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Dec 032012
 

A couple of weeks ago, AJ Sweat posted his article entitled Guess What, Kids? You Don’t Really Want A Job In Manufacturing, which is AJ’s analysis of CNN’s Best Jobs in America.  His lament is obvious – apparently manufacturing was not considered in this list, or it was, and it just was not desirable.    This article drew me like a moth to a flame for two reasons.  First, I love data!  Maybe it makes me think of happy days, rushing to the U.S. News rankings as a college student to see how my school fared,  but I am really susceptible to a list, even based on pseudo subjective data.  Second, it was a about manufacturing,

CNN used the following criteria to judge the desirability of a job.

  • personal satisfaction
  • low stress
  • benefit to society
  • flexibility

In AJ’s opinoin, only one job on the CNN list is related to manufacturing.  I thought, “surely this cannot be true!”  So, I’ve done my own analysis.  Here is my criteria.  First, I considered manufacturing fairly broadly.  If you developed and made a physical product, be it cars, computers, or a cancer drug, you are part of “manufacturing” in my opinion.  Second, I consider software development to be a form of design and manufacturing, even though it is not physical.  I binned the 100 CNN ‘best’ jobs into four categories:

  1. Direct Manufacturing Relation – someone who is on the manufacturing floor be it manufacturing, assembling, managing (a foreman), or direct support (e.g. manufacturing engineering)
  2. Product Value Chain – these jobs are not on the manufacturing floor but are in the direct chain from when a  product is just a twinkle in the eye until the start of manufacturing.  This category also includes jobs between manufacturing and the distributer or end customer.  Examples would be engineers, software developers, purchasing, or direct sales.
  3. Corporate Support Function – other typical jobs in a product and manufacturing company (e.g. IT, HR, accounting, marketing, finance, etc.) that are not part of the product value chain.
  4. Non-Manufacturing – Everyone else.  FYI, this is where I put almost all the consulting jobs on the list.

Here are my results:

Lack of good manufacturing jobs Hiller Associates

Click image to ENLARGE the graph!

I am forced to agree with AJ, sadly.  I can only find ONE direct manufacturing job, but I find more in the Product Value Chain than he did.  Even adding these, we only have 19 jobs – less than 20% of the CNN Top 100 jobs list.

The should be extremely concerning to the success of America in the future, if it is indeed true that these are the jobs people will be seeking.  According to Manufacturing Executive, the 17 million people who are in manufacturing companies in the US produce $1.7 trillion of GDP (11.7%).  Manufacturing also funds two-thirds of private research.  So 5.6% of the US population produces 11.7% of the output.   The people in manufacturing are TWICE as productive as the average person, in terms of the GDP they produce for the US.

I’d like to leave you with Hiller’s three manufacturing maxims, that I hope to explore in further articles:

  1. Services exists to service manufacturing; manufacturing does not exist to service services.
  2. Real value is created by growing something, mining something, or manufacturing something.
  3. Manufacturing and technological superiority are what make and keep a nation a superpower.

America needs to internalize these maxims.  It needs to stop just talking about helping manufacturing in Presidential commissions and initiatives and start DOING something to realign the focus of America where it should be:  design and manufacturing.

 

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Nov 232012
 

Today we take a break from corporate Product Cost Management to personal PCM.  I know that I should do this Black Friday thing to myself, but I enjoy the competition and the hunt.  It’s in my blood, I guess, and it’s the closest thing we normal people get to stepping into the Octagon.

I have been planning my attack for tomorrow.  You may know this stuff, but… here’s my advice.

  1. Check Amazon first!
    • You may find it for the same price (although often the BF prices at the store are cheaper)
    • You can check the quality of the items to see if you want to buy the items or a better alternative at a different store or Amazon.
  1. Order Online – Almost all the major stores are giving FREE shipping, and/or free in stores pick-up. This is especially helpful for people who are out of town at for Thanksgiving.  Ship it to the store near you an pick it up if you are afraid leaving the box on your porch.
  1. Use ebates.com – ebates works for almost every major store (except Amazon) and is very legitimate (if you have never used it before). They are giving DOUBLE rebates at a lot of stores. This is 6-8% back at most stores – some up to 10%!  All you do is sign up for a free account, search for your store and click-thru to the actual website
  1. Eric’s ALL NEW attack strategy
    • Order online in the morning first, for any item you can.
    • Then go to stores for stuff you have to try on to see if you want it. And, it will be later so the lines and traffic will be gone.
    • Go home and order the stuff you tried on, online.
  1. Tactical trips  
    • NO CARTS – Take backpack / shopping bag
    • Use non-main aisles
    • Game face – look like you stepped out of the latest Assassins Creed video game and people will move out of your way
    • Stay away from crowds and confuse looking people ambling aimlessly.
    • Muay-Thai style – throw elbows and knees… just joking.  Be nice, everyone else is just as flustered as you.
  1. Delay? Rumor has it that many items like TVs and electronics will be even cheaper after Christmas.

 

That’s it. I hope it works for you.  Let me know how it turned out and Happy Thanksgiving!

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Nov 052012
 

 

Last week, Hiller Associates published an article in Tech-Clarity with the title:

PRODUCT COST MANAGEMENT AS A LINK BETWEEN ENTERPRISE SYSTEMS

Here’s an outline of the article:

  • Siemens PLM recently bought Perfect Costing Solutions from Tsetinis & Partner.  What does this mean?
  • To answer this, let’s first ask, what IS Product Cost Management and what does PCM software really “do”?
  • Now that we know what PCM software really does, who would value this in the Enterprise Software world?
  • There are look’s of possible categories of enterprise software that could value PCM software, but the most likely are PLM and ERP.
  • Product Cost Management software  is really a bridge linking the engineering language of physical things to the rest of the organization (purchasing, supply chain, finance, manufacturing, etc.) who primary speak the financial language of dollars.
  • If independent PCM software companies are not bought by a large PLM or ERP player, what are the other possible options for their future?

Here’s a teaser diagram from the article, just because who doesn’t like maps?

Product Cost Management Bridge from PLM to ERP Hiller Associates

Click to Enlarge! The position of PCM Software in the Enterprise World

 

My thanks to Jim Brown and Tech-Clarity for the publishing platform to discuss this subject – Eric Arno Hiller

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Oct 292012
 

Last week Hiller Associates published an article on Should-cost in one of the leading online magazines for manufacturing companies, IndustryWeek.com.   Below is a synopsis  of the article.  However, you may want to just read the article here:

Your Should-cost Number is Wrong, But It Doesn’t Matter

Should cost is not perfect, but it does not matter, because its purpose is to be a leverage tool to improve negotiated cost, regardless of the should-cost number’s absolute accuracy.

  • What is should cost?
  • Methods of should cost?
  • Uses of should cost, specifically to reduce the price of products one buys
  • No one expected Peter Lynch to achieve his absolute return predications for a stock
  • How to use should cost as pricing pressure
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Sep 112012
 

Today is a day of solemn remembrance for Americans and many around the world who remember the 9-11 attack on the the United States of America.  However, there is at least one person who likely quite happy today for a very different reason: Andreas Tsetinis. Siemens Acquisition of  Tsetinis Perfect Cost Hiller Associates   Andreas is the Founder and CEO of Perfect Costing Solutions who makes Tsetinis Perfect Pro-Calc and Perfect Calcard.  In the biggest Product Cost Management (PCM) news of the day, Siemens PLM (specifically the Industry Automation Division) has announced the acquisition of Perfect Costing Solutions.

What is Tsetinis and What are Its Products?

For those of you who are not familiar with Tsetinis & Partner (parent of Perfect Costing Solutions), it is an integrated product cost company of software tools and consulting services. Siemens Acquisition of  Tsetinis Perfect Cost Hiller Associates Many people consider the software tool side of the Tsetinis business, Perfect Costing Solutions, the recognized market leader in Europe for the PCM.  In the last couple of years, the product Perfect Pro-Calc has also been making inroads in the US.  Perfect Costing Solutions makes two software products:

  1. Perfect Pro-Calc – This is a cost estimation tool used primarily by costing experts.  It is fed by manual input that allows predictions of cost for mechanical and some electrical parts.  Perfect Pro-Calc also includes that ability to roll up costs in a hierarchical BOM structure that the user defines.
  2. Perfect CalCard – This is a software focused on capital tooling (injection molding, casting, and stamping) cost estimation by tooling experts.  It has the capability of accepting 3d solid CAD models as input to the costing process, although, I am personally not aware how advanced this ability is.
Per the Perfect Costing Solutions website, “today over 240 companies in the automotive sector and other industries successfully use our products.”  Perfect Costing Solutions has 50 employees according to the Siemens press release.

What does this mean for Product Cost Management?

Product Cost dominos Hiller Associates

The last year, starting from September of 2011, has been a very eventful year in Product Cost Management.  First, Solidworks unveiled its first foray into the PCM world:  Solidworks Cost — the first tool, besides aPriori, that can cost parts directly from geometry.  Then PTC announced Windchill Cost.  Windchill is not a cost generation tool, but is a cost management / roll-up tool that builds off of Windchill.  It allows customers roll-up costs generated by other softwares or methods and track and analyze these costs.  Now we have the very first Product Cost Management acquisition (Perfect Costing Systems, Gmbh) by a major Product Lifecycle Management player (Siemens).  This begs many questions, among them:

  • Will the PLM companies begin to dominate the PCM space and crowd out the pure plays?
  • Will Siemens attempt to build CAD Feature Based Costing abilities into Perfect Pro-Calc?
  • What does this mean to PCM software companies; will other players acquire specialized PCM software companies?

I am going to see if I can get an answer to these questions.  In an eerie coincidence, just this week, Jim Brown of Tech Clarity and I were just discussing me writing an article about where Product Cost Management might settle out in the enterprise software landscape.  It sounds like it’s time for me to write that article…

What does the rest of the PCM world think about the Siemens acquisition of Perfect Costing Systems.  Please let us all know by commenting!

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Sep 052012
 

Yes, you read the title correctly.  It may sound like an oxymoron, but some form of this statement is uttered every day in the world of Product Cost Management (PCM).  Usually, a company, will say, “I don’t have time for profit.” right before it notifies the PCM software vendor that it cannot buy the vendor’s tool at the current time.   Sometimes, the statement is spoken to a PCM consultant who is proposing an engagement to boost the profit of the company.

The customer typically does not convey the thought exactly as the title says.  It is usually more eloquent, such as:

Um, yes well, I’m sorry, but times are pretty bad here.  We just got our quarterly results and sales [or profits] are down.  Our management is having to really tighten their belts, so we have to put the implementation of your software [or your consulting engagement] on hold until times get better.  It’s a shame, because everyone really liked your software and thinks it would significantly benefit our bottom line, but we just can’t invest in anything right now.

Actually, I am a pretty naive guy, so maybe this is the customer’s way of politely telling the vendor that they are not interested in the vendor’s or consultant’s product or service (or that there are better options to increase profit).  Maybe the customer is trying not to hurt the sales guy’s feelings — similar to the girl that makes up legitimate excuses why she can’t go out with you every time you ask her out.  However, I actually believe most customers are very honest about these things, and they are telling the vendor the truth.

Manufacturing companies are really saying:  “This is no time to think about profit! We’re doing badly enough already.”

Paraprosdokians

There is actually a word for a statement such as the title of this post.  It’s called a a paraprosdokian — a statement that leads you to start drawing conclusions in one direction and then finishes in an unexpected (and often humorous) different direction.    Winston Churchill, Groucho Marx, and Henny Youngman were all masters of these grammatical zingers.

The difference here is that I don’t think the customers intend the paraprosdokian.

No time for profit right now

I have observed an interesting phenomena during my years in the Product Cost Management.  One would think that the companies in need of Product Cost Management are the ones that are facing a profit problem or a sales decline.  The idea is that the PCM improvements would generate greater profits to make up for sales volume loss.   However, these firms are regularly the ones that will delay buying a PCM tool or seriously engaging a PCM expert.

No time for Product Cost Hiller Associates

This phenomenon reminds me of a cartoon that one of my bosses once showed me (see figure to the right).

Conversely, the companies that are the fastest buyers of PM tools and consulting are those that are doing really well and want to keep on winning. These companies use PCM as a steroid to pump their profits, but in reality, it is the companies having a tough time that truly need the vaccine of Product Cost Management.

I find this an ironic Catch 22.

Damn the Torpedoes, Full Speed Ahead!

To firms who are facing difficult quarters with sales and profit, I would say, that most of your business brothers sympathize.  We have all been in your position before and may be in it with you right now.  However, now is NOT the time to accept less profit. Now is the time to make more profit, so you can trade-off profit vs. increase sales through market share.

I’m not sure my reasoning will convince all the firms out there that are delaying taking serious action to improve their PCM culture, process, human resources, and tool kits.   However, I do hope that the decision makers in some of the firms that read this article will think twice before summarily delaying the improvements on Product Cost Management.  If you and your fellow managers and executives have already agreed already agreed that PCM is needed, don’t be so quick to casually push off the PCM work until next quarter or next year.  The time for more profit and sales is now.

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Jul 232012
 

Last week we began talking about a common problem in many projects, including Product Cost Management: the withholding of needed data for analysis and modeling.  We also talked about the many reasons, some legitimate and some not, why people refuse to share data. Those reasons are summarized in the graph below.

Then I introduced one way of working through the data withholding problem.  I call this technique Habeas Corpus Data.

Excuses for no data in Product Cost Hiller Associates

Reasons people withhold data [CLICK TO ENLARGE}

It’s very simple and works like this:

  • Politely and ardently make your case to the data gatekeeper as to why they should share the data with you.
  • If you are rebuffed, ask your management or project champion to see if he can break the data roadblock.
  • If you are still ignored, simply nod politely and stop asking. Instead, go and make an assumption for what the data should be.
  • Present your findings (based on your assumptions for the withheld data) in the presence of the data prison warden (be it the individual or organization that is withholding).
  • Sit back and watch the chaotic scrambling of the data warden.

This is the typical flow of the Habeas Corpus Data process, but in reality, the result will be slightly different depending on the real reason that the person or organization is guarding the data. In our post today, we are going to go through each reason and talk about the result that Habeas Corpus Data has in each case.

1. Data truly requires confidentiality / conflict of interest

This is the best and, really, the only legitimate reason that data should ever be withheld. Fortunately, it’s also the rarest. Very little data really needs to be kept confidential, especially to another member of the same product program or a consultant who is under a Non-Disclosure Agreement (NDA) already.

Effect of Habeas Corpus Data: The data holder probably feels guilty already for having to withhold the data. If the data is legitimately confidential, he will likely give you an indication of how good your assumptions are saying something such as: “Well, I can’t tell you the exact values, but you’re not making a bad guess.” Or “Well, I can’t tell you the exact values, but I would reconsider your numbers, because they aren’t remotely close.”

The more important effect of Habeas Corpus Data happens when the person or organization is using “confidentiality” as an excuse for one of the other five reasons. This is the common result. In this case, the data warden will start complaining about your results, to which you will politely reply, “Oh, well I had to make an assumption, but if you have actual data that is better, I am happy to redo the analysis with quality assumptions.” This is basically checkmate for you. The data warden will either immediately produce the data, or mumble something vague about having to check with his manager about seeing if he can share the data. This is your permission to promptly follow up a day later to see if that “permission” has been received.

2. Legitimate concern that colleagues / partners understand the sensitivity

Sometimes data is not officially confidential in the sense that it cannot be technically shared with someone of your clearance, but the data warden is personally concerned that you do not understand the sensitivity of the data.

Effect of Habeas Corpus Data:  Habeas Corpus Data will almost always make the data warden reconsider his reservations. He may initiate a discussion with you directly or with your executive champion to re-emphasize the gravity of the data he will now share, but you will get your data.

3. Does not know the data asked for

Sometimes the person you ask does not have the data.

Effect of Habeas Corpus Data:  The question is, “should” he have the data?  If the answer is no or maybe, consider who else might have the data. However, if the data would normally reside in the bailiwick of the person or organization, the organization may welcome your assumptions as the first steps in researching the needed data and may ask you to work with them in refining your assumptions.

4. Too busy or lazy to assemble data

Effect of Habeas Corpus Data:   If the reason that the person or organization does not know the data is because they are busy with other things or the organization is simply negligent, Habeas Corpus Data will force them to prioritize digging out the data that they do have in their organization.  If they do not currently have the data they will typically prioritize the due diligence required to get it. Otherwise, they will be forced to accept your assumptions.

5. Job security / authority protection

Sadly, the two most common reasons people withhold data are the two most illegitimate reasons. First, many people see data and/or knowledge [which is valuable] as one of the biggest contributors to personal job security. This may seem strange to some younger readers, who have grown up in the world of the internet and social media.  In the internet world, sharing (not hoarding) ideas makes one popular and successful. On the other hand, consider the importance of “content” (the fancy internet word for data) ownership and rights. Many people do not want to share the data they have personally appropriated from the organization, believing they will be less important without the data.

Effect of Habeas Corpus Data:   Even if he personally still does not want to share data, if the audience with whom you share results includes the data warden’s colleagues, it is highly likely that one of them will force the Data Warden to relent. They will not want you using incorrect assumptions that produce incorrect results. If these results are used and lead to a bad decision, the executives will start investigating the analysis chain and discover that the Data Warden’s organization had data and were aware of the analysis, but refused to share.  Habeas Corpus Data typically makes the fear of being seen as a data hoarder greater than the fear of losing your job from sharing data.

6. Fear of exposure of mistakes

Everyone makes mistakes, but some people are more sensitive than others about having their errors exposed. Without the proper data, it is very difficult to prove that a decision was right or wrong in the past. Obviously, you are rarely explicitly looking for mistakes in Product Cost Management. However, with the right data, you may well uncover honest mistakes from the past, or simply new opportunities to re-source, re-route, or re-design a part or product. Many people are uncomfortable with someone finding out that their original decisions were not optimal and/or they just don’t want the hassle of having to deal with a certain part again.

Effect of Habeas Corpus Data:  The effect of Habeas Corpus Data in this case is similar to the effect it has on “5. Job security / authority protection.” Habeas Corpus Data typically makes the fear of being seen as a data hoarder greater than the fear of discovering a past mistake or opportunity discovered.

Is Habeas Corpus Data Too Harsh?

Habeas Corpus product cost data Cost Hiller AssociatesMake no mistake, Habeas Corpos Data is a powerful technique. However, readers should not view it, nor practice it with the attitude of being a “data extortionist.” Much like the martial art of Judo, Habeas Corpus Data is really the “gentle way” compared to your other alternatives, escalating the data withholding in a loud way to the executive ranks of a company.  As I discussed above, Habeas should not be used until you have personally made your case to the data gatekeeper and asked your immediate management or project champion to see if he can break the data roadblock.  Like Judo, Habeas Corpus Data will often allow you to control your data withholding opponent without harming them. It allows them to gracefully back down from their recalcitrant position in a way that will allow them to save face in front of your executives and theirs.

 

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Jul 192012
 

Data.

At the end of the day, the data and assumptions that we use in Product Cost Management, specifically in cost models, is as (or more) important than the equations and the approach to modeling itself.  The classic example in cost modeling is raw material rates ($/kg for steel, plastic, etc.). A close second and third in importance are the labor rate ($/man-hour) for work in a given manufacturing activity and direct overhead rates ($/machine-hour).

Good, trustable data can be very hard to find in a company, even when everyone in the company wants to help the cost modeling effort. However, a bigger problem is not the unavailability of data, but the unwillingness of people to share the needed data with you. If you have ever been involved in a Product Cost Management (PCM) effort, especially one involving cost modeling or implementing a PCM tool, you have certainly encountered this problem.  Certain people and whole organizations will be unwilling to share data with other organizations and/or with you personally as the PCM professional who is trying to help the firm.

So, what do you do when you run into this data stonewall? Today, I would like to share a very powerful but simple technique that I discovered years ago. Some may call this technique by another name, but I call it “Habeas Corpus Data.”

Why People Withhold Data

As a young researcher at University of Illinois, I was flabbergasted the first time that I was on an internship and someone became squirrely or delaying regarding data.  At a university, of course, the goal is to freely share and promote good data to advance the common good of learning and research.  However, in organizations this is not the case.  Over the next few years, I realized that withholding data was the norm, not the exception in many organizations.  The natural question one asks when told “no” is “why?”  I have been given a lot of excuses, ranging from the presumably plausible to the outright ludicrous.  However, they mostly break down into the six categories shown in the pie chart below.  Furthermore, in my experience they break down in the proportions shown.

Excuses for no data in Product Cost Hiller Associates

Reasons people withhold data [CLICK TO ENLARGE}

As you can see, the first three categories, are legitimate concerns that need to be addressed.  However, you will also note that this is a minor part of the pie.  The lion’s share of the reasons given are simply excuses that should not be tolerated.  The most frustrating thing is that no matter how illegitimate the real reason for withholding data is, the withholder will tell you a covering lie.

So, what do you do when you find the data door locked? Easy! You use Habeas Corpus Data to storm the castle.

Habeas Corpus Data

Many of the readers may remember Habeas Corpus from junior high civics class as the Latin phase meaning “you must present the person in court.”  This legal idea originated in 12th century England and means that you cannot hold someone in detention without first showing sufficient cause.  Or, as William Blackstone explained in 1305 “The King is at all times entitled to have an account, why the liberty of any of his subjects is restrained, wherever that restraint may be inflicted.”  [Maybe that means you are the King and the data are your subjects?… oh, if only Product Cost Management were so glorious!]

Just as the court demands a reason for imprisonment of a citizen, so too you demand a real reason why the data is being held hostage. But, how do you expose the data despot for the unlawful detainment?  Here’s the key to the prison cell:

Make and assumption and present the results from your work.

For example, if purchasing will not cough up a supplier’s labor and overhead rates for the cost model on which you are working, you assume a labor and overhead rate based on your past experience and expertise in PCM.  It does not even matter if your assumption is close to the real numbers.  When you present your results for the costs of the product or part, the warden of the data prison will very likely be present.  You should make sure of it, which will be easy, because he is likely be a key stakeholder in the product cost project.   As this point, you are effectively calling his hand, and he will have to lay down his cards and show the true reason why he is withholding data.

Why does Habeas Corpus Data have this effect on the warden of the data?  First, he will be shocked you were able to proceed with your work without his data.  More importantly, he will get very worried how your results (which are based on your assumptions, not his) will affect his job.  The exact effect that Habeas Corpus Data will have depends on which of the six reasons for withholding data is the real underlying reason the person should have admitted in the first place.

Stay tuned next week, and I will will let you know the specific effect Habeas Corpus Data has based on the true each reason for data withholding.

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Jul 092012
 

It’s been a couple of weeks, since we discussed the Voices series, so if this post is interesting to you, you may want to go back and read the first two:

In these first two articles we introduced several of the voices that are always present in the Product Cost Management conversation, including:

  • The Voice of Hopefulness – the Pollyanna voice that assumes product cost will just work itself out in the end.  It is a voice of justification to ignore Product Cost Management, because the team is just too busy at XYZ point in the development process to seriously consider product cost.  Hope is NOT a strategy.
  • The Voice of Resignation – the nihilist voice that assumes that you have to accept high prices because the three suppliers that purchasing quoted gave you pricing far higher than what seems reasonable
  • The Voice of Bullying – the seemingly unreasonable scream of the customer telling you what your product should cost — not based on reality, but based on the customer’s own financial targets.

However, there is another voice in the conversation that can bring some reason to the cacophony.  It is a voices of reason — the Voice of  Should-cost.

Buck-up Cowboy. The Voice of Should-cost Can Help

Should-cost is just what it sounds like, using one or more techniques to provide an independent estimate of what the cost of a part or product “should” be.  The question is, what does “should” really mean?  For many, the definition depends on the type of cost being calculated, as well as personal should-cost calculation preferences.   I will provide my own definition here, mostly targeted at providing a should-cost for a discretely manufactured part.

Should-Cost – The process of providing an independent estimate of cost for a part, assembly, component, etc.  The should-cost is based on a specific design, that is made with a specific manufacturing process, and at a supplier with a specific financial structure.  Or, the should-cost is calculated assuming a fictitious supplier in a given region of the world that uses the best manufacturing technology, efficiency operating at maximum sustainable capacity.

I realize that this is a broad definition, but as I said, it depends what you want to estimate.  For instance, do you know the supplier’s exact manufacturing routing, overhead and labor rates, machine types, etc.?  In this case, do you want to estimate what it “should” cost to manufacture the part under these conditions?  OR… do you want to know what the cost “should” be for a new supplier who is well-suited to manufacture your design and has a healthy but not overheated order book?  Although you could make many other assumptions, the point is:   KNOW YOUR ASSUMPTIONS.  You will note that I said nothing about margin.  Some people call this a “Should-Price,” while others call it a “Should-Cost” referring to what they will pay vs. what the part costs the supplier to make.  The only difference is that you will also make an assumption for a “reasonable” margin for a Should-Price.

The important point is that the team relying on the should-cost information must define the scenario for which they want a should-cost estimate.  There is nothing wrong with wanting an answer for all these scenarios. In fact, it’s preferable. Run the calculation / estimate more than once.

Should-cost, Should Be a Choir, not a Solo Act

Manufacturing cost is a very tricky thing to calculate.  I often say that the true cost of the economic resources to make a part or product is a number known but to God.  Put statistically, you can’t know the true meaning or standard deviation of a population, you can only estimate it from the samples that you take.  People take two common approaches to should-cost.

The Pop Star Solo Act

The popular solution that too many people pursue is the solution pictured at the right.

No Easy Button in Product Cost Hiller Associates

There’s no easy button to should-cost

They want the easy button — the single source of truth.  They want the plasticized overproduced solo pop star version of should cost, i.e. the easy button tool.  There’s nothing wrong with this and there are some really good should-cost solutions available, but none of them are infallible.  In addition, it is not appropriate to put the same should-cost effort into each part or assembly in a problem.  One should focus where the money is.  However, too many people, especially cost management experts, become sycophants of one particular tool to the exclusion of others.

Single estimates in Product Cost Hiller Associates

The Lonely World of a Solo Should-cost Voice

 

Looking at the diagram to the left, you can see what the landscape looks like when you make your comparisons to one point in cost space. It is an uncertain, scary world when you only have one point of reference.  In this case, all one can do is try to force a supplier to match the should-cost output of your favorite tool.

 

 

The Andrews Sisters, Competitive Trio Quoting

The other very popular approach comes from the purchasing department:  three competitive quotes.  If the auto-tuned single pop star should-cost is too uncertain, purchasing will listen to a trio instead.  Why three quotes?

Supplier quotes in Product Cost Hiller Associates

The Trio of Should-cost Quoting

No one seems to know, but in EVERY purchasing department with which I have ever worked, three shall be the number of the quoting, and the number of the quoting shall be three.  [If you are an engineer, you know my allusion.  If not, watch the video to the left!]   The trio of quotes in the diagram to the right do help clarify the picture a little better, but there is still too much uncertainty and what I call “commercial noise” to really believe that the quotes alone bound what the should-cost plus a reasonable margin is in reality.

An Ensemble of Should-Cost Estimates

Returning to our statistics example, one of the first things you learn in statistics is that it takes about 33 samples to characterize a bell curve distribution.  At 33 samples, you can start to approximate the true mean and standard deviation of the actual population.  I am not saying that one needs 33 estimates of should-cost to triangulate on the true cost, but you should get as many as you can within a reasonable time frame.  Have a look at the diagram at the right to see this illustrated.    Instead of the single pop star approach or the Andrews Sisters trio of quotes, hopefully what you get is a well-tuned small chorus of voices who start to drown out the Voices of Resignation, Hope, and Bullying.  The chorus of should-cost estimates start to bound the “true” should-cost of the part or product and can give the team a lot more confidence.

Triangulating on Product Cost Hiller Associates

Chorus of Should Cost [CLICK TO ENLARGE!]

Sometimes the team does not have time to assemble all the voices of should-cost.  Not all parts or products are worth assembling the full choir.  More often than not, the organization is either unaware of the should-cost voices at its disposal, or are just too lazy to assemble them.

Don’t let your organization be lazy or sloppy with respect to should-cost, and remember that the best music is made when groups of instruments and voices work together, not when one person sings in isolation.

 

p.s. Bonus PCM points if you can guess what a cappella group is pictured in the thumb nail to the post

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Jun 252012
 

Today we have the third in our series of insights from the article “Putting it All Together at Harley-Davidson.”

At the end of the article, Pete Schmitz strikes a chord in my heart when talking about supplier selection:

 

 

[Schmitz] Don’t pave a cowpath! We believe in never automating a bad process – first, fix the process, do a solid supplier selection, then automate it. The tools are only so good – at the core it is the philosophy.

I believe this is a brilliant observation.  Too often, companies that want to get involved in Product Cost Management kick start their PCM efforts after a particularly painful event where they missed a profit or product cost target on a specific product.  Often, their first impulse is, “What tool can help me solve this problem?”   That is just human nature, especially in our modern technological society, to look for an instant, easy, off-the-shelf solution to all the things that bring us woe.  Isn’t there an app for that?  For most complex problems in life, there is not an app for it, and if there is, that app does not work in isolation.  To make a tool work well, we have to assume that three other elements are considered:

  1. Culture
  2. Process
  3. Roles

We talked about these three elements and the fourth (Tools) in our discussion on the PCM World Map before.  I would argue that you need to start with Process.  Depending on the maturity of your Product Cost Management culture, you may be able to handle a more or less complicated set of PCM processes.  However, Pete Schmitz at least takes the focus from Tools up to the Process, which is major progress.

His analogy is interesting.  If you have a traffic problem, and the road connecting two places in a winding narrow cowpath, the solution is not to pave the winding road.  Cars move faster than cows and are wider.    Cows make cowpaths seeking the path of least resistance and not being able to remove inherent natural roadblocks and bottlenecks.  But, if you need to move thousands of cars per hour, you would look at the two places and see where the straightest path would be.  Within reason and technical ability, you will invest in removing the natural roadblocks first and then lay down a solid foundation, before paving a wide road.

Think of Product Cost Management like this too.  Buying the software tools to supercharge your process is the last step in your journey.  Consider the diagram to the right.

Fix the process in Product Cost Management Hiller Associates

Don’t Pave the Cowpath –> Simply and Supercharge!

Most people want to buy tools to speed up an existing PCM process.  However, there are usually many inherent problems, including:

  • There is NO Product Cost Management process to begin with
  • The old PCM process assumes a certain level of tools and roles/team attention
  • The old PCM process developed in an emergent way, i.e. no one ever design it; it just happened.
  • The old PCM process assumes a much lower priority on profit and product cost and the company wants in the future.
Assuming your firm is already clear on your PCM goals, the firm first should lay out the PCM process that will accomplish those goals, which are specific to its corporate culture.

As shown on the diagram, when you focus exclusively on the new tool, the firm will simply move from the existing process on the left to the the upper right diagram.  Here, the firm keeps the old byzantine cowpath process that was constructed with more primitive (or no) PCM tools in mind.  At best, the firm is just slightly speeding up the wrong process with new tools.  However, often the firm will realize no benefit from the new PCM tools, and they may even slow the process down further!

Compare this to the diagram at the bottom right.  Here, the process has been re-designed and value streamed with the the availability of newer tools in mind.  The firm has removed old process steps that are no longer value added.  In the bottom right process, the same PCM tools can much better supercharge a clean straight process.

Don’t pave the cowpath; plan the Product Cost Management autobahn.

 

Eric

Note: there is no PCM Tool today that can handle all of the many varied use cases most firms have for Product Cost Management.    You may likely need more than one of them and some of your own internal tools.  This is no reason for despair, though.  By realizing this and picking the PCM toolset that seamlessly threads into your PCM process, this is your opportunity to out distance your competition.

 

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