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Auto suppliers: Do your cost-estimating practices need a tune up?

December 19, 2017 Article 2 min read
Jon Wood
Autonomy, technology, product mix. Drastic changes in the automotive industry have suppliers paying close attention. Want to stay profitable? You must understand the strategic and financial implications, but is your cost-estimating function up to the task?

men with hard hats working in a manufacturing setting

Do you fully understand the cost drivers in your organization? How they impact profitability and your return on investment? If these answers are anything but a confident, capable "yes," it's time for a tune-up. As OEMs are demanding even greater cost transparency from suppliers, your business's costing and estimating function needs to be top-notch if you want to compete — and win — in today's quickly changing market.

As OEMs demand even greater cost transparency from suppliers, your business's costing and estimating function needs to be top-notch if you want to compete…

Lightweight, electric, autonomous

From autonomy and electrification to weight reduction, industry trends are driving suppliers to reimagine their businesses as vehicle designs evolve in new ways. If your business has been providing structural components or body panels made of steel, what will the continual focus on lightweighting mean for your volumes in the next five years? The next 10? What if the drivetrain components you supply aren't needed in the growing electric vehicle (EV) market — what will happen to your production volumes in those same time frames? Understanding the risk to your return on investment as you quote new programs will be critical.

There is, of course, a flip side. As the industry moves to greater automation and vehicles require new and different technologies, what opportunities might there be for your business? Suppliers that make parts for conventional rearview mirrors, for example, might look for inspiration at recent innovations in "smart" mirrors, some of which use cameras and displays and integrate GPS and vehicle communication systems. Is your cost-estimating function up to the task of projecting costs, margins, and ROI in areas where you might have limited experience?

As another example, suppliers that can quickly adapt and position themselves to supply new EV components can take advantage of the coming ramp-up. Overall, suppliers that can bring superior engineering and technical resources to their customers will have an advantage. There's plenty of upside and potential for future business. But targeting the right platforms and understanding the potential cost and profit dynamics is critical.

Ensuring investments deliver profitable work

Whether you're concerned about declining volumes or anticipate a ramp-up for new products and programs you're targeting, the questions you must ask are the same: Do I have the ability to compete? What investments in new processes or technologies will I need to make? And how do those investments translate into profitable work and a good return?

Whether you're concerned about declining volumes or anticipate a ramp-up for new products and programs you're targeting, the questions you must ask are the same…

The answers all require you to have strong cost-estimating practices in place so you can evaluate trade-offs and, given so much uncertainty today, run multiple scenarios (volume, throughput, etc.) to fully understand best- and worst-case outcomes. For example, as electrification comes online, what will that ramp-up look like? (Hint: It's likely to vary by platform.) No one has a crystal ball, but you’ll need to make some educated guesses.

For starters, suppliers need to understand the cost and profit implications of:

  • The changing cost structure of the vehicle and related components.
  • Product mix changes.
  • Impact on existing equipment and processes utilization.
  • Required capital investments in new production technologies.
  • The ripple effect of program launches, including how investments in pre-production activities will be amortized over the life of the program. If forecasted volumes are uncertain, your investment recovery may be at risk.

It's important for your cost-estimating practices to deliver timely, accurate costs, margins, and ROI under multiple, alternate scenarios, including about volume assumptions, about which components you should make vs. buy, and about assessing where-to-produce alternatives, as examples. We encourage clients to run multiple scenarios — best-case, worst-case, and at least one in between. Project your required investments, costs, and revenue over the life of the program for each scenario. Be sure to look at the projected margins, payback, and return on investment.

Let technology work for you

Recent developments in affordable, versatile software can make the estimating process easier and more effective than spreadsheet-based approaches. Using data analytics, too, can enhance cost estimating by helping suppliers identify and understand specific product and process attributes that lead to increased costs and/or greater profitability.

With the groundswell of changes in the automotive industry, suppliers must confront the strategic and financial implications. To minimize risk and leverage opportunity, a best-in-class cost-estimating function is crucial. Don't wait. Tune yours up now to position your company for success in an increasingly competitive market.

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