Moderator

Nov 212017
 

Hello all!  

As some of you may know, I joined McKinsey & Company a little over two years ago as an expert in their Product Development Design-to-Value practice.  (Don’t tell anyone, but I do a lot of work for clients in the purchasing space, too!).

It’s been a whirlwind of a couple years, but I finally got some time to publish some new thought leadership.    I just did this on McKinsey Ops Extranet, sadly not here.  But, the good news is, you can join for FREE, so don’t be worried when you see you need to register.

Here’s the first.  Enjoy!  Oh, and may sure to 5-star my post if you read it and like it.  Thanks.

 

What should it cost? 

(Welcome to the standard costing party! What’s this all about?)

 

 

 

Jun 052014
 

IW_LogoNEW ARTICLE in Industryweek.com by Hiller Associates

Synapsis:  No matter how badly you think you are pinned down in a pricing negotiation, there are always tools for leverage that can help you improve your position. Relative should costing is one of these powerful tools.

To read the article at Industryweek.com, click here.

Or, you can read the full article below

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Relative Cost Power – How to not know the cost of your products and win negotiations, anyway

With product cost accounting for 70 to 90% of every revenue dollar on the income statement, it’s not hard to understand why cost is such a big deal to many companies. In the last decade, there has been a renewed focus on the world of Product Cost Management, including techniques like Design for Manufacturing (DFM), Should-Costing, Spend Analytics, etc. Many of these techniques are used (or are intended to be used) *before* the sourcing phase of the Product Life Cycle. While procurement professionals should be involved up front in product design, a lot of the responsibility for success with these techniques will rest on the design engineering staff.

Regardless of whether your company is best-in-class in Design-To-Cost, or whether you have the most cost-oblivious design staff in the world, your designs must be eventually made or bought. With the dominance of outsourcing, it’s more difficult than ever to know what the should-cost of a product is? Purchasing agents are told that they should know the should-cost of products before they walk into a negotiation with a supplier. However, that is not easy, and the fact is:

Your supplier will typically know more about their costs than you do.

So, how do you precede in a negotiation where your supplier has more and better information? Are you completely at their mercy? And, what if your supplier holds oligopoly, or even monopoly, supplier power? Are you just a price taker?

ANSWER: No, you don’t have to be a price taker, at least in the case of buying multiple variants of a similar spend item.  Recently, I wrote a blog post about how the human brain does not like non-linearity, discontinuity, or non-monotonic functions. This is a fancy way of saying that people are very good at detecting pricing inconsistencies within multiple similar products.

This inconsistency is the key to being able to better control a negotiation, in which you really don’t know what the absolute cost of a product should be, or where you know the should-cost, but have little buyer power. Let’s explain this with an example:

Case Study in Relative Should-cost: Pick-up Truck Driveshafts

Hiller_Associates_Relative_Should_DriveshaftsIn the late nineties, I had the privilege of being the product development owner for the drivelines (axles and drive shafts) used in the full-size pick-up that was best-selling vehicle in the world for over 30 years. This truck made over 100% of the profit for my employer (making up for losses on other vehicle lines). I was very young and inexperienced at the time, so it was a great experience, but a big challenge.

Within the first few weeks in the assignment, I was told that it was time to negotiate the contract for the driveline commodity (over $450 million annually) for the upcoming 2004 vehicle. I was told that this was a very complex process, but that the purchasing group would lead it. However, my first meeting with our purchasing team lasted about 10 minutes… long enough for the purchasing team to say: “Oh, your supplier is *that* supplier? We don’t get involved with them. Have a nice day.” And, they walked out of the room.

After the shell shock of the experience wore off, my manager explained that our supplier was the former components division of our employer (the OEM) and that our CEO had desperately wanted to spin-off the component divisions from the OEM. To do this, our CEO had negotiated a deal with the powerful automotive union, agreeing that the union members would technically work for us (the OEM), but be leased to the newly spun-off supplier. If the OEM did not give enough business to the components supplier to keep the union members employed, the OEM was responsible for paying them a large portion of their wages, while they waited to be deployed somewhere else.

Effectively, this removed almost all negotiation power from us, the OEM. Therefore, our purchasing team had made a decision at the executive level to not participate in negotiations with this particular supplier. Instead, these negotiations were dumped into the laps of the product development team, with some support from finance.

Suppliers with Complete Supplier Power

The product development team had its own problems already. The marketing team were demanding much better performance and quality out of our parts. But, the finance team demanded that those parts be cheaper than the previous generation of parts! And now, we had an AWOL purchasing team. In terms of the old Porter’s Five Forces framework, our supplier had tremendous supplier power! What to do?

I certainly was not an expert in drivelines yet, but I had just completed a master’s thesis focused on product cost. So, I first reached out to the cost estimation team within the OEM. They helped us understand what the absolute cost might be for a driveshaft. We were also able to negotiate with the purchasing to do an “unofficial” price study with other driveline suppliers.

Our first negotiation with our supplier (the OEM’s former component divisions) was pleasant, but utterly futile. I excitedly explained what we thought the absolute part cost of these driveshaft parts should be, and hinted that we had quotes from other suppliers to prove it. Our supplier, being quite shrewd, politely explained why their product was, obviously, so much more valuable, combined with a tangible undercurrent of, “Well that’s nice that you have should-costs and quotes from other suppliers, but we really don’t care, because you have to use as a supplier regardless.”

Relative Should-Cost to the Rescue

Now what were we going to do? These lines of argumentation (absolute should-cost and competitive quoting) were not prevailing on the supplier. So I tried something different: Relative Should-Costing.

Hiller_Associates_Relative_Should_CostA driveshaft is complex in many ways, but in reality, it is a modular part design. It’s constructed mostly of the end yokes coupled with an extruded or seam-welded tube between those yolks. If we had a longer truck we simply extended a tube. (For technical safety reasons, we had three variants: a 1-piece steel driveshaft, 1-piece aluminum, and a 2-piece steel.)   In total, we had over 70 part numbers of these three designs, and we knew the price quote for each variant.

Using a spreadsheet, I simply estimated a reasonable cost for one driveshaft tube for each of the 3 variants. With this estimate, it was easy to calculate a per-inch cost of that tube. By subtracting, I knew what all the other parts in the driveshaft (e.g. end yokes) approximately cost. That was all I needed. I didn’t need to know what the absolute cost of each driveshaft should be.

I just needed to know what each similar part should cost RELATIVE to another part.

In the second negotiation, we politely questioned the supplier on their confidence in their pricing ability. They professed with great certainty that they knew how to price and stood by those prices. Then we coyly pulled out the part numbers for the three drive shafts for which I had estimated the absolute, and asked if they stood by those prices. They eagerly declared they stood by those prices. Gotcha!

At that point, we started asking how Part B that was 5 inches longer of extruded tube than Part A could cost $10.00 more than Part A, when the tube extension was only worth $0.30. The supplier was not sure and asked for time to investigate. We had several more meetings on the topic, but in the end, the supplier could not give any logical reason why their pricing for similar drive shafts varied in bizarrely non-linear ways.

The supplier reduced the cost of the entire driveshaft commodity by about 8%, resulting in about $35 million a year, straight to the bottom line of my employer, the OEM.

Should the discount have been bigger? Yes. Did my calculations show that the supplier should have given us more money? Yes. But, did we get a significant concession from a supplier who held every card in this negotiation? Yes we did!

In reality, the supplier still could have refused to reduce their costs. However, the point of these Relative Should-Cost negotiation techniques is to bring logic and facts to bear to increase leverage in a situation where you seemingly have no leverage.

The win occurred when the supplier just couldn’t answer why their own pricing was internally inconsistent with itself.

This is a good lesson for suppliers to learn, as well. When quoting a basket of similar parts, it’s wise to make sure that you understand your own pricing and reflect the underlying costs in a logical and linear way to your customer. This greatly reduces the risk of your customer casting doubts and driving your pricing down, perhaps unfairly.

Diagnostic vs. Leverage Tools and Absolute vs. Relative Should-Cost

The case study above is an example of the difference between using a Relative Should-Costing technique, versus an Absolute Dollar Should-Costing technique. If this sounds interesting to your company, you may want to read more in my previous article in Industryweek.com, Your Should-cost Number is Wrong, But It Doesn’t Matter. In this article, we talk further about using should-costing, not only as a diagnostic gage to tell you what the cost is, but as a tool for leverage to move the cost down.

Remember, no matter how badly you think you are pinned down in a pricing negotiation, there are always tools for leverage that can help you improve your position. Relative-Should costing is one of these powerful tools that should be in your tool box.

May 142014
 

Have you ever walked into a dining room with several pictures and seen that one picture that is not hanging parallel to the floor? If you’re a recovering engineer like me, you feel an overwhelming urge to correct the problem. You just can’t be comfortable until the frame is in alignment… unless you find your molding or floor/ceiling are not parallel.   Then you have bigger problems!

Why does a slight misalignment (maybe just a couple degrees off bubble) set off instant and loud alarm bells in your brain? It’s because the human brain is very sensitive to two things:

  1. Linearity/symmetry
  2. Discontinuity (especially non-monotonic functions)

I was having a lively discussion the other day with a director of pricing at a Fortune 500 distributor.  We were talking about how this affects product pricing. For example, when you have a catalogue with millions of products, it can be very challenging to keep pricing consistent. Consider the figure to the right. The orange dots could be product offerings for electric motors, graphed by the price vs. a performance attribute, such as horsepower. We expect price to increase with performance. But what happens when you find the blue or green dots?   The brain says “that’s not right!”Hiller_Associates_Costing_Linearity

Now, there may be legitimate reasons for the negative or positive arbitrage.   Maybe there is a sale? Maybe there is an economy of scale on selling that particular model?  However, that brings us to the next challenge, pricing functions that are not monotonically increasing (i.e. they have a negative slope for at least one product model). This is a problem, because this is difficult for even economies of scale to overcome. And, the customer does not like it, because it makes the vendor look as if their pricing is capricious, which causes distrust.

Discontinuity in Product Costing

This happens in costing too. For example, although “sunk cost” is an important concept in capital investment, it can wreak havoc on product costing. If a certain machine is fully depreciated and now has a greatly reduced overhead rate assigned by the accounting department, this will likely confuse the purchasing or engineering folks using a Product Cost Management software. It will either cause them to distrust the costing software or your manual analysis or it will drive them to cost all the parts they can using that

This is yet another curse of the difference between the data relevance needs in order to perform good cost or pricing analysis versus the data reliability needs, over which accountants typically obsess. From an accounting point of view the depreciated resource is “free” (or highly discounted). However, from a costing viewpoint, the abilities of that machine will have to be replaced sooner or later. Worse, the distortion in the overhead rate will lead to underestimations of cost, and often, unpleasant surprises late in product development and sourcing.

What to do about non-linearity, discontinuity, and non-monotonic pricing/costing functions:

Hiller_Associates_Fix_it_or_feature_itYou have a couple of choices on how to resolve the geometric costing/pricing problems in the minds of your customers or colleagues:

  1. Remove them – the first solution is to correct the false arbitrage by fixing the pricing or costing data. For example, in the case of the machine that is fully depreciated, change the overhead rate back to reflect the cost at which a new machine with the same capability would depreciate.
  2. Highlight them – if the pricing or costing curve has an unexpected kink in it for a legitimate reason, then you should make everyone aware of this and use it to your advantage. For example, in the catalogue motor example, advertise the sale and let people know this is not natural or permanent!

A lot of mistakes in pricing or costing are difficult to notice without close inspection, but remember anything that violates the brains desire for smooth regularity will stick out like a sore thumb… or a good deal.

 

 

Mar 202014
 

Hiller Associates posted the following article at ENGINEERING.COM yesterday.  You can read it there at this link, or just keep reading below!

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Another solid piton in the cliff of making product cost mainstream in CAD / PLM Products?

CATIA users can now get a faster and more effective way to design and source composites products with the highest profit by bringing the estimation ability closer to the designer’s native environment. Galorath Incorporated debuted its newest integration of SEER® for Manufacturing with the Dassault Systems 3DEXPERIENCE® Platform in CATIA at the JEC Composites conference in Paris. The new product is called the SEER Ply Cost Estimator.

Who is involved?

Hiller_Associates_Seer_Catia

Galorath Incorporated grew out of a consulting practice focused on product cost estimation, control, and reduction that began in the late 1970

s. Over the last 30 years, Galorath built their costing knowledge into the SEER suite of software products. SEER is one of the independent product cost estimating software companies.

Dassualt Systems is one of the “big 3” Product Lifecycle Management (PLM) companies in the world.

Hiller Associates spoke with Galorath CEO Dan Galorath, Vice President of Sales & Marketing Brian Glauser, and SEER for Manufacturing product lead Dr. Chris Rush and got a full product demo.

What does this integration do?

The integration allows users of CATIA to use SEER’s costing software for composite materials within the CATIA environment. In CATIA, the engineer designs a lay-up for a composite part, generating a Ply Table (a critical design artifact for composite parts that specifies material, geometry, and some manufacturing info). That activates the integrated SEER Ply Cost Estimator so that the designer (or the cost engineer or purchasing person aiding him) can set up more part-specific costing choices and preferences within the CATIA environment.

When ready, the user pushes the cost analysis button. The information is processed by SEER Ply Cost Estimator which sends the ply table data and other information to the interfacing SEER-MFG software to compute cost. The cost data is returned and presented to the user, once again within a native CATIA screen.

How broad is the capability?

Click to ENLARGE!

Click to ENLARGE!

Currently, the integration of SEER is applicable for parts made of composite materials. It’s a strong starting point for the integration partnership because SEER has a long experience in the field of costing composites, working with companies in the defense and aerospace verticals. Composites are also becoming more mainstream in other industries, such as automotive and consumer products. Galorath has been a major player in the US Government’s Composites Affordability Initiative (CAI), a 50/50 government/industry funded consortium including Boeing, Lockheed and Northrop Grumman that was formed to drive down the costs of composites. Galorath has also worked with Airbus in the area of composites parts costing.

Galorath’s Brian Glauser says that the SEER Ply Cost Estimator has hundreds of man-years invested, much from previous work with CAI and with aerospace companies that resulted in several of the modules already in the SEER-MFG standalone product.

The first version of the SEER Ply Cost Estimator handles many composites manufacturing processes, materials, concepts of complexity, and both variable and tooling costs. However, it does not yet directly cost the assembly of one part to another.

The initial integration will be to CATIA v5, but SEER and CATIA have signed a v6 agreement as well. That integration will follow later.

Galorath (and likely Dassault) are hoping that the SEER Ply Cost Estimator will be well received by customers and help drive many product cost benefits. If this happens, there may be demand from Dassualt’s end customers not only to improve the SEER Ply Cost Estimator, but to expand the SEER/CATIA integration to other manufacturing processes covered in SEER’s stand-alone software products such as machining, plastics, sheet metal and assembly processes.

What does it mean for Functional Level Groups?

Philippe Laufer, the CEO of CATIA was quoted saying :

“Using Galorath’s SEER for Manufacturing in CATIA…will help companies perform early trade-off analysis on the use of various materials and composites processes before manufacturing even takes place.”

Well, that has been one of the goals in Product Cost Management for a long time. If your company uses composites, the tool has the following possibilities:

  • Engineering – identify which design choices are driving cost and by how much
  • Purchasing/Manufacturing – get an early warning of what to expect from suppliers before asking for quotes or estimates (should-cost)
  • Cost Engineering –focal point for the cross-functional discussion about cost to drive participation, especially from engineering

It’s important to realize that this integration will have its limitations, as with any costing product. First, the current integration applies only to composites. While expensive, composites are only one type of part on the Bill of Material (BOM). You will have to go beyond the current integration of SEER/CATIA to cost the full BOM, perhaps to SEER’s standalone costing product or to those of its competitors.

Second, remember that cost is far harder to “accurately” estimate than many physical performance characteristics. While meeting an absolute cost target is important, even more important are the following:

  1. Continuous Design Cost Improvement – If your company consistently designs lower cost products because you have superior cost estimation information, you WILL beat your competitors.
  2. Correct Cost and Margin Negotiation – If your company is better at negotiating quotes because it can give suppliers a better understanding of what it will cost them to make your part and you can negotiate a margin that is not too high, but adequate to keep your suppliers healthy, you WILL beat your competitors1.

What does it mean for the C-Level?

Philippe Laufer of CATIA also says:

“This [the SEER Composites integration] leads to finding out the most efficient way of manufacturing a product while meeting cost, performance, functionality, and appearance requirements.”

The C-suite doesn’t really care about composites or ply tables in and of themselves, but it does care about revenue and profit. Of course every well-marketed product will claim to improve these metrics. Regarding product cost, the good news is that Galorath and Dassault are aiming at a big target. Companies that use a lot of composites can have very high costs. For example, Boeing and Airbus have Cost of Goods Sold of 84.6% and 85.5% and Earnings before Tax of 7.2 and 3.6%, respectively2. Those COGS figures are big targets on top of a highly leveraged COGS/Profit ratio.

What does it mean for Product Cost Management becoming mainstream in the enterprise software stack?

We asked Dan Galorath how long it would be before Product Cost Management was as much of the PLM ecosystem as finite element, manufacturing simulation, or environmental compliance. He replied:

“Cost estimation software will never be on every designer’s workstation, but I don’t believe that is what it means for Product Cost Management to be considered ‘mainstream.’ It’s not fully mainstream yet, but a greater need is being driven by outsourcing and the tight business environment. The procurement folks can’t only rely on internal manufacturing knowledge like they used to. They need tools like SEER to fill the gap and move the cost knowledge base forward.”

We agree with Mr. Galorath. This is another step, another piton to secure Product Cost Management onto the PLM cliff, as PCM continues to climb this steep hill.

This is the first integration point between independent Product Cost Management software companies and the PLM/ERP world since September 2012, when Siemens PLM purchased Tsetinis Perfect Costing3. PTC has built some level of cost tracking ability into Windchill, and Solidworks (owned by Dassault) has developed the first couple versions of a costing calculation module for their product.

There is still a lot of ground to cover. There are quite a few independent product cost management software tools that have costing intellectual property that can accelerate the process, especially if the big PLM companies acquire them or partner with them. When that will happen is anybody’s guess, but for now it looks like CATIA users, at least, have a viable solution for composites costing… and maybe more in the future.

1 For more information, see the Hiller Associates Industry Week Article: Your Should-cost Number is Wrong, But It Doesn’t Matter

2 Per www.morningstar.com, trailing 12 months COGS, 3/13/2014

3 Siemens buys Perfect Costing Solutions (Tsetinis), Hiller Associates, September 2012

Mar 182014
 

 

If you are in the New York area and interested in product profit, you should attend the DFM Summit which is THIS THURSDAY MARCH 20?  The event includes sessions on distributed manufacturing, Design-to-Cost, Industrial Design, and networking.

 

Design-to-Cost Panel

The design-to-cost panel will include the following panelists:

  • Jon Hirschtick is the founder and Chairman of Onshape, developing new not-yet-announced products for the CAD/CAM/CAE/PLM market. Previously he founded and led SolidWorks.
  • Jon Washington is the founder of The Innovation Garage, a business innovation firm that partners with its clients in the design of product, process, service, and supply chain solutions.
  • Ben Gebhardt is a co-founder of Refactory, making hardware easy. He was the lead electrical engineer on the Beats By Dre team for all of 2012 until spring 2013.
  • Eric Arno Hiller is the principal of Hiller Associates and one of the pioneers in Product Cost Management (PCM). Hiller co-founded technology companies aPriori and End Around.

To read more about the panelists and the subjects to be covered read Designers need to be responsible for cost by conference organizer Peter Verkooijen.

Hope to see you there!

Register Here for the DFM Summit.

 

 

 

Jan 292014
 

We received the following question about Bills of Material (BOMs) from a product development manager:

QUESTION: “How does one balance the need of a BOM to be expedient and fast for real world use, while still trying to make an investment in a universal and reusable bomb?”

That’s a great question for product development teams. Our answer is a series of steps:

STEP 1 – Admit it’s a problem

It may sound like the trite stuff of a 12-step program, but the first step to recovery is admitting you have a problem! There’s nothing wrong with having a problem, and in fact, solving problems is what we went to engineering school to do, didn’t we? Some people will tell you that you can have it all (usability and re-usability) in your BOM structure instantly and without conflict. That’s delusional, but we can make incremental progress over time.

STEP 2 – Define the problem

Going back to our school days, the first thing we would do in our statics or dynamics homework would be to list the forces that are active. There are at least two forces in play, and for the most part they are directly opposed to one another:

  1. Functional Universality / Re-usability – we would like to have a universal BOM that can be re-used and easily modified to work for each product.
  2. Expediency / Practicality – We have to ship the product out the door on a certain timeline. The BOM has to be easy enough to use that we can modify it quickly so that we can get our “day-job” done.

STEP 3 – Recognize that the equilibrium point is dynamic over time

Where we start out on our journey of practicality vs. universality in the BOM is not where those forces may end up in the future. The equilibrium point between those forces will change over time.

In Figure 1, we see that initially the force of expediency/practicality is stronger. Therefore, at first our BOM will mostly focus on the needs of today, rather than the needs of tomorrow. However, over time we can reduce some of the immediate pressure to ship product, because we have invested in the bill of material. The equilibrium point is driven to the right on Figure 1 toward a more universal BOM, which is still practical and expedient for our daily use.

Figure 1 Balancing BOM Usability vs. RE-usability

Figure 1 Balancing BOM Usability vs. RE-usability
Click to ENLARGE

STEP 4 – Knowing the equilibrium point at any point in time

How do we know how to balance the two forces at any given point in time? The recognition of a third force may actually help us simplify the problem. That force is the needs and goals of our management team in the company.

The management team is certainly interested in shipping the product for immediate revenue and profit. However, they are also responsible for stable growth of the company over time. Management needs are a downward pressure that we can use to our advantage, just like the Romans did with their brilliant discovery of the arch.

Figure 2 represents such an idealized arch. The forces of the needs for universality vs. practicality are pushing against one another. Without a third force, certainly the structure would tumble. However, with the third force of management needs, it’s much easier to balance the two forces and know where that equilibrium point is at a given point in time.

Figure 2 Balancing BOM Usability vs. RE-usability with Management Pressure CLICK to ENLARGE

Figure 2 Balancing BOM Usability vs. RE-usability with Management Pressure
CLICK to ENLARGE

Figure 2 – The down force of management decision making

STEP 5 – Make sure you have a solid keystone

What is the keystone in the arch? The keystone bears the pressure of all three forces and balances them. The keystone in our process is a thoughtful and dynamic owner of the bill of material structure. This might be a consultant, a specific person who specializes in product lifecycle management, or the product development manager. Whoever it is, this person or team should be able to view the opposing forces not as forces that will crush them, but as forces that will help them balance each other.

 

As with any problem in the real world, unfortunately we’re not dealing with a precise science here. However, hopefully this expansion of our framework will be a way to think about making progress, as you balance usability vs. re-usability in your bill of material structure.

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This post is 3rd in a series of posts on ENGINEERING.com about Bills of Materials (BOMs). The first outlines the importance of managing the BOM: Dr. Strangepart: How I Learned to Stop Worrying and Love the BOM. Next is a framework of how to build re-usability into the BOM: Form, Fit, and Function – A Framework for your Bill of Material.

Jan 272014
 

Continuing , the series on the Bill of Material we began with the article Dr. Strangepart: How I Learned to Stop Worrying and Love the BOM, here is a full re-print of the next in the series.  You can find the original at ENGINEERING.com here:

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In my post Dr. Strangepart: How I Learned to Stop Worrying and Love the BOM, we began talking about the extremely complex process of managing the bill of material (BOM). That discussion focused on intelligent part numbers, but today I want to move to the question of whether the BOM is primarily keyed off of the functional use of a part or the specific part number itself. This is a tension that has existed since bills of material were created, when man married an axle to a wheel.

Why do people care whether the BOM is driven by part numbers or the part’s function? The answer is that each has certain advantages. Driving the BOM by actual part numbers is very useful for purchasing and manufacturing, and when an engineer is focusing on an individual piece of hardware. However, when the engineer or a product manager moves from one product to another, a function driven BOM allows him to compare components more easily.

The ability to compare BOMs has huge implications for the ability of engineering to successfully re-use parts. Re-use lowers both the cost of the hardware itself (by re-using tooling and increasing production volumes) while also reducing the engineering time needed to design a new part. Re-use has been the great white hope of the engineering community from time immemorial, but it is very challenging.

Although Product Lifecycle Management software vendors talk about re-use, most companies do a very poor job. Trying to manage re-use without intelligent part numbers and a functional way to look at the BOM is like searching for a single item in a hoarder’s basement that’s jammed full of boxes with no labels. Eventually you give up, go to the store, and buy a new one! That’s one of the big reasons why re-use has struggled in the engineering community.

So, how do we balance the tension between these two things? Here is a simple framework for thinking about the BOM that I call Form, Fit, and Function.

CLICK to ENLARGE

Figure 1 CLICK to ENLARGE

By function, I mean what the part is actually doing, what its purpose in life is. By form I mean the specific piece of hardware or part that we’re dealing with. In Figure 1 there is a simple example of how function and form relate to each other. Typically, the superset will be function. The function in this case is to provide rear vision to a driver of a vehicle. The function is the result of the part operating correctly. The part itself is the form that “delivers” that function. In this case, we might provide rear vision by designing a mirror, a camera, or some sort of sensor.

The third part of the framework is the fit of the part. However, by fit I don’t mean the actual geometric tolerances or real estate that the part occupies. What I mean is, “What are the unique attributes of the part that make it “fit” the function, i.e. accomplish the function?”

Figure 2 shows another example of a functionally controlled BOM. In this case, we’re using an example of the propulsion of a vehicle, perhaps a jet aircraft. In this case we show propulsion as a top level Function, along with sub-levels of the powerplant, how the power is transferred, and the cooling system.

Hiller Associates Form & Fit Functional BOM

Figure 2 Hiller Associates Form & Fit Functional BOM Example
CLICK to ENLARGE!

 

The coolant is the Form that satisfies the Function of the cooling system. We assign an intelligent part number for the specific coolant. One might ask, when do I move from a Function to a part number (Form)? The answer to that is, whenever it is convenient. It will take a little bit of time for your team to develop a functional BOM that has a manageable level of hierarchy in it.

TIP: Any more than three or four levels of hierarchy can be very difficult to manage.

There is a many-to-many relationship between the Function and the Form (part). Depending on how far down the Function tree we go, we may need to attach more than one Form (part) to satisfy a function. On the other hand, if our functional tree is deeper, on certain products there may be one assembly (Form) that satisfies more than one Function on the functional tree.

Moving to Fit, we see that each Form may have multiple attributes (ways of fitting the function). The coolant “fits” our functional need by the attributes that it has. In general there will be a one-to-many relationship between Form (part) and Fit (attributes) respectively.

Form, Fit, and Function is a simple way to look at how we structure our products. It lends itself well to re-use of parts, but also for the re-use of work break down structures that are used in aerospace and defense.

Some companies are now working on constructing skeleton “Starter” or “Universal” BOMs that they re-use for each new product. The idea is to start with a generic BOM, and then add and delete to match the needs of a new product. The goal is for the company to have one universal BOM, or one for each unique product group.

This is a great idea in theory, but it’s not trivial to execute. To do this in your own company will likely take your engineering team, product management, and a consultant a year or more to find a structure that suits your needs. However, once this is done, the speed and re-use advantages should be significant. Hopefully, the Form, Fit, and Function BOM Framework will give you a simple way to think about it!

Jan 232014
 
BOM Away from Hiller Associates

Yesterday, we began a series of articles at one of our media partners, www.ENGINEERING.com.  Instead, of focusing on Product Cost Management, we are focusing on another maddeningly difficult problem with critical implications to the Firm:  structuring the Bill of Material to promote ease of use… and re-use.  We will reprint the article below, and you can view the original here:

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A few months ago, unleaded client and asked me an interesting question.   That question was how does one reconcil the tension between specific parts or hardware vs. the functional use in the product of those parts.    This client was from a major fortune 500 company with a bill of material (BOM) containing thousands of parts on each product.  I was a bit taken aback, at first, by this question.  Although it is a very difficult question and subject, I assumed that most major companies were old hands at dealing with this tension.  I was wrong.

This reminded me that something that might seem old hat or common sense to one person, might be very interesting to another.  For example, when I graduated from the university and went to work for Ford Motor Company, I was taught that the Ford part numbering system.  Ford uses a system for parts that is an intelligent part numbering system, in which the part number makes it obvious which product programs , functional type of hardware, and what version of the part is being described

Hiller Associates - Intelligent Part Numbers

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This system of numbering parts has been around for goodness knows how long.  It is no great secret in the auto industry.  I’m sure every person at Chrysler, GM, the foreign auto companies know the Ford system of numbering parts.  In fact, apparently , eBay even teaches us about the Ford part numbering system.  It’s very straightforward and makes complete sense.  As a young engineer, fresh out of school, who didn’t know any better, I assumed that every company had a similar intelligent part numbering system.  However, when I gained a little bit more experience and maturity, I realized that Ford’s ingenious but simple system was not so common sense at all throughout industry.  In fact, most companies I have met in manufacturing have nothing more than a sequential part numbering system that tells nothing about the part for which you were looking.

The point here is not for me to glorify the Ford part numbering system.  I’m sure there are companies with even better and more intelligent part numbering systems out there.  In fact, we don’t even have to go back into the horrors of the group technology fad in the late eighties or early nineties to know that!  No, my point is that relatively simple and logical ways of classifying (but not over classifying things!) on the BOM can really help us in our management of engineering parts and the product.

Therefore, in the next few weeks, I plan to post a series of articles that talk about these ways that we can view the bill of material and help ourselves and our company.  I look forward to hearing what other experts in the product life cycle management will have to say in comments.

Nov 222013
 

Hello Product Cost Management World!

We have been off the air for a little while, but we are coming back on with a bang. It’s finally here, the long awaited 2013 Hiller Associates and CIMdata report: Product Cost Management in Discrete Manufacturing

That’s right, this week Hiller Associates, partnering with CIMdata (a leading analyst firm in the area of Product Lifecycle Management), released the most extensive research to date on Product Cost Management.

We surveyed respondents from many industries and drew upon decades of our own experience in the field to provide a comprehensive report that discusses the state of product cost today and how well companies are doing at meeting cost targets. This report defines each of the Product Cost Management techniques and puts them in perspective. It discusses the priority of cost as a product attribute versus time-to-market, quality, performance, and other product attributes. It also discusses how extensively cost targets are set in industry today, what percent of products meet cost targets, what product cost management techniques companies are using, and what software tools can help.Hiller Associates 2013 Product Cost Management Research

If you work on  product cost or in an adjacent field, the report will be useful to you or a colleague in your company.  You can find the press release at the link here:

Do you have burning questions about Product Cost Management?  This report has the answers:

  • Hiller_Associates_2013_Product_Cost_Management_Research_ReportHow well are companies doing versus cost targets?
  • What is the priority of cost versus quality and timing?
  • How are companies setting cost targets?
  • What is holding firms back from profit?
  • What tools and techniques are solving the problem?
  • …and is the DARPA study a hoax!?

CLICK HERE to get the report, and feel free to contact us with questions!

Hiller_Associates_2013_Product_Cost_Management_Research_bar

 

Jul 122013
 

Today we are reposting the article we wrote this week for ENGINEERING.com.  The original article is here and our announcement of our partnership with ENGINEERING.com is here.  Enjoy!

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One of the most frustrating things for many engineers is understanding the quotes they receive from their suppliers. They want to know how these quotes compare to their own internal estimates. Unfortunately, most engineers are not skilled at getting the right answer.

Strangely, engineers are typically very good at this in their personal lives. Let’s say you’re going to buy a new stereo receiver. In a matter of minutes you have the following options laid out:

  • Option 1 – Amazon ($300) + Shipping ($0) + Squarespace extended Warranty ($50)
  • Option 2 – Amazon vendor ($270) + Shipping ($15) + Squarespace extended Warranty ($50)
  • Option 3 – Stereo Shop ($320) + No Shipping ($0) + Included Extended Warranty ($0)

In your personal life, you not only outline how much costs are, but where they are. That is, in which cost bucket does each dollar reside? So why is this so hard when dealing with a part quote at work? The answer is: it shouldn’t be!

Don’t ask what, ask where

The first step to unraveling quotes is to put the numbers aside – what matters first is to decide into which cost buckets each dollar should go. To illustrate this, let’s consider buying a lightly machined casting.

CastingFirst ask, what resources go into delivering this casting to your shipping dock? Take a look at the figure below. On the top line in orange blocks, we show the various cost buckets for the casting. These include the raw material that is melted, the various processes that are applied, the machining, any painting, and then margin and logistics.

Hiller Associates Matching Estimates and Quotes

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Start with your estimate

We suggest that your starting point should be your own internal cost estimate from your cost expert, your spreadsheet, or from a third party Product Cost Management calculation tool.

It’s likely that the level of detail in your calculation method will be deeper than what you receive from suppliers. Even so, your tool or spreadsheet may not provide a number for each bucket of cost. In our casting example, our initial estimating method did not provide margin and logistics. Becaues these are real costs we will list them, noting that we don’t know what numbers to use for those costs at this point.

 Lay out what you know from the Supplier Quotes

Now, it is time to match up your supplier quotes. We show three different quotes in the casting example. Your purchasing department may give you more quotes or less quotes. However, in our experience, three shall be the number of the quoting, and the number of the quoting shall be three. (If you don’t get that reference, please see the attached video).

The quotes you receive probably won’t line up exactly with your estimates. Suppliers, as in example Quote 3, rarely provide a detailed breakdown. Regardless, it’s important to know which costs are included in the $23.00. Are any costs included missing?

But what if I am missing a cost bucket?

It’s common to not have an estimate for every cost bucket from one single tool or spreadsheet. Thankfully, there are several methods to triangulate to a better estimate.

  • Look at past part quotes for similar parts.
  • Ask an expert. For example, your shipping department may know what it would cost to ship similar casting parts.
  • Use a different estimation tool that does include the missing cost bucket.
  • You can also surgically lift and triangulate cost buckets from the quotes themselves. For example, you could average the cost for logistics between Quote 1 and Quote 2, so your internal estimate of logistics cost becomes $1.50.

The benefits to you and your company

You may think that this exercise is just about whether you should be paying $23.00 for this casting or $20.00. That is an important question, but there are other big benefits to this method.

  1. Missing Buckets – One of the biggest advantages to accounting for cost buckets is to identify any misunderstandings between your company and the supplier. It is better to find out now that the supplier has not included the shipping costs than to find out later.
  2. Your time to shine in front of management – regardless of the final cost that you negotiate, if there is a question later from your management about why you paid what you paid for a part, you have a ready-made, easy-to-understand management slide prepared.
  3. Negotiation power – deep understanding of costs is very useful when talking to the supplier with whom you decide to negotiate. Of course, you cannot show them the numbers from other suppliers’ quotes, but there is nothing wrong with showing your internal should-cost estimates.
  4. Learning by doing – after you go through this exercise several times, you will start to develop an intuitive feel for what drives cost in a commodity class. In our example, you will start to understand the relative magnitude of machining vs. casting cost vs. raw material for lightly machined castings.

They say that “It’s not about the destination; it’s about the journey.” The good news is that with part quote evaluation, both the journey has value (as shown by the four points above) and the so does the destination (e.g. paying $20, rather than $23 for a casting). Enjoy both!

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