By Gene Russell, Manex President and CEO
I recently picked up a great book by Chris Domanski, “Cost Engineering: A Practical Method for Sustainable Profit Generation in Manufacturing.”
I recommend this book to the C-suite and financial departments of any manufacturing company. Per Domanski,
“Cost engineering is focused on developing products to specific cost requirements and is an umbrella of concepts relating to cost estimating, control and optimization. These concepts include but are not limited to, Target Costing, Cost Estimating, Should Costing, Cost Modeling, Activity Based Costing, Value Analysis, Value Engineering, TRIZ, Cost and Value Management, Cost Accounting, Standard Costing, and Marginal Costing. Although cost engineering is a simple concept, its implementation is complex and must be carefully orchestrated in order to be successful. It involves almost all functions of an organization such as sales, finance, engineering, operations, and purchasing. It also touches every part of the product development process, from concept development to product manufacturing. It is important for a company to start the cost engineering process early in product development. Waiting to cost optimize products until after design is finalized could be a fatal mistake. There will not be enough time and resources to make any significant changes and the price that a product can bear in the market will not change, so the result will be diminished profit, or financial loss. With early focus on cost engineering, the development team can be made aware of cost issues and have time to adjust the design direction. This will result in a product that meets its cost and profit targets while maintaining an acceptable market price.”
I couldn’t agree more.
My background is primarily in product development, marketing and sales, and from my perspective, too many products fail in launch just by being off by a hair on cost and thus price. The single most important element in cost engineering is the ability to estimate costs and thus model your business to meet the market. Spending decades in consumer products I learned that many products have “threshold prices” in areas of who can purchase in the family without checking with someone else. Not being able to hit the retailer’s target margin while also hitting the most popular retail price is a major immediate failure. All this starts back at the drawing board, with detail, integrity, and good information on:
- Raw Material
- Purchased Components
- Packaging (inbound)
- Logistics (inbound)
- Material Overhead
- Manufacturing Labor
- Manufacturing Overhead
- Equipment Depreciation
- Corporate Overhead
- Packaging (outbound)
- Logistics (outbound)
- Tooling and Fixtures
Domanski points out that most cost estimators prefer to work in today’s dollars, or a point-in-time approach.
The book was written in 2020 and given where we are in today’s supply chain and high inflation world it’s critical to model as best possible future cost fluctuations. It is also important to understand the project cash outflows and inflows since these determine the ROI of a project. If you’re an econ major or MBA, we are talking about IRR/Net Present Value analysis. Cost engineering has a bright future according to the book, and I very much agree. If you don’t understand your business model in these details then you can’t really practice all the change management, strategic planning, and innovation everyone talks about. Let me know your thoughts and feel free to reach out to me at firstname.lastname@example.org
About the Author
As Manex President and CEO, Gene Russell is a driving force behind the firm’s successful track record in helping California manufacturing companies grow and thrive. He has held three successful CEO positions over a 20-year period for businesses that included early-stage, private equity, and non-profit. He has served as senior leadership for global Fortune 100 and iconic consumer-branded companies. Prior to Manex, Russell led a turnaround at a California midsized manufacturer. His experience in global sourcing and manufacturing over several decades led him to Manex where he brings real-world experiences, and as a result, a personal passion to restore and invigorate domestic USA-based manufacturing.