All successful engineering projects share a few traits: ingenuity, innovation, and value. The best projects solve problems and deliver something new. One factor that’s often overlooked is cost management. Every project has a budget. Even if a team of engineers delivers a brilliant final result, cost overruns can make the project unsuccessful. In these cases, the problems often start during the procurement phase.
Companies that get their engineering projects right practice some cost optimization techniques on the procurement side. These strategies are essential for staying within budget, timely completion, and maximum ROI. Here’s a look at a few of the best cost optimization techniques in procurement for engineering projects.
Analyze Total Cost Factors Beyond the Initial Price
Too often, the initial investment gets all the attention in engineering projects. That’s understandable because the company stakeholders that approve projects are highly focused on this number. However, more important is the total cost of ownership, or TCO. A comprehensive analysis of all costs associated with a project throughout its lifecycle gives project managers more insight. This knowledge helps inform better procurement decisions, resulting in significant savings.
Look at things like acquisition costs. This includes the initial purchase price, transportation costs, import duties, taxes, and any other expenses related to the project. Next, factor in operating costs. These are the long-term expenses like energy consumption, maintenance, and repairs. Analyze other relevant factors like operating costs and disposal fees, and you’ll arrive at a TCO.
Once a project manager has the TCO, they can make smarter procurement decisions about things like construction materials, equipment, software, and services. That’s because sometimes, choosing the cheapest option upfront isn’t actually a cost-saving measure. Increased maintenance, repair, or replacement costs can drain profitability over the project lifecycle. The long-range view afforded by the TCO ensures you get optimal value from every purchase.
Leverage Economies of Scale Through Bulk Purchasing
Your company likely spends significant money each year with a few select vendors. That means you have a powerful cost optimization technique at your disposal: bulk purchasing. Most suppliers will offer quantity discounts. You can leverage economies of scale with your most trusted vendors by combining purchases for multiple projects or everyday needs.
On the accounting side, consolidating multiple smaller orders into a single large order reduces overall expenses. Bulk purchasing minimizes transaction costs associated with processing purchase orders, invoices, and payments and reduces the per-unit costs for project materials. The result is more cost-optimized engineering projects.
Identify Cost-Saving Opportunities With Value Analysis
Value analysis is similar to a TCO analysis, but it’s geared toward optimizing the cost efficiency of a product or service. Applying a value analysis to an engineering project is a great way to identify cost-saving opportunities throughout the procurement phase.
To start a value analysis, perform a detailed breakdown of your engineering project and the functions of the final product. Break each function down into its essential components. Next, perform a cost analysis on each function to identify where costs may be disproportionately high relative to the value provided. Once you’ve identified functions that aren’t delivering high value, you can explore alternative solutions that offer the same or better functionality at a lower cost.
Negotiate Favorable Payment Terms and Delivery Schedules
Don’t overlook the importance of cash flow. If your customers pay you quarterly, it can be a problem if your bills are due monthly. But just like you can negotiate better prices with your suppliers, you can often negotiate extended payment terms. Longer payment periods like net 60 or 90 can give a project some breathing room by retaining cash for longer.
You can also negotiate delivery schedules; there’s good reason to do so. Of course, you need project materials delivered on time. But too often, materials are delivered early in the project lifecycle, well before they are required. Materials sitting in storage rack up inventory expenses and force you to pay for things before you need them. Strive to achieve just-in-time (JIT) delivery schedules to help optimize costs.
Track (and Control) Procurement Costs Against Budget
Cost optimization isn’t possible if you don’t know how much you’ve spent or how that compares to your project budget. Use the available software tools to track expenditures throughout the project lifecycle. Many accounting or ERP packages allow you to view expenses in real time. Utilize this feature to keep tabs on budget line items and overall project expenses.
If you find cost overruns in the procurement process, get things under control as soon as possible. This may mean finding alternate materials or new vendors to keep costs in line. Perform a careful analysis before making any changes in the project scope or budget to help ensure costs remain optimized throughout the project.
Cost-Optimized Engineering Projects Are Successful Projects
Many engineering projects deliver amazing results. Only the profitable ones are known as successful projects. Cost optimization helps ensure every bit spent on a project is a wise investment. Each of these techniques can be implemented today using the tools and vendor relationships you already have available. For more insights into the issues facing business leaders today, follow MRINetwork.