Miltera job shop in Kitchener, ONClick image to enlargeBy Tim Wilson

Most companies set their cost targets based on what they’ve done already. There are two problems with this: first, it limits opportunity for improvement; and second, it doesn’t help much with new jobs. As the saying goes: if you look in the rear view mirror, you might drive off a cliff.

“Historical data typically does not accurately represent what a product or part should or will cost,” says Julie Driscoll, VP of strategic marketing & product management at aPriori, a cost management software company. “As such, the manufacturer may not have insight into the true cost drivers.”

The challenge is that costs become more predictable the closer a shop gets to the manufacturing process itself, and it is mistakes at the concept or design stage that can lead to serious over-runs at the end. Good estimating at the design stage should therefore minimize the potential for decisions that may create unnecessary costs further down the line. But this can be difficult with new jobs.

“Cost engineering and sourcing teams do a great job evaluating a small percentage of the new parts developed by the designers and engineers,” says Driscoll. “But a significant percentage of new parts, especially moderately engineered parts, are often not cost-optimized due to lack of human resources and automated costing solutions.”

From aPriori’s perspective, the answer is to automate costing as much as possible. This way, engineering and sourcing teams can screen large volumes of parts, allowing them to reject those that may be overdesigned, or where a supplier quote does not match the estimate provided by the software.

“By isolating the outliers before going into production, or before committing a purchase order to a supplier, the cost engineering and sourcing teams can work with the supplier to get it right from the start,” says Driscoll.

When experience is the problem

“Estimating based on experience is the typical method, and leads to companies winning some jobs and losing others,” says Jay Snow, marketing manager at estimating software company MTI Systems. “Their customers, however, have and still are becoming smarter, in that they expect more from the quotes they receive from their manufacturing supplier.”

Specifically, customers want to see more data. They want to know the thinking that went into the estimate, and more transparency. This can go against the culture of estimating, in which shops believe their internal methodologies offer competitive advantage. But if a customer thinks there is too much guesswork involved, they will lack confidence in the entire process.

“It can become a problem when the customer requests changes to the part estimate,” says Snow. “For example, requesting different quantities, different materials, adding or subtracting features.”

This exposes both the customer and the shop to undue risk. For the customers, changes to a ‘guesstimate’ can reveal inconsistencies, which makes it harder for them to adjust to market demands. Uncertainty with regard to alterations can also add to frustration with the supplier, and a desire to seek out other options that can deliver more transparent and consistent pricing. As well, though simple Excel spreadsheets can be handy and useful, over-reliance can create issues.

“Problems increase with spreadsheets used over the long term, such as accurately reflecting data updates and changes,” says Snow. “What this means is that when an estimate is complete, and the customer requests a change, it’s common that the estimate needs to be started over–almost from the beginning.”

The most challenging scenario comes when there are changes in materials. When this happens, a shop typically has to call up all its estimates and change the data to maintain accuracy throughout the system.

“This process adds inconsistencies leading to inaccuracies and other errors,” says Snow. “In the end, either the manufacturing supplier issuing the quotation over bids and loses their competitiveness, or they underbid and lose profit on the job.”

Change is the only certainty

Many estimators are overrun with the quantity of quotes they need to turnaround. Often, worried about the degree of uncertainty within the process, an estimator will throw in a “fudge factor” to protect margins. This is an ineffective approach complicated by the fact that the industry has fewer seasoned estimators.

“The guys that really know their stuff have been retiring,” says Jim Lurtsema from Micro Estimating Systems. “As a result, knowledge is being lost. But our system can capture that knowledge and store it in a database.”

With this approach a new estimator can leverage the years of knowledge that came before. And when new parts are in play, the software can still help out–assuming people are willing to make the investment.

“We have found that with new parts some people can be way off,” says Lurtsema. “Yet the older generation often doesn’t want to invest in new technology. They don’t want to change.”

The question then is: can they afford not to? It can be extremely costly for a company to process large volumes of engineering change orders. Software can help here. It can shorten cycles and add confidence, while also allowing non-specialized workers to participate. It can even help with expansion plans, with companies using estimating software to justify capital investments in new types of equipment.

“More companies are feeling the crunch, and are looking at investing in the software,” says Lurtsema. “You have to look at every penny, at every detail, including shift costs, to see where you are losing money and to make changes.”

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