Target Costs As A Guide In A Turnaround

What made it clear that a turnaround was necessary?

Earnings trends declined over several periods, culminating in a loss-making year in 2025. At the same time, the ratio of material costs and the ratio of personnel costs rose significantly. In addition, there was a lack of clear guidelines for collaboration in key areas, particularly within the project organization structure between sales, planning, production, and order processing. Overall, the cost base and operational performance were no longer aligned.

Why did we define a target cost structure first?

When you jump straight into single measures during a crisis, you often end up in endless debates about priorities. What’s essential, what’s “nice to have,” and what actually drives EBIT and cash flow? A clear target cost structure takes these discussions out of the realm of gut feeling and makes them manageable. For us, it was clear: The customer needs a cost architecture that restores competitiveness, and this must be measurable through target ratios for materials and labor.

How did “Own Best” and the international benchmark become a robust target?

We used two benchmarks to ensure that the target scenario is credible internally and marketable externally. First, the historical “Own Best” To put it simply: what the company has achieved in the past is fundamentally achievable. For personnel costs, the comparison showed that a return to the ratio of the reference year 2023 would require savings of around 20%. Additionally, a cash lever via inventory became apparent. Depending on the approach and parameter adjustments, the potential for inventory reduction ranged from 20% to 50%.

Second, an international benchmark. A European and Asian peer group was formed for this purpose. Asian competitors were significantly more profitable, and the European peer group averaged an 8.3% EBIT margin. The client had been well below this in previous years. That was the external reality check: It is not enough to merely “smooth things out” in the short term. The cost structure must shift noticeably.

What were the main driving costs for materials and personnel?

Using the target vision as our guide, we conducted a deep dive analysis of the income statement and operational cost drivers. The focus was on manufacturing/production materials as well as direct and indirect labor costs in the operational areas. A key aspect was integrating data analysis with shop floor realities: For twelve selected manufactured parts, we performed cost comparisons using an internal parts cost database to prepare for specific make-or-buy decisions. At the same time, ongoing customer projects were analyzed on-site together with the manufacturing teams to ensure that the measures would not later fail due to day-to-day operational challenges.

On the HR side, FTE structures by function, sick leave rates, and compensation trends were evaluated and translated into scenarios. The works council was involved from the outset to directly discuss and agree on the results and the measures derived from them.

How was the target vision implemented in purchasing, engineering, and production?

The key was ensuring that the initiative did not become a collection of individual projects, but rather a turnaround program with a roadmap and clear governance. This included a conceptual end-to-end process for project management (from inquiry to after-sales), a make-versus-buy decision tree with clear rules and responsibilities, and a cash management office to actively manage liquidity in critical cost areas. In total, more than 50 specific measures were identified and translated into an implementation framework.

In terms of content, three strands came together:

In procurement, short-term profit contributions were secured, including through profit-and-loss-account-effective kickback agreements and renegotiated framework contracts. At the same time, supplier-related claims were restructured and negotiated to achieve short-term compensation. In engineering, a “good enough” approach was implemented, involving the systematic removal of non-value-adding components and over-engineered functionalities. The goal was to shift cost reduction into the specification phase rather than relying solely on negotiations. In production, capacities were adjusted to meet demand, layout and space utilization were improved, and additional revenue was generated, including through the leasing of unused warehouse space to other businesses.

What was the bottom line?

The point is not to simply list potential savings, but to realize and secure actual results. The project identified and achieved the following savings: 

• €10.4 million in personnel cost savings through a social plan and a transfer company
• €8.5 million in savings identified for direct materials
• Of this amount, €650,000 has already been realized through kickbacks
• Further material savings for subsequent periods contractually secured
• €1.2 million in savings on indirect materials achieved through newly concluded framework agreements

What is the key lesson for turnarounds?

Speed is important, but without direction, it’s of little use. The leverage comes when target metrics for materials and personnel are clearly derived from “Own Best” and benchmark data and then implemented as a joint initiative across purchasing, engineering, and production. That’s exactly how an analysis turns into a turnaround that makes a real difference on the shop floor.