into outer space. 

2. Collecting actuals – Supplier Analysis 

You know more that you know ... especially about your supply chain. Performance data, feasibility studies, auditing documents etc. are great source of information about the material, process and overhead cost base. By applying a standardized cost model and some experience, often high-level cost breakdowns can be created without involving your supplier.  

Optimizing in the “real” world – Best Practice Brownfield Analysi

At some point, it has to get real. Benchmarking and data analysis are very important, but without creating a realistic view, they are mostly worthless. 

While having the Best Practice Greenfield as a base, the Brownfield considers actual machinery, shift models and overheads and creates a reachable target for the negotiation process. 

3. Spreading the wings – Market Benchmark 

At the same time as the Best Practice Brownfield Analysis, it is advisable to integrate the learnings from previous steps and re-evaluate the supplier base for the RFQ process. While procurement is often under pressure to “seal the deal” with suppliers, especially during the development or engineering phase, an additional round for RFQ brings almost always new players onto the field. 

4. Writing the playbook – Negotiation preparation 

With all the information available now, you need to direct it. You certainly don’t have to go full Stanley Kubrick on your teammates, but clear roles, targets and strategies are important. You can start with simple preparation meetings, assign responsibility for raising questions, taking notes, and defining commercial targets. For bigger negotiations, it’s advisable to take a look into “game theory”. 

5. Coming to terms – CE-backed supplier negotiations 

After all you have done now, just close the deal (we know, it’s not that simple). But what everyone, who has already worked with cost engineers as a strategic purchaser, will tell you is, that it’s worth it. Getting down to what really creates value and what’s simply driving the cost, is a discussion many suppliers need and want (often because they learn about their cost structure the first time in that very meeting). 

Combine cross-functional know-how

Many of the tasks we just mentioned can be done internally. Whether you involve supplier development, engineering or controlling in your negotiation preparation. 

For creating a concept, defining processes, finding the right approach and managing a lighthouse project, it’s a good idea to involve external know-how.  

Schaich, T. / Stefan, F.