Moderator

Jan 222020
 

As a consultant, I am sadly, no stranger to extensive travel, and the inevitable hassles and pains that come with it.  Nor, as a resident 24 years in Central Illinois, 10 in Boston, 5 in Detroit, and 6 in Chicago, am I a novice to how to handle bitter winter conditions.  However, recently, my wife and I shared such a bad travel experience with 4,000-5,000 other people that it compelled me to not only rage about it while it was happening, but to reflect more deeply upon it as an ops and process improvement professional.

In this article, I will not only take you through horrible travel experience, but also look at it from a critical ops professional point of view.  Hopefully, Hiller Associates can not only provide some advice to a foreign airline and airport, but that we all can consider in designing and building organizations to be fault tolerant and resilient to surges and shocks.

The Narrative

My wife and I were returning from Europe to the US several weeks ago, after succumbing to this newish first-world fad, a “babymoon”.   It had been a whirlwind of education in history, culture, religion, art etc. in the winter in Paris, Belgium, and the Netherlands – even combined with a business meeting (who says multitasking doesn’t work?).    After our last three nights, in Belgium, where an old friend kindly hosted us in his home with his family, we were flying out of Brussels.  Always cost conscious, I had our flight going from Brussels (BRU) to Keflavik (KEF, Iceland) back to Chicago (ORD) on Icelandair (IA), which seemed to be saving a fair amount vs. other options. 

Enter winter weather, which is to be expected in January, and was a massive shock to the system (in this case Keflavik airport and Iceland Air).  As we will see, such shocks are sometimes unavoidable, but what matters is how you have (1) prepared for and (2) react to that surge / shock condition.

Feel free to follow along with what I am about to tell you with a birds-eye process flow view using Figure 1.

Click picture to enlarge!

We started spending 4-5 hours comfortably seated in Brussels airport, as we received furious texts and emails from Iceland Air delaying the flight, repeatedly.  However, I do not remember getting any notification that a voucher for food was available, until I talked to a nice Belgium employee of Iceland air… 30 minutes before we had to board.  Unfortunately, Iceland Air was being frustratingly obtuse on whether our connection to Chicago would be waiting when we landed for several hours, or not.  We were supposed to leave at 1 pm CET from Brussels. It was now 5:00 pm.

Three and a half hours later, we were circling Keflavik, and that is when the problems got much worse.  We ended up circling for 15-30 minutes.  We had to complement the pilot for getting us down safely, as it may not have been a safe idea to have let us take off in the first place, given the winds and blizzard conditions.   Iceland claims it is warmer than NYC in the winter, but the conditions were very bad this night.

We’re there!  Wrong.  We were about a football field from the airport… but we have to wait for over 2 hours.  Eventually Iceland Air (who does NOT serve meals on international flights unless one [over]pays) gives everyone a little water and a sad granola bar.  This is a place is called ICEland, but they seem to have no plows to clear a path to the runway, and for some reason, we cannot just creep slowly for a few minutes through the snow.  When we finally do taxi to the airport, there is not even a jetway.  We have to exit down an icy set of stairs, out into the blizzard, then carry bags upstairs to the airport.  We thought to ourselves, “couldn’t we have just walked the football field 2-3 hours ago?”  My hopes of making the connection are now dashed, but at least the ordeal is over, right?  Wrong.

~10:00 pm UK time – upon entering the airport, my recovering engineer and process geek spidey-senses were going off immediately.  The scene had a refugee camp malaise and chaos to it, with people looking utterly confused (including Iceland Air employees).  We were eventually funneled into a long line of passengers from multiple flights waiting to speak with only two people from Iceland Air to help us figure out what was going on. In the US, I would have called the airline, but it was clear that strategy would be futile with this national carrier.   I send my 7 months pregnant wife out for food immediately, fearing the worst, as I held position.  She returned 10-15 minutes later shocked that there is only one market / newstand open for food.  She reported the sort of scene I remember from 60 Minutes segments in the 80’s, inside a supermarket in the USSR, as frantic passengers swarming like locusts over rapidly emptying shelves with not nearly enough food and drink.  She spent over $40 for two sandwiches, a couple bags of potato chips, a water, and a strange chia seed fruit dessert cup thing.  The only protein my wife can find in the middle of the night is cold deli meat on the sandwiches, which she is nervous to eat, being pregnant.   We fuel up for what is going to be bad night.   

After making friends with people in line, and waiting for almost 2 hours, suddenly everyone in our line and the entire airport is told to get their luggage.  But, it’s unclear to everyone what to do?  Wait in line?  Go to baggage?  Given the cycle time of Iceland air to  help each person seems to be 10-15 minutes, I decide this was sunk cost, and we headed to baggage.  However, the airport had now sent several thousand people through a very small pipe (one escalator) at once.  It took half an hour to move several hundred feet.  Getting the luggage was not that bad, considering, but then we were directed to ANOTHER line.  At least this time there were about 6 Iceland Air desks open.  However, there were 2-3 times that amount that COULD have been open.  Why are they closed?   My wife, who is pretty low-maintenance and much more patient than I am, beseeches the Iceland Air lady who is herding us.  She says she’s pregnant and we need something more than the airport floor tonight.  The women shrugs, and it is clear that she could not care less.   After 2 more hours of miserable standing, they announce there are no more hotels (at least in Keflavik). 

While waiting we noticed an army of heavily geared-up search and rescue guys, looking like they wanted to help around the airport, but not being used in the least.  The airport also announced that the Iceland Red Cross was setting up a “shelter” with some water and cots, because there are no hotels.  It’s now 1 am.   Children are asleep on suitcases; the disabled are dozing in wheelchairs.  One lady passenger kindly offers us a blanket she stole from the plane.  My wife, typically a trouper, is done; she bursts into tears.  I am out of patience, too. I’ve been noticing failure after failure in the operations of this place, and I am professionally and personally offended. 

Hailing a search and rescue guy, I explain the situation.  He is the only person in the airport we have met that is (a) empathic and (b) had an action bias.  He says not to worry and he’s on it.  After 15-20 more minutes, we do have vouchers to a hotel in Reykjavik (it is 45 minutes by car, but at least my wife is not riding on a donkey while I seek a stable and manger).   But then we find out that apparently there was an accident on the road and other plowing problems for which they were unprepared (in a country called ICEland).   Busses are delayed; cabs are delayed; it is 2 in the morning.   A group of 10 of us have to wait about 30 minutes outside in the blizzard, as one cab arrives every 5 minutes.  Finally, we get a very nice driver who speedily spirits us away to the hotel.

The next morning (after a good hotel and breakfast), we feel a little better, but things are not better at the airport.  It takes 4x the time it should to check-in, because Icelandair’s one kiosks and systems are confused that we have all been transferred to new fights, so the system forces everyone to the human desks (now 12 are open thankfully).  After more lines at security, we go to the gate, which is chaos as well.  There is no seating, and people are jammed up in the hall blocking other people who are trying to get through, while other passengers pack themselves on the stairs from our level up to the jetway, creating a fire hazard on the stairs.  No one from the airport or Iceland Air takes charge to get the people off the stairs and have them line up in an orderly fashion along the hallway wall (I regret that I did not show the initiative to do so, myself). 

But, eventually we do board and, mostly, uneventfully get home to Chicago.

What went wrong and how to improve the operational system

So, that is the story.  It could have been a lot worse, i.e. as far as I know, no one was serious hurt in the ordeal, but the suffering of thousands of passengers (and many airport and Iceland Air employees) in that airport that night was clear.   The weather was so severe it was unlikely that most people would have ever gotten out that night, but the experience could have been much better, if things were handled differently. 

Figure 2 shows the various critical elements of an organization (Culture, Strategy, Process, Team, and Tools / Infrastructure), as well as KEF’s assets, some of the failures that we observed, and ways these failures could have been eliminated, or at least, significantly mitigated.

While we go through this, keep in your minds that iconic scene in Apollo 13, where ingenious NASA engineers look at the problem from the standpoint of what they DO have to work with, dumping out a box of miscellaneous items that are on the spacecraft.  I don’t know all the assets that KEF and IA had; it is probably far greater than what I observe here, but we did observe some powerful tools that could have been leverage much more.

Click picture to enlarge!

Culture

Let’s start with culture, because as a famous quote probably mis-attributed to Peter Drucker said, “Organizational culture eats strategy for breakfast, lunch and dinner so don’t leave it unattended.”  The first thing that was apparent to me was there seemed to be a lack of strong and directive leadership.   Different styles of leadership tend to work better or worse depending on the situation, but in a crisis, somebody needs to be in charge.   Perhaps this was influenced by culture.  For example, according to Wikipedia, “… an important key to understanding Icelanders and their culture… is the high importance they place on the traits of independence and self-sufficiency. In the June 2005 European Commission Eurobarometer public opinion analysis, over 85% of Icelanders found independence to be “very important” contrasted with the EU25 average of 53%, 47% for the Norwegians, and 49% for the Danish.”  Some of the other Americans at KEF were telling us this similar observation about Iceland after having spent a couple weeks there, as well.  Often our greatest strength is also a weakness at times.  The lack of leadership caused a palpable uncertainty that we could feel from the small things (no one telling us to get out of the middle hallway at our boarding gate and line up along the wall) to the process (no one was parsing passengers into needs-based groups that could be handled en masse) to the holistic (KEF and IA seemed to be using the same processes they would use for a normal load scenario in this surge scenario). 

No leader seemed to be stepping up and saying, “Stop!  This is not working.  Let’s do this instead…” (and deploying resources accordingly).   Even the visible presence of an executive leader (maybe even dressed differently to show their rank) walking around the airport controlling things would have given certainty to passengers.  We recommend that KEF and IA work on a command structure with clear roles and authority for the future.  One asset that could likely help is Iceland’s tight-knit, homogenous population.  They only have ~360,000 people (the capital is about half of that).  It is much easier to mobilize and impact with a small and ideologically-aligned group (e.g. the Navy Seals) than a lumbering mass of people.   So, KEF should have taken advantage of this (as we were told they did after 9/11 when planes were grounded).

Strategy

The second major area to improve is Strategy.  The short-term strategic failure was allowing so many flights to take off, knowing that (a) there was a high probability no connections could leave and (b) the airport did not have the capacity to handle the mass of passenger who would be stranded.  This strategic error caused the crisis.   Considering the expected low volume of the passengers who could fly out (likely none that day), KEF should have grounded / delay all incoming flights beyond the capacity of KEF to house efficiently.  These passengers could have been housed at their origin airports, spreading the load.  We understand that often you want to get people “part way home” at least, but there is a limit.

The long-term strategic error was not building surge capacity to begin with.  I am not sure KEF and IA even were aware of what the max capacity was (or maybe they severely overestimated it?).    KEF and IA needed to have tight understanding of capacity and a surge / crisis plan, beyond a Red Cross shelter.

Process

Process was a big problem in the airport.  There were many problems I observed, but let us focus on three that caused a lot of problems.  First, KEF and IA seemed to make no attempt to parse the passengers into needs-based groups, such as:

  • Special needs passengers with small children, pregnant women, the elderly, the disabled, who needed special care and more immediate attention
  • Passengers who have been re-booked already and only need a hotel and food for the night
  • Passenger who need to be re-booked
  • Sub-groups that are going out early in the day vs. late.
  • etc.

If they had, they could have directed them into different lines where each like group could be handled en masse with much faster cycle times.  And, special cases could be handled appropriately with more time and care (Lane Strategy).

There also seemed to be little preparation for this.  Clearly, it took several hours to fly to KEF and almost double that time to get to the gate.  IA could have prepared transport strategy, vouchers, bags of food to tie people over until the hotel, etc.   This would have given comfort and certainty to the passengers and greatly sped up the process for the IA and KEF team.

The team also seemed unaware of what the capacity of hotels was, given that they had only gotten through half the final queue we were in, when they announced the KEF area hotels were full.  There should have been a process to know the capacity of hotels in KEF, Reykjavik, etc.

Team

It was clear that the team was severely understaffed.  Hearkening back to Culture (leadership) and Strategy (building capacity), IA should have activated more resources to handle the crush of passengers.   And, not all jobs require the same skill.  KEF and IA could have built surge / temporary resources that have a basic level of training.  These auxiliaries would allow the full-time employees to focus on the more sophisticated tasks.  Here KEF had a big asset that was underutilized:  The Red Cross / EMS.  If I get lost in the wild, Iceland might not be a bad place to be, because it’s clear that Iceland had created a small army of EMS, loaded for bear (maybe literally?).  They were geared up and all over the airport baggage, and ticketing, looking eager to help.   But… no one was using them (except me — they were our saviors that night).   Clearly, emergency care is their primary vocation, but in these situations, it’s likely there will be few traditional medical emergencies.  A large number of the EMS folks could have been cross-trained to be auxiliaries for KEF and the airlines, hopefully with generous donations or direct payment to support the EMS organizations.

One note on training of the team: my wife’s experience with the IA employee was really poor, in that she did not seem to recognize or care that my wife was very pregnant and had been trapped at KEF for over 6 hours.  I hope IA invests in some been training with an eye to customer service.

Tools & Infrastructure

Often companies and other organizations make the mistake of thinking that more or fancier tools can cure deficient culture, strategy, process, and team.  They cannot.  Tools and infrastructure are only force multipliers and enablers of culture, strategy, process, and team.  However, the converse is not true.  If you don’t have enough of them, it can frustrate the good progress you make in culture, strategy, process, and team.   In KEF that night, this was clearly the case. 

Let us begin with the lack of food options for thousand of people and the fact the food was so expensive.   KEF and the airlines should have had agreements with the restaurants for emergency catering. It would have been easy to have tables of free or inexpensive fruit, water, juice, snacks, etc. Alternatively, lunch bags could have been hastily prepared for people to grab or handed out after they had been parsed into needs-based groups.  (EMS or other auxiliaries could have set all this up).     

The seating situation was terrible.  There was not enough seating within security and virtually none outside of it.  People were standing, literally, for hours.   KEF had an asset here:  it was a fairly large airport.   Foldable chairs could have been set up by EMS / auxiliaries.  This would have worked well in conjunction with dividing people into needs-based groups.  People could get their luggage and sit comfortably with their sorted group while they waited for attention.  For example, the airport team could have call 10-20 people at a time to go to an agent to help them, or they could address a block of 20-50 seats at a time with instructions, vouchers, etc.

The cab queue being outdoors in a blizzard was ridiculous.  However, many winter airports in the US (e.g. O’hare) also have this problem.  However, KEF had an asset here – cabs could drive right up to the terminal.  Once again, some simple blocks of folding chairs would have allowed exhausted passengers to sit comfortably in the warmth and the cabbies could come get people in order as they arrived.   Once again, parsing people by groups would have helped as well.  If people were parsed by hotel area, buses, vans, and cars could have been efficiently filled.  For example, my wife and I were the only people in a very nice 8 passenger van (75% of capacity was wasted). 

We were told that there were problems both with getting a path plowed from tarmac to airport and on the roads to the cities of Keflavik and Reykjavik.  This seemed bizarre in a place called ICEland.  This was extreme weather, apparently for Iceland, but once again there was no surge capacity in the system.  KEF and airlines could work with city and state to subsidize more equipment that the airport could acces for use inside the airport and on the arteries to it.

Finally, we have a sad tale of woe about an excellent asset underutilized when it was needed.  Iceland Air had a very good automatic text and email system for updates.  This could have been used to pre-sort people into needs-based groups and communicate instructions.  Imagine this survey:

Hi! Welcome to Keflavik airport.  Regrettably, we are having bad weather tonight, but we’ll keep you warm and fed while we sort it out.  To help us do that, please answer the following questions:

  1. Are you or are you traveling with someone with special needs (with small children, pregnant, disabled, elderly, etc.) [Eric:  Yes!]
  2. Sadly, all the connections to your destination for tonight have left or were canceled. According to our system, you have been re-booked on IA flight XYZ to Chicago (ORD) at #:## tomorrow.  Does that sound right?  [Eric:  Yes!]
  3. We have the following options for you for accommodations. Which would you prefer?:
    1. Stay in the airport (we’ll give you blankets and pillows and food – no bathing options available).
    2. Stay on cots in our nearby Red Cross shelter (we’ll give you blankets and pillows and food – no bathing options available).
    3. Stay in a hotel that we will provide (we cannot guarantee whether this will be in Keflavik which is 15 minutes away or Reykjavik which is 45 minutes, but we will provide transport)[Eric: C, please!]

Thanks!  When you arrive in the terminal:

  1. Please go to gate X, where we’ll give you some food and drink to go.
  2. Then proceed to baggage claim and collect your bags.
  3. Once you have your luggage, please proceed to the XYZ area (follow the signs), where we will give you vouchers and further instructions.

If you have any questions, please see the personal dressed in XYZ uniform. Thanks!

The other tech failure was the next morning in the check-in system.  Although we had received our boarding passes the night before, we had to re-check bags.  However, the system was not designed to handle this common exception case, so we (and everyone else) were sent to live desks of people to check bags.  This idled ~25 very expensive looking kiosks that could have reduced the load on the desks by 50-80%. 

A vision for the future

Looking at Figure 3 & 4, you can see designs of how the system COULD have worked to make a much smoother experience that would also increase throughput and capacity of the system.  It would also result in much higher customer satisfaction, and maybe even the same or less cost.

Click picture to enlarge!

Click picture to enlarge!

In the grand scheme of our lives, this was a minor hiccup, but a very painful one for everyone stuck in it for 8-10 hours.  Our thanks to the team at Keflavik airport and Icelandair who did keep us safe, and eventually put us on a plane home.   Hopefully, they will find this operational analysis useful in the future.

And, hopefully, this little case study is also something to ponder for your own organization.  Do you know what your maximum capacity is? Do you know where your bottle-necks are? Do you have a plan for surge and shock to your systems? Do you need to build capacity?   All good things to conside.

p.s. If you like nature (or Bjork), I hear Iceland is a lovely place to visit!

 

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Dec 192019
 

Yesterday, we announced the first of 2 new articles in SpendMatters.com!   They discussed the histor, and growth of the market of Product Cost Management software and the state of the art today. 

Normally, Eric would have made us hold of to tease you on part 2, owing to his steely Krampus and Grinch-like heart.  But, being that we are so deep in Advent and close to Christmas, we’ve decided to give you an early present!

Here’s a teaser of Part 2: (but, if you’re just impatient, click here)

 


In our first article in this series looked at product cost management software and how it fits in with the world of procurement software in the earlier years of development. This Part 2 focuses on the second wave of developments in PCM: feature-based automated 3-D CAD costing tools, advanced cost-accounting and control systems; the role of little and big data; and the future of product cost management.

To recap, it’s important to consider that purchasing has added a lot of new tools to what was mostly a relationship-focused discipline. These developments include:

  • Data-rich environments of spreadsheets, MRP and ERP systems
  • Supply chain management and supplier relationship management systems
  • Online auctions
  • Spend analytics tools/product cost management (PCM) software

And it’s important to recall our roadmap to this journey through time and technology, which is shown in Figure 1. Notice that the 3-D CAD development is the latest one. Let’s explore how this has developed and what it has to offer businesses today….

Curious?  Yes, you are.  To read the epic conclusion of the PCM softwares on the market today, what they can (and can’t do) and how they can generate impact for your company ,read more here!

 

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Dec 182019
 

Hiller Associates is pleased to announce a new article in SpendMatters.com! Spend Matters plucky founder, Jason Busch was having a conversation with our founder, Eric Arno Hiller, about the growth of the market of Product Cost Management software and the state of the art today.  Well, that is chicken soup to Eric’s soul.  It’s a TWO-part series, so read this one and look for the next very soon!

Here’s a teaser: (but, if you’re just impatient, click here)


A lot has happened in the world of procurement software in the last 20 years. Purchasing has added a lot of new tools to what was mostly a relationship-focused discipline. These developments include:

  • Data-rich environments of spreadsheets, MRP and ERP systems
  • Supply chain management and supplier relationship management systems
  • Online auctions
  • Spend analytics tools/product cost management (PCM) software

Although the relationship side of the business is just as important as ever (some might say more important), purchasing analytics are here to stay, and they continue to become more prevalent in the discipline. The same is true for product cost management tools and their offshoots of service cost management tools. In this series, I am going to discuss the evolution of these tools and the state of the art.

Our roadmap to this journey through time and technology is shown in Figure 1….

Curious?  Yes, you are.  To learn about what softwares are on the market today, what they can (and can’t do) and how they can generate impact for your company,read more here!

 

 

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Nov 042019
 

Image result for supply chain brain logo

Hiller Associates is pleased to announce its first article in SupplyChainBrain!  As usual, it’s on a most fascinating of topics… well at least to us:   Tariffs and their effects on your products.

Here’s a teaser: (but, if you’re just impatient, click here)


Total cost of ownership (TCO) was popularized by Gartner in the 1980s. The basic idea is that the value derived from a product involves more resources than what you pay the supplier.

TCO is essentially a consumer-facing concept, but another term, total cost of acquisition (TCA), has more of a supply-chain and procurement application. In the past, it was less important in the U.S., as the nation gravitated toward free-trade pacts such as the North American Free Trade Agreement (NAFTA). That has changed under the current administration. In addition, because of automation and the development of manufacturing sites in other countries, TCA is regaining importance in the U.S.

Today, a manufacturer might have multiple choices of suppliers within overwhelmingly complex supply chains. How does the modern purchasing professional sort out which option is best?

Let’s break it down to three steps:

  • What? Understand the supply-chain options strategically.
  • How much? Populate the numbers for each assumption tactically.
  • What does it mean? Quantify the total and understand where the costs are.

Etc…

Curious?  Yes, you are.  To learn how tariffs can impact your Total Cost of Acquisition / Ownership, read more here!

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Oct 172019
 

For the impatient:  To see the analysis of Illinois Football, CLICK HERE!

Download the analysis here:

==============================================================

Sometimes you just have to step away from helping clients with design-to-value teardowns and ideation and Product Cost Management to consider the less fortunate.  In this case, the less fortunate include our Managing Partner, Eric Arno Hiller, and his fellow alumni at the University of Illinois, Urbana-Champaign.   

Sure, it’s one of the greatest engineering schools in the universe (…or is it the “multiverse?”), has produced a large number of Nobel Prize Winners, and has respected alumni and programs in a plethora of disciplines.   But, let’s talk about what really matters to most people in the world of large American universities:  College Football.  Eric has done an analysis of Illinois Football and coaching.

According to Eric:

I have loosely followed Illinois football since I was a freshman in 1991, through my time recruiting many interns and full time people to Ford Motor Company as a young engineer, through being president of the Boston Illini Alumni Club, through moving to Chicago — the heart of Illini alums on earth.  

Until circa 2007, I veritably bled orange and blue.  This was due to my experiences with student leadership in the College of Engineering and personal experiences, far more than the sports.  But, after being friends with enough Wolverines and Buckeyes and Badgers, I really did get perplexed and irritated about what is really going on with Illini Football.   So, while visiting my college roommate, I was inspired to do a little analysis.

Eric wanted to answer the following questions:

  • Is Illini football performance really as bad as I perceive it to be?
  • Is this a new phenomena, since I became an Illini, or have my older Illini brethren struggled here as well?
  • Was Illinois ever good?
  • What coaches were the greatest in history?

Along the way, the data led Eric to some other interesting insights that he shares in with the graphic flair of a recovering engineer and recovering McKinsey consultant.   

To see the analysis of Illinois Football, CLICK HERE!

Download the analysis here:

Image result for university of Illinois football

Eric also started to think about what to do about the problems with which Illinois struggles, and tries to scratch the surface of a solution.   Find out what he says in the analysis!

(Spoiler alert!:   Don’t expect miracles — generating hundreds of millions in impact for clients with design-to-value, Product Cost Management, and great product management is in Eric’s wheelhouse.  Touchdowns on the gridiron, are a bit outside of it.)

 

 

 

 

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Oct 162019
 

OK, Hiller Associates is back in the saddle again!     And, we have a our latest article posted in: 

 

 

IndustryWeek.

Dullsville Just Got Interesting

by Eric Arno Hiller
 
The most boring parts of cost analytics are the difference between success and failure.

 “What does this mean?”

That’s an excellent question and one that a purchasing professional should be asking any time they receive a quote from a supplier or a cost analysis from their Product Cost Management team.  Sadly, however, many times, purchasing professionals don’t even vocalize this question to themselves, much less to their analytics teams, even after the analysis is presented. Instead, they just feel uneasy and uncertain about the validity of the cost analysis.  This is a dangerous position, because once the supplier smells that lack of confidence in a negotiation, it’s all over. … read more!

That’s just a teaser, as is this simplified diagram.

Curious?  Yes, you are.  To learn why everyone is confused about what your cost estimate means, after your team spent so much time calculating it, read more here!

 

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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?)

 

 

 

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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.

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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.

 

 

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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

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