cost estimation is a major step in cost control and profitability. A cost estimation is a prediction done by the cost engineer or estimator based on the available data. It creates the baseline of the parts’ and overall cost of the product, part and/or project.
Cost estimation in automotive, engineering and manufacturing industries is an intricate procedure wherein the product to be costed is broken down into lower-level components such as parts, assemblies, sub-assemblies and wide range of techniques are used for estimating the costs by summing detailed estimates of various raw material, assemblies, sub-assemblies and processes and their direct labor and other costs. As the conditions and the design keep getting better, the estimated values also keep getting more precise.
Cost estimation provides the decision-makers with a better understanding of taking evidence-based decisions. While there are plenty of reasons why proper engineering part cost estimation is required, this article talks about the main reasons as not just estimation, but cost estimation accuracy is equally crucial.
1. Critical for Operations Planning
One of the biggest reasons why we need accuracy for engineering part cost estimation is because entire operations are planned and aligned based on this. While a bad cost estimation can end up in a loss of profit, a good cost-estimating helps in keeping operating margins down by avoiding unnecessary expenses. For the automotive, manufacturing and engineering industry, especially when it comes to cost engineers, following a right procedure for cost estimation is crucial to bring in accuracy.
2. Preparedness in Inventory Planning
We need to pay a lot of heed to the word, ‘inventory’ when it comes to cost estimating. Both are closely associated. If there is inaccuracy in cost estimation as regards to the vendor selection and/or quantity, then your inventory planning suffers. You may run out of the necessary material before time. Your production line may shut down because of insufficient resources making the product/part more expensive to finish due to delay. All this unexpected increase in cost reduces or eliminates profit. Hence, accuracy in the planning of suppliers, quantity and parts’ and their costs is very important.
3. Better inventory control
While the above-mentioned point talks about how inventory can be better planned with accurate cost estimation, the other aspect of the same point is overestimating creates fat in the product/parts ‘costing with too many resources. You cannot have a tonne of products lying unused. When you have chalked out your process properly, you would surely be able to stock up your inventory with what is required and not block or waste your valuable funds on over-stocking, again reducing margins that could have been added to the profit.
4. Mitigate potential delays from suppliers
Since automotive, manufacturing and engineering works with many ancillaries and suppliers, therefore chain of tasks is involved. It is crucial to complete every task as planned and scheduled. Even a delay of a day or two can create huge losses for the involved entities. The better the accuracy of a cost estimate, the better the planning and scheduling in predicting and adjusting for future change, if the need be.
5. Provides major insight into the primary manufacturing costs of the engineering parts
Cost estimation process allows you to look at the impact of alternate processes on the production of a part, assembly or sub-assembly. This helps you to decide primary manufacturing cost of the engineering part.
6. Cost estimating software with their cost drivers creates cost estimation in minutes
Conventional ways of estimating cost of a part, assembly or sub-assembly in automotive, manufacturing and engineering industry is very time-consuming, cumbersome and error prone. With the cost estimating software, each part detail which has an impact on overall costs is automatically associated to the production cost. With just a few mouse clicks, it calculates material, machining, labor and process costs based on the defined production sequence. As a result, the cost estimating software enables you to systematically assess various alternative processes, suppliers and quickly nail down the most cost-effective one.
7. Brings effectiveness in deciding SOBs
When it comes to deciding suppliers’ share of business, it is of utmost importance to know how much quantity for a part/component you need, to run your production unit. Accurate costing plays a vital role in creating a procurement plan. Because it breaks all the products at the component/part level and based on total requirement company gets to know total quantity required. With total parts requirement and suppliers details, help you effectively decide how to divide business amongst suppliers along with minimizing cost.
8. Proper anticipation of the budget even if your plan changes
The company allocates budget based on multiple factors. One of the factors is cost estimation because this gives a complete picture of any companies’ cost in sourcing raw materials. Perfect cost estimation is very crucial and should be flexible to incorporate any changes that affect product costs. A wrong estimation can mislead the overall budget of the company.
9. Comparison of Zero-based costing with Vendor-based costing for better negotiation
Accurate costing eventually takes cost engineers to know Zero-based costing of a part. This helps to answer one of the important questions “Are we paying the right costs to the supplier”.
10. Impact of prices change in overall business
Finally, costing is a very sensitive for the owner of the company and sourcing head. Raw material procurement cost is one of the factors to decide the profitability of a company. Fluctuation in the price of a raw material may impact the profitability to a company.
There are many more such reasons to the cruciality of accurate cost estimation. Being so important function of a Manufacturing, Engineering and OEMs companies, one can not rely on a legacy and insecure application for cost estimation. At the same time it is a cumbersome job that needs 100% attention of a cost engineer because just one error or change and your cost estimation go wrong completely. In this digital era its time to switch to automate solutions that make crucial cost reports for business owners on the fly and give better working experience to the cost engineers.
Cost It Right is one such solution which helps you achieve real-time cost data analysis for real-time decision making. Watch the video to know more about this Intelligent cost estimating software.