Auto suppliers: Do your cost estimating practices need a tune up?

The automotive industry is experiencing unprecedented shifts caused by factors such as market volatility, tariffs, foreign policy, labor shortages, and the rise of automation. Suppliers are under immense pressure to adapt while safeguarding profitability. To succeed in this environment, understanding both strategic and financial implications is essential. In many cases, this can hinge on one critical question — is your cost estimating function up to the challenge?

The strategic importance of accurate costing

Accurate product costing is not merely a financial exercise for automotive suppliers — it’s a vital strategic tool. Here’s why it matters:

• Risk mitigation. A comprehensive understanding of your cost structures allows you to anticipate risks stemming from market changes or regulatory pressures and take proactive measures.
• Data-driven decisions. Precise costing enables you to make informed decisions about product development, pricing strategies, and capital investments.
• Customer relationships. Transparency in costing fosters trust with OEMs, creating stronger, more collaborative partnerships.
• Competitiveness. Accurate costing helps you offer attractive pricing without slashing margins, enabling you to thrive in a competitive marketplace.

Today’s volatile and dynamic landscape makes these factors interconnected. Together, they determine your company’s ability to secure a strong market position and long-term success. Simply put, accurate costing can mean the difference between profitability and commercial irrelevance.

The complexity of automotive costing

The dynamic nature of the automotive sector has made effective product cost estimating increasingly challenging. As a supplier, you need the ability to identify opportunities, balance costs, and maintain competitiveness — factors that depend on accurate estimating and quoting. Consider these five steps to help improve your processes.

1. Refine your costing methodology

A robust costing approach ensures that cost inputs, cost drivers, and overhead allocation are aligned with actual operations. For instance, using a single overhead rate for a plant with diverse processes can lead to distorted profitability projections and poor decision-making. Ideally, costs should be allocated based on drivers such as labor hours, machine hours, or machine-specific costs.

Consider the example of a Tier 1 supplier struggling with competitiveness. Their pricing was consistently 25–30% higher than industry benchmarks. After reviewing their methodology, several issues surfaced:

• They applied a single plant average overhead rate for distinctly different manufacturing technologies and processes — both machine-intensive and labor-intensive operations — leading to inaccurate cost distribution.
• Overhead costs were based on labor hours rather than machine hours, causing machine-intensive processes to be under costed, while labor-intensive processes were grossly over-costed.
• Underutilized assets were costed for full absorption, thus expecting customers to pay for open capacity. This inflated prices, deterring potential customers.
• SG&A and ED&T costs were spread across all customers uniformly, unfairly burdening customers who weren’t heavy users of these costs while subsidizing others.

After assigning overhead costs based on appropriate drivers and putting similar machinery into overhead pools, the supplier was able to produce accurate, machine-based overhead rates. Additionally, by providing overhead rates for both quoting and inventory valuation, the supplier could leverage a targeted utilization for fixed costs that helped sell more work and fill their open capacity.

2. Streamline the quoting process

An optimized estimating and quoting process doesn’t just enhance efficiency — it enables timely and strategic responses to opportunities. Check for inefficiencies in three key areas:

• Strategy. Low win rates — sometimes below 10% — highlight wasted resources on noncompetitive quotes. By identifying core capabilities and aligning efforts with high-potential opportunities, you can improve focus and minimize waste.
• Timeliness. Lengthy quote cycles can strain customer relationships and lead to lost business. Adopt flexible quoting frameworks tailored to the complexity and desired accuracy of the quote at hand. For example, you could include expedited processes for design changes or estimates for parts that are largely a replacement from a prior program. Using a “same-as-except” process can reduce cycle times dramatically.
• Technology and data management. Many suppliers lack systems to effectively manage quote workflows, often relying on tools like email, Excel, and shared folders to manage dozens or hundreds of quotes. Investing in third-party software can centralize data, establish consistency, and streamline quoting by making it easier to organize staff, compile inputs and cost buildup, and find prior quotes and underlying assumptions.

Addressing these inefficiencies will allow you to respond faster, reduce errors, and foster trust with your customers.

3. Manage variations in customer expectations and associated costs

You may increasingly find yourself facing hidden costs when managing diverse client requirements, particularly with the emergence of EV OEMs. New relationships often involve challenges such as unclear volume forecasts, engineering changes, frequent quote revisions, and intensive administrative demands.

To mitigate these risks, negotiate contract terms that safeguard profitability while setting clear expectations. Factors like volume realization, equipment amortization, engineering change protocols, and program management practices should be negotiated beforehand and accounted for from a business case perspective. Proactive efforts can prevent resource-draining obligations while enhancing long-term customer satisfaction.

4. Conduct a value chain analysis

A cost reduction in one area shouldn’t compromise efficiency elsewhere. For instance, one supplier accepted a demand to reduce racks for a program without analyzing the operational impact. By accepting the cost reduction without involving the appropriate experts, there weren’t enough racks to effectively run the operation, resulting in extensive overtime, labor turnover, and margin erosion. Consider the broader consequences of decisions, ensuring your entire value chain supports operational goals. You may need to push back when a customer is trying to pull back.

5. Expand cost indices

While raw material costs are commonly protected from change by tying them to a third-party index, rising expenses in other areas such as labor, freight, utilities, and tariffs require similar attention. Explore mechanisms to reflect these costs in pricing agreements, recognizing their potential to significantly impact profit margins.

Aligning strategy and execution

The list above is not exhaustive, but it covers some of the key metrics you can use to manage your quoting process and highlights the need for alignment between your cost estimating and management teams on all aspects of quote management. Whether you’re responding to requests or formulating strategic bids, creating consistent assumptions and strategies will help ensure that profitability is maintained.

Looking ahead

The pressures driving the automotive industry today — including regulatory changes, market instability, and inflation — will only heighten in complexity. Accurate and timely costing is no longer optional; it’s a non-negotiable requirement for your long-term viability and success. By refining costing methodologies, optimizing quoting processes, and navigating external pressures, you can transform challenges into opportunities, positioning your company to thrive in a rapidly changing market.