How to avoid common pitfalls in the costing of automotive products?

This whitepaper includes the insights that ASI gained over the past seven-years from working in India’s automotive industry. It contains hundreds of projects related to cost reduction, teardown, and benchmarking.

Auto component manufacturers require a reliable system to create detailed costing. This will allow them to meet the OEM’s should-cost scrutiny. This whitepaper will address common problems that can be overlooked in costing and offer solutions. Costing software be used as a checklist, or a guide that can be shared with employees in order to encourage them to take corrective actions.

The importance of a multidisciplinary costing team, automation in costing processes and category-wise tracking dynamic cost drivers are all important topics. The key to stopping margin leakage is real-time tracking costs and margins. The right costing system will allow you to easily update your costing.

We have a mission to make the Indian automobile industry more competitive in the global marketplace. This is just one step towards reaching out to our fellow peers who share this goal.

We are always interested in your feedback and if you have any questions, please email us [email protected]

Introduction

Costing a product is like a tightrope walk. If you price it too high, you risk losing your business to a competitor with a lower price, or if the price is too low, you will lose more margins. To achieve the optimal product cost, it takes more than just knowledge about materials and processes. It also requires real-world experience as well as judgment.

Market forces will determine the final price, but it is important to have a good understanding of the product cost in order to make the best business decisions. The pandemic proved that only companies that can manage to keep their costs under control and have strong financial controls have been able to weather the storm. Our experience with component manufacturers has shown that the OEM they work with is the best source of product costing information. They also have fixed norms. This costing is based upon a set norms. They do not show the true costs of a manufacturer or how they can be optimized.

If the products are built-to-spec, costing is done using rules-of-thumbs that have been developed through experience. Manufacturers who are looking to scale up need to create their own costing method based on data. This is important in an era of “should-costing”. This whitepaper will help you avoid common pitfalls and make it easier to create your own costing process.

Let’s start by listing the most common mistakes we have seen companies make. These are arranged in the table as follows:

The next chapters will provide more detail on each of these categories. We will now discuss the best way to cost your project.

As a team, costing

A single marketing or finance guy can’t do costing. This team must include members from all departments, including finance, design, production, finance and purchase, as well as marketing. The marketing team should establish the target price or the winning price as the starting point. Next, the design team must create the BOM costs and perform teardown and benchmarking in order to understand competitor products.

The inputs from purchasing would include whether the part can be purchased locally or if it must be imported. Production must provide inputs about in-house parts production, and whether machines can meet production goals based upon machine hour rates and productivity. The finance team must then compare all costs and prices and make a decision about whether the business is viable.

All departments need to have the same database or platform from which to choose prices. Otherwise, coordination can be a problem. The design team must understand that price and cost are different. Prices are determined by the market. The marketing and purchase teams must also understand design in order to work well together.

Automated tracking of dynamic cost drivers

When costing a method, it is important to consider the dynamic nature of input prices. This is combined with the fact that companies may have between 20 and 30 cost drivers. It is impossible to manually track and update them. Automation is the answer.

This allows the ERP system to pull the information from the product’s input price and reflect it in the internal costs of the products. Real-time margin calculations are used to show the impact on the cost.

Automation also allows you to quickly create costing scenarios before you quote for a part. If the part is possible to be manufactured in two plants, it’s important to consider the impacts of the different logistic, MHR, and LHR costs before making a final decision. To find the best cost, it is worth studying different manufacturing processes and engineering scenarios that use different materials.

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About RJ Frometa

Head Honcho, Editor in Chief and writer here on VENTS. I don't like walking on the beach, but I love playing the guitar and geeking out about music. I am also a movie maniac and 6 hours sleeper.

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