Calculating the cost of 'going green'

  • 26-Jul-2012 08:01 EDT

Profit is a key factor influencing the value equation, according to FEV’s Greg Kolwich: “[OEMs and suppliers] are not going to make anything if [they] are not making money.”

Dual-clutch transmission or eight-speed automatic? Downsized turbo DI engine or conventional engine with variable valve timing and lift? Clean diesel or an alternative fuel such as CNG? Plug-in hybrid or battery EV? Vehicle engineers and product planners are faced with so many powertrain options, each with its own unique set of advantages and disadvantages related to performance, environmental impact, and, of course, cost.

Determining these costs, and managing them to benefit the company's bottom line while also satisfying market and regulatory expectations, is a highly involved and critical task, explained Greg Kolwich, Manager of Value Engineering at FEV Inc.

“Where do you begin to assess what’s the best value?" Kolwich asked the audience during his presentation at the SAE 2012 World Congress. "If you’re a consumer, an OEM, a supplier, where do you spend your money? How do we pick the best technology? And really, is there only going to be one technology in the future, or are there going to be a bunch of different complementary technologies going forward?”

Kolwich, a specialist in manufacturing costs and feasibility analyses for various leading-edge technologies, discussed the tools that companies can use to assess the life-cycle costs and environmental benefits of advanced-technology vehicles.

“Calculating value—calculating cost—is really a complex undertaking," he said. "There’s lots of uncertainty and lots of parameters that you need to include. And if you don’t include, you need to state that in your assumptions.” That's one reason answers to the above questions can vary so greatly from company to company. Uncertainties can include the price of raw materials, such as aluminum or lithium, and the amount of energy required to manufacture batteries.

Another complexity Kowich noted is the linking between the multiple parameters. "If the price of electricity goes up, how does that affect manufacturing batteries, how does that affect the volume of batteries that are going to be sold, and so on. All these connections are real and dynamic,” he said.

Kolwich summarized different models and parameters used to assess the costs of competing technologies, including the “direct manufacturing cost” model typically used for an initial assessment.

“In the value equation, we’re looking at function over cost, and direct manufacturing costs are really a big part of that,” he noted, adding that up to 60% of new-technology costs are material-based. Other factors include labor costs, manufacturing infrastructure, scrap rates, SG&A, product liability, warranty, and ED&T (engineering, design, and testing) costs.

More complex models can involve the “time factor” and consider all the indirect and direct cost factors, along with the different variations of those factors—the price of electricity, volume of sales, etc. The model that FEV recommends and typically employs, according to Kolwich, is the “decision analysis” methodology.

“We can take all your parameters that go into cost and create an influence diagram that shows how all these different cost factors tie together," he said. "The goal is to try to simplify the model. You want to drill down into what the heavy cost drivers are—is it material costs, is it market, is it volume?”

This means identifying the five to 10 different "knobs you can turn" to determine potential costs, he explained. For example, for a given technology if electricity is high, aluminum is low, and oil is medium, what is the potential cost impact for that technology? "It’s a good way of tying in all of these parameters,” Kolwich observed.

And one additional factor cannot be overlooked when considering any new "green" technology: profit. “OEMs and suppliers have to make a profit for these new technologies,” he added. “We’re not going to make anything if we’re not making money.”

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