How to master current and future challenges
Quotation calculation in mechanical engineering is often difficult. Many customers do not require standard machines, but customized solutions. Our CPQ software can effectively support you in offering your customers individual and reliable products. Read the blog article to find out what makes quotation costing in mechanical engineering so difficult and how you can overcome these challenges.
What are the challenges of calculating quotations in mechanical engineering?
With regard to their quotation and product costing, machine manufacturers are confronted with challenges in various areas that are likely to become even more pronounced in the future. These include:
Complex products and projects
Machines and systems are complex products in which customized special solutions play a major role. Although modular strategies and the modular design of machines help to reduce the complexity of costing in mechanical engineering, a high proportion of individual engineering is often required for the planning of a customer order, which keeps the price calculation complex. Ultimately, you have to meet your customers’ requirements and wishes precisely and without compromise.
New materials and technologies are also making price calculation increasingly difficult and complex.
Price volatility
Market prices for energy, raw materials and primary products are subject to constant fluctuations. In addition, they may change during the course of the project. For project and product pricing, you therefore need a flexible approach that is able to immediately reflect such short-term changes.
Global competition
As a machine manufacturer, you operate in a global market. Your customers expect top technical performance from you, but also competitive prices. The focus here is on the entire supply chain. When calculating quotations in mechanical engineering, you need to take into account the prices and margins of your own suppliers as well as the customer’s price expectations.
Uncertainty
It is also important in this context that you have to make many assumptions and decisions under uncertainty when calculating quotations in mechanical engineering. The production of customized machines and systems often involves long-term projects. Prices and project specifications can change over time – nevertheless, you need a valid price calculation from the outset that is consistent for your customers and also takes possible risks into account.
Shortage of skilled workers
A great deal of personal know-how and experience is required to create an individual quotation calculation in mechanical engineering, especially for special solutions. In addition, putting together a customized, highly technical solution using conventional methods is time-consuming and prone to errors.
Without the support of a powerful, digital system, companies often reach their limits when it comes to project and quotation costing. The shortage of skilled workers is a major contributing factor. The so-called baby boomer generation is already retired or will retire in the coming years. Many mechanical engineering companies have difficulties securing the company’s expertise and finding suitable specialists on the labor market. In addition, new engineers and sales staff have to be trained before they can reach their full potential.
What makes quotation costing in mechanical engineering so difficult?
The difficulties of costing in mechanical engineering arise on the one hand from the challenges faced by mechanical engineers in their project and product planning. A number of other factors also have an impact on quotation costing in mechanical engineering:
- Standard calculations are usually not applicable to individual customer requests. The calculation can become particularly complicated in the case of explicit special services and special developments.
- Many companies do not yet have a sufficient database to calculate the costs of a project or product accurately and with the necessary flexibility. The main problem is often the timeliness of the data.
- Product costing is a key tool for ensuring the company’s price competitiveness, but there is no benchmark information on competitors due to a lack of data.
- No standardized processes and workflows have been established in the company for product price calculation.
What steps must be taken into account when calculating quotations in mechanical engineering?
As you know from your day-to-day work, quotation costing in mechanical engineering is a multi-stage process that is often very complex due to the technological and functional requirements of the product. In addition, the products to be calculated are often one-offs that are developed on behalf of a single customer. If prices are too high, you run the risk of your company not being awarded the contract. If your price calculation is too low, you will lose valuable margins or the project may even turn into a loss-making business.
Your project and product price calculation must therefore meet the following requirements: Your offer must be based on competitive and cost-covering prices, taking into account appropriate profit margins. Your customer must be able to see at a glance that the latest technological standards are being used in the development of the product and in the implementation of the project.
Quotation costing in mechanical engineering is carried out in the following steps:
- Order clarification
- Data collection
- Price calculation
- Risk evaluation
- Offer control
- Offer preparation, offer negotiation, contract conclusion
1. order clarification
- Clarification of all customer requirements for the product
- Definition of all technical specifications
- Clarification of project and delivery times as well as the framework conditions for project implementation
- Definition of payment terms and delivery times.
2. data collection
In the next step, all data relevant to the calculation must be collected along the entire supply chain. In this step, parts lists are created, prices and delivery times for materials and preliminary products are determined and all internal parameters for project implementation are established. This includes development and production times, the planning of employee deployment and the calculation of indirect costs.
3. price calculation
Depending on the order and product, prices are calculated using contribution margin accounting or target cost accounting. Target costing is often used in mechanical engineering, as it enables the price that can be achieved on the market for a product to be set in relation to the specific product characteristics.
4. risk evaluation
The quotation calculation in mechanical engineering should also include a risk assessment, which can result from price fluctuations along the supply chain or from the course of the project, for example. Both financial and time aspects play a role here.
5. offer control
Before you send your quotation to a customer, a precise check is necessary. Your offer and all calculations must be complete, correct and plausible. The feasibility of the project is also checked as part of the tender review. If a technical solution formulated in the offer later proves to be not or not fully feasible, this can be very expensive for your company due to subsequent improvements and contractual penalties. In addition, the company’s reputation suffers – with consequences for your competitiveness.
6. offer preparation, offer negotiation, contract conclusion
Once the previous five points have been completed, you can submit your official offer to the customer with all the relevant information.
This may be followed by one or more offer negotiations in which your customer further specifies their requirements, which must also be in line with your company’s interests and capabilities.
Once your offer has been accepted by the customer or subsequent negotiations have been successful for both parties, nothing stands in the way of concluding a contract for the development and delivery of your product.
Quotations are often calculated in Excel – what is problematic about this?
First, an example of what can happen if only Excel is used for quotation costing in mechanical engineering:
When calculating a special solution, the Excel method proved to be particularly error-prone. A sales representative had manually recorded a customer’s special requests in an Excel form. However, this individual listing was overlooked when the order was placed. In the end, the customer was supplied with a standard version of the machine instead of the customized version.
Excel is only suitable to a limited extent for organizing complex projects and therefore also for calculating quotations in mechanical engineering – the following reasons contribute to this:
- Excel is prone to human error – whether typos or formula errors.
- Calculations in Excel are often not comprehensible and easy to check.
- With large amounts of data and complex calculations, Excel sooner or later reaches its limits.
- Excel can only be integrated into other data systems (ERP, CRM) to a limited extent.
- Standardized workflows involving several departments and employees cannot be implemented with Excel.
- In Excel, it is difficult to ensure that everyone is working with the most up-to-date data.
How does CPQ software help with fast and error-free quotation costing in mechanical engineering?
The abbreviation CPQ stands for Configure, Price, Quote – i.e. for the configuration of a product and the creation of prices and quotations. CPQ software enables engineers and sales staff to configure products and services quickly and transparently. The software supports the complete recording of customer requirements and then automatically converts these into a corresponding and verified quotation.
Sales staff and customers can configure the product together – the software uses product and price specifications to ensure that no incorrect configurations are developed. The software can be used to automatically add relevant information such as prices, product descriptions, visualizations and technical drawings as well as project and delivery times to the final offer.
Changes to the original configuration are also recorded by the CPQ software. If such changes are price-relevant or need to be checked with regard to their technical feasibility, they automatically trigger the corresponding internal workflows. All changes are documented transparently and comprehensibly in the software for everyone involved.
CPQ software – suitable for different types of quotations
CPQ offers you the opportunity to digitize various types of quotations in mechanical engineering.
With ETO (engineering-to-order) orders, machines and systems are developed and designed to meet individual customer requirements.
This often results in long quotation processes and lead times before actual production begins. In the calculation phase, CPQ software enables a better understanding of customer requirements to be developed and product configurations to be made in direct cooperation with the customer. The software also makes it much easier to plan costs, prices and project timescales for customized special solutions.
CTO (Configure-to-Order) orders are the norm for most customers in the mechanical engineering sector.
Products are manufactured on a modular basis from a range of predefined options. A CTO focus has numerous advantages in mechanical engineering. Processes, costs and project times can be significantly optimized using such an approach. At the same time, sources of error are minimized. By combining different modules and standard options, customer requirements can be met on a very broad basis. Depending on customer requirements, ETO and CTO are combined with each other. CPQ software supports fast and precise configuration of products for CTO orders. Among other things, it ensures that only compatible options are included in an offer. The software also optimizes purchasing processes for materials and preliminary products as well as the overall use of resources. As with ETO orders, customers can be actively involved in the digital configuration of the product.
Customized engineering plays no role in ATO (Assemble-to-Order) orders.
Machines are assembled exclusively from predefined components. Nevertheless, individual configurations are possible in order to meet customer requirements. CPQ software proves to be particularly effective in calculating quotations for ATO orders. Quotations can be prepared directly by sales staff, usually without the involvement of engineers or the design department. The sales department can therefore respond very quickly to customer inquiries.
Conclusion: More efficiency and customer friendliness through CPQ
CPQ software accelerates and automates product configuration as well as quotation calculation and preparation. It also eliminates major sources of error, enables the establishment of workflows within the company and ensures transparency in customer communication.
The software is available as a desktop application and as a mobile app, giving your sales staff significantly greater flexibility. Quotations can also be created directly on site at your customers’ premises.
All in all, CPQ software increases your efficiency and customer friendliness. We are your competent partner for customized CPQ solutions for your company – we look forward to hearing from you.
Teamlead Marketing, encoway GmbH
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