Moderator

May 142012
 

Lately, it’s become popular to talk about “voices” in business, e.g. the “Voice of the Customer.”  With all the voices, it is difficult not to wonder if one is listening in on a business meeting, or a group of choral composers arguing over the score’s balance, psychologists trying to diagnose a patient, or a kitschy show with karaoke singers trying to go pro.    I believe that the “voice” nomenclature is the new new way to say “stakeholders,” a term that was the new way to describe the groups of people and forces of the universe that prioritize your product decisions and limit its possibilities.

All frivolity aside, the Voices framework is not a bad one. Instead of arguing over what we call the rose, I’d like to focus on WHO and WHAT those voices are with respect to Product Cost Management. Click on the diagram to the right. In this graphic, I show three categories across the product development cycle:

Voices in Product Cost Management Hiller Associates

Click to Enlarge! Voices in Product Cost Management

  1. What are the ‘Voices’ in the discussion of product cost and profit
  2. What are the target costs or cost statuses that the voices dictate or influence
  3. What are the ways that people can estimate the cost target or cost

The First Voices in the Discussion Had Better Be Balanced

The first two voices are the Voice of the Customer and the Voice of the Business.  The Voice of the Customer is supposed to tell you what consumers will pay for a certain bucket of product features and attributes based on perceived customer value.  Understanding the weird customer dialects isn’t so easy because customers won’t give you an exact number for the price they expect, such as $44.85.  If customers do give you an exact number, the number should still be considered fuzzy because customers have a hard time conceiving the value of your intended offer.   It is traditionally marketing’s job to read these tea leaves in order to decipher the Voice of the Customer.
The second voice, the Voice of the Business, gives us the Product Target Price and Product (System) Level Cost Target.  To illustrate, the CEO or Group VP comes in and says, “We need X total revenue and Y market share,” and the VP of Finance comes in and says “We need to have Z profit margin on the product.”   Great! Right?  Well, yes, but this is a TOP-DOWN cost target, or as the EE‘s in the room would say, an “open loop” control.  Normal people refer to this as an “estimate” or a “guess” (a.k.a. a hope).
Trade-offs in Product Cost Management Hiller Associates

Click to Enlarge! Product Fiscal Planning Triangle

The hopeful nature of the top-down product cost target is why the next voice in the discussion is so important:  the Voice of Reason.  What modern businesses don’t like to think about (or have been taught not to by consultants) is that there is a fairly rigid triangle (see the figure to the left) linking the price you must charge (or the customer will pay), the feature set (value) you will deliver in the product, and the product’s cost (margin).  If you set two of the corners of the triangle, the third will move to compensate.  I am not saying that people cannot do better on their product cost, but there are limits.

The key is to ALSO estimate what is theoretically possible for product cost in a BOTTOMS UP way — given REASONABLE assumptions.
The bottoms-up estimate moves you from an open loop control to a closed loop control (with feedback for adjustment), as the EE’s would say.  If the top-down and the bottoms-up costs are too far apart, somebody needs to throw a flag.  The first figure above shows the methods one can use to get an early bottoms-up product cost estimate.  Another voice that is often not heard is the Voice of Intent.  People often just assume a design alternative and immediately launch into full scale engineering.  But the old DARPA study told us that 80% of cost is decided in the first 20% of decision making.  So, the solution is pretty obvious.
Spend significant effort and time in the concept design stage seriously generating, considering, and costing a series of alternatives with your cross-functional team of design, manufacturing, purchasing, etc.
Spend the money needed on comparative teardowns of carryover systems you plan to cost reduce and systems with new features you plan to design versus similar systems of your competitors’ products.  Spend time together in a workshop evaluating your design alternatives and estimating your costs (raw material, manufacturing, shipping, etc.).  You do not need triple point precision — you only need a good enough estimate to allow you to compare one alternative to another.   Then you should give a REVISED Product Cost Target to management and marketing.   Very little cost has been spent up to this point, so if a program needs to be stopped or modified, now is the time!

Keep the Conversation Going

The next voice that should be in the product cost discussion is the Voice of Engineering.  Often, the discussion on product cost just stops for months or years until suppliers send in the first quotes at the end of the detailed design phase.  However, the conversation should continue.  Where is the engineering team in their cost roll-ups?  Have they discovered problems and barriers that will force costly changes, or have they found clever ways to beat the cost target?

Shrink the Triangle with Should-Cost and Spend Analytics

The Voice of Partners and the Market refers to the price your suppliers (or your internal plant) will charge you to produce your design.  If you want to get the best prices, it is important to understand another triangle:  the Purchased Cost Triangle (to the right).   The corners of this triangle are the price the supplier or plant quotes, the final cost you negotiate with the supplier/plant, and your should-cost calculations.  Here’s the secret:  this triangle is much more flexible and stretchy than the product fiscal planning triangle above.   Powered by the number and quality of your should-cost and spend analytics estimates, you want to drive all three vertexes together and converge.   Product cost is a difficult and fuzzy world; it’s even fuzzier when you have no facts (or even well-reasoned estimates) to rely upon.

Triangulating in Product Cost Management Hiller Associates

Click to Enlarge! Purchased Cost Triangle

If you want your Negotiated Costs to reflect the actual costs of manufacturing plus a reasonable supplier margin, invest heavily in good Should Cost and Spend Analytics.

If that’s too hard or too expensive… well, it’s only your product’s profit anyway, right?

Time to Pay the Piper

For the most part, the final voices settle things.  The Voice of Realization happens when you actually start to make the product and do the formal accounting to see what the product actually costs.  Sadly, this is where most companies spend the lion share of their product cost management effort. This is not to say that there are not opportunities to reduce costs after launch.  However, this is not where companies should be spending a lot of Product Cost Management effort.  Cost is pretty much set at this point, and companies should be working on the NEXT product.

The last voice is the Voice of Regulation / Responsibility.  In general, the Voice of Regulation should be known up front, in regards to disposal fees or other government penalties and taxes for which the company is responsible.  On the other hand, the Voice of Responsibility is trickier. The company should take its warranty predictions very seriously.  Most products, though, tend to have surprises, and they are typically not positive surprises.  Sometimes, the Voice of Responsibility speaks with legal authority (e.g. contractual warranty), but it should also speak to the corporate conscience to do the right thing for the customer, even when the company is not legally bound.

Next week….

This week we talked about how things SHOULD work.  However, the framework and solutions presented are not how many companies DO work.  Next week, we’ll talk the ad hoc and emergent system by which most companies operate, and what problems this causes.

 

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May 072012
 

I happened to stumble upon an article on SpendMatters from a few weeks ago by Sheena Moore:

Friday Rant: What’s in a Brand? For Tiffany’s new “Rubedo” Cuff, a Preposterous Mark-Up

The article about the manufacturing cost versus the price of a new bracelet at Tiffany. If you don’t know what Tiffany is, you’re probably unmarried and have not been dating. Some say you can’t put a price on love; Tiffany disagrees and will help you do it! The first great thing about the article is Sheena’s calling out of Tiffany’s deceiving marketing.  Apparently, they told her the bracelet is made of a golden “metal” called “Rubedo.”  No ladies it’s not gold; it’s something better; it’s Rubedo. (Rubedo is actually just an alloy that helps Tiffany water down the gold to make more $$$. Sheena and I had a good laugh about this on the phone).

Sheena’s article caught my eye for two reasons. First, I’m just really cheap, and the idea of a $7,500 bracelet made of 55% Copper and 31% Gold flabbergasted me. However, more interesting than my miserly instincts was that Sheena does a nice little product cost analysis of the bracelet. In doing so, she highlights another form of fool’s gold:  Material Cost Multipliers.

The Material Cost Multiplier

Material Cost Multipliers are a simple idea. They postulate that one can first calculate the cost of a product’s raw material and multiply it by a number to get the overall “Piece Part” cost.   But wait, you may object: how can this be valid? Why would someone vastly oversimplify the product cost calculation like that? That’s simple: calculating actual cycle times and tooling costs for each machine needed in the product’s manufacture is HARD, and it requires a lot of manufacturing knowledge.

Material Cost Multipliers just sweep all that nastiness under the rug… or into the multiplier, in this case. They have the following assumptions:

  • Assumption 1: Parts is Parts. Remember the old Wendy’s commercial making fun of the contents of Chicken McNuggets? No? Well I do, and you can too, by watching the video below.

The Material Cost Multiplier inherently assumes that all parts that you are manufacturing require the same processes and have the same complexity of design. For example, assume that our Tiffany bracelet and this Gucci Earring had the same mass:

Product Cost Bling Hiller Associates

Assume these had the same mass!

Would you guess that both of these items take the same effort to make? If you said  ‘no,’ you are right.

  • Assumption 2:  The Biggest Loser – The Material Cost Multiplier also assumes that the part mass is very highly correlated to the part’s processing costs. Therefore, the more mass you lose, the more your processing cost goes down in DIRECT correlation.  There is no doubt that many manufacturing costs do have a correlation to the mass of the part, but many do not. For example, the polishing or burnishing of the Tiffany bracelet is much more dependent on the surface area burnished, the complexity of the surface, and the hardness (composition) of the material than the mass of the item.

The Cost of the Tiffany Bracelet

Sheena received notice from a colleague that material is only about 25% of the cost of an item. So, Sheena first did a nice material cost analysis of the bracelet. She says that the cost of material is $1,500.  Although, she does not account for scrap or loss, this is a pretty good assumption, given that this type of material which can be re-melted.  Also, the manufacturing process is likely a net form process, where there is virtually no loss in specific design).  I would, however, question the assumption that:

  • Material Cost = 25% * Piece Part Cost.
  • Or, Materal Cost * 4 = Piece Part Cost. Basically, 4 is her Material Cost Multiplier.

First of all, that seems backwards in the world of simple metal part manufacturing which, in my experience would be more likely to have:

  • Material Cost = 75% * Piece Part Cost
  • Materal Cost * 1.33 = Piece Part Cost).

In fact, I think the processing costs are even lower than my general assumption. Just looking at the picture of the bracelet, my guess is that this is made by a routing such as:

Extrusion Routing for Jewelry Hiller Associates

CLICK TO ENLARGE! Tiffany Bracelet Mfg Routing

Extrusion is very efficient and cheap, especially for a straight cylinder. I would shoot from the hip and say the processing is definitely under $20 (probably under $10). Let’s say we have the $1500 raw mat’l cost + $20 processing/logistics + $100 for marketing (which might be outrageously high). That’s a $1,600 Fully Burdened Cost for the high class Wonder Woman wrist bracer (you’ll need 2 for Halloween).  At a price of $7,500, just one bracelet is generates $5,900 PROFIT (370+% margin)! I did a product cost analysis in one of the commercial Product Cost Estimation tools for a very similar looking part to the Wonder Woman Tiffany Bracer, and I got a result of $5.25 (Extrusion = $2.20, Flaring = $0.7, Marking = $0.50, Polishing = $1.30, Packaging – $0.55). My former co-founder’s wife owns a florist and gift shop and once told me told me once that typical mark-up for jewelry is ~50%, so the bracelet should be priced (at max) at $3,200, not $7,500.

So are Material Cost Multipliers bad?

No, they are not necessarily bad or inaccurate… but they often can be because they are misapplied. It’s important to know:

  1. What processes will be used to make a product?  Each major process probably needs its own multiplier for accuracy.
  2. What physical part attribute most strongly drives cost in each process?
  3. Make sure if someone gives you a multiplier that it is based on these considerations?

Consider the differences:

  • Sheena’s general manufacturing Material Cost Multiplier  = 4x –>Processing Cost = $6,000!
  • Eric’s general simple part metal manufacturing Material Cost Multiplier  = 1.33x –>  Processing Cost = $1,900!
  • Eric’s manufacturing “judgment” from experience and given the the routing Eric assumed Processing Cost = $20 –> Material Cost Multiplier = 0.013x!!!
  • The Product Cost Estimation Tool’s estimate of Processing Cost = $5.25 –> Material Cost Multiplier = 0.003x!!!

There is no doubt in my judgment that the Product Cost Estimation tool is the closest to reality. Regardless, a fast back-of-the-envelope calculation is far better than nothing. I am a big fan of common sense and back-of-the-envelope reality checks. I applaud Sheena’s effort, which, honestly, is more than many design engineers or purchasing engineers would do in considering the profit impact of their decisions.

Conclusions

  1. Material Cost Multipliers are useful, but can be dangerous. They should be applied by experts or with expert guidance.
  2. My analysis shows that Sheena is even MORE correct in that the bracelet is not worth it.
  3. Kudos to Tiffany for Jedi Mind Tricking girls into believing a $1,600 bracelet is worth 3x as much.
  4. Ladies, your boyfriend’s/fiancee’s/husband’s willingness to buy you the Tiffany Rubedo bracelet may mean he’s filthy rich, desperate, or not too smart… but it may not necessarily mean he loves you.  Admittedly, that’s just my guess… but then again, I’m a product cost guy, not the love Dr.)

Eric

p.s. Guys, perhaps you would be interested in buying the woman of your dreams the Hiller Associates RubedA bracelet. It’s just like the Tiffany RubedO bracelet, but MINE is 35% gold, not 31% like Tiffany.  The only difference is my bracelet will say “H&CO” where Tiffany’s says “T&CO”, and likewise mine says Hiller’s, instead of “Tiffany’s”.  It’s a bargain at $4,999, versus Tiffany’s $7,500.   H&CO:  “Don’t just show her your love; show her your intelligence.”

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May 032012
 

A friend of mine just sent me this article from the much venerated “The Economist” magazine.  Just like the Harvard Business School, the Economist is also interested in manufacturing again.  See their article here:

A third industrial revolution | The Economist

That is pretty encouraging, except that I think the reporters that are covering the subject may be a bit too uneducated on manufacturing, or sensationalistic, or optimistic.    Consider The Economist’s comment about making a hammer on a 3D printer:

That is why the process is more properly described as additive manufacturing. An American firm, 3D Systems, used one of its 3D printers to print a hammer for your correspondent, complete with a natty wood-effect handle and a metallised head. This is what manufacturing will be like in the future.

Yes, maybe in the DISTANT future.  They don’t bother to tell the reader (or maybe they are not aware) that a hammer has a forged head, and I am not aware of any rapid prototyping method that produces objects with the performance of forging.  Then we have the problem that one wants the handle of the hammer to be of a different material, so that it is light weight, unlike the head.  To be fair, the author does admit:

Additive manufacturing is not yet good enough to make a car or an iPhone, but it is already being used to make specialist parts for cars and customised covers for iPhones. Although it is still a relatively young technology, most people probably already own something that was made with the help of a 3D printer. It might be a pair of shoes, printed in solid form as a design prototype before being produced in bulk.

OK, I agree, 3D printers, an other rapid prototyping are very popular in product development.

Star Trek Hiller Associates

Star Trek Replicator… or is it a 3D Printer?

It is just that the article makes it sound like we now have the technology in manufacturing that has made the beloved Star

Trek replicator (a device that on the show that could create food and other objects ex nihilo).  Then we have this quote about engineering materials:

 

The materials being used to make things are changing as well. Carbon-fibre composites, for instance, are replacing steel and aluminium in products ranging from mountain bikes to airliners. And sometimes it will not be machines doing the making, but micro-organisms that have been genetically engineered for the task.

Well, yes, but as I look around my office, my house, and the neighborhood in general, I don’t see a lot of stuff made from these exotic materials.  Why?  Because THEY ARE REALLY EXPENSIVE!  Their quote actually is correct, but they don’t explain that these are high end performance materials and from a Product Cost Management perspective should be avoided if at all possible.

The Economist does a much better job when reporting on the world’s financial situation than manufacturing, BUT I in no way mean to discourage The Economist.  Would that they would write more about product development and manufacturing!   And, I hope that they are right that we are entering a 3rd Industrial Revolution, especially for American Manufacturing.  The author’s last sentence, hopefully, will be the truest:

The wheel is almost coming full circle, turning away from mass manufacturing and towards much more individualised production. And that in turn could bring some of the jobs back to rich countries that long ago lost them to the emerging world.

Amen, I hope so.

Eric

p.s. now that I know the author’s level of manufacturing knowledge, I will see if I can convince him to do an article on my adamantium bonded bones and claws… ok, that was a little mean.  Just kidding, Economist — a valiant attempt to promote the new coolness of manufacturing.

 

 

 

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Apr 302012
 

Michelle Boucher from Aberdeen Research just put out another nice piece of research on Product Cost Management.  (Actually, it’s not about PCM specifically.)  It’s called Product Development Single Source of Truth:  Integrating PLM and ERP.   The report delves into perennial topic of Enterprise Resource Planning (ERP) and (or versus) Product Lifecycle Management (PLM).

I have worked closely around these enterprise categories for the last 10 years, but I admit I may not be an expert of Michelle’s level.  However, from my seat in the ballpark, it feels like the open warfare between PLM and ERP has now morphed into a cold war or maybe cautious Glasnost and the realization of each other’s right to exist.    Michelle’s report doesn’t focus on the war between the software categories but on the end customers.  The end customers know that both ERP and PLM must exist in a corporation, but they have the problem of figuring out how ERP and PLM should best work together.

The general interoperability of ERP and PLM is beyond my interest in this post.  What is interesting is that there is research in the report on Product Cost Management, even if the report does not call it out specifically.   Here’s a few pieces of data that I have surgically excised from much larger tables from a much larger report.

How important is Product Cost Versus Other Pressures?

Top Pressures Driving Improvements to How Products Are Developed Hiller Associates

CLICK to Enlarge: Top Pressures Driving Improvements to How Products Are Developed

Readers of Jim Brown’s blog on PLM may remember that I did a post on this very topic a few months ago.  You can read it here.  Take a look at the figure to the right.  It appears that my intuition was right, at least with the preeminence of time-to-market as the number one priority to product development.  However, I was surprised to see that Product Cost Management came in number two in importance, albeit 25% less important than time-to-market (using time-to-market as a base).  Regardless, that is encouraging.  So, one wonders again why more companies don’t have stronger PCM efforts?

Does PLM and/or ERP Help with Product Cost Management?

One of the tables in Michelle’s report shows the effect of a company having PLM and the effect of PLM’s level of integration with ERP on many different performance metrics.  One of those metrics is whether a company meets its product cost targets or not.   Take a look at the chart to the right.  This is very interesting for two reasons.

ERP and PLM Hiller Associates

CLICK to Enlarge: Performance Benefits of Integrating PLM and ERP

First, we see a range of meeting product cost targets of 65%-72%.  Really?  In my own research on about 40 operational companies in many different industries, the mean percent of time that companies meet product cost targets at launch is 20-30% — HALF of what Aberdeen is seeing.  I wonder what the disconnect is in my data versus theirs?

Second, the report shows mean (average) of the respondents that fell in each category on the chart (having ERP but no PLM system, having PLM and ERP but unintegrated, and having both in some level of integration).  As expected, the companies with some level of integration do better, but is this statistically relevant?  What is the standard deviation on this data?  I ask this because the range of answers I get when I ask companies how often they meet product cost targets is from 0-100% of the time.

Is PLM or ERP is Storing Product Cost Data?

ERP and PLM Hiller Associates

CLICK to Enlarge: Data sent from ERP to PLM

Looking at the graph to the right, notice that none of the couple hundred Aberdeen respondents were pushing any cost data from PLM to ERP.  They were pushing some data from ERP to PLM.  I have shown the pieces that they are storing in ERP and pushing to PLM.  One could argue that the “Sourcing Data” that they pushing to PLM may be quite relevant in Product Cost

Management.  However, I wonder how relevant the “Costs / Actual Costs” are to PCM, given that ‘actual’ costs imply old carryover costs, which are fairly irrelevant to new designs or re-designs.

According to Aberdeen, 77% of companies do store “Item Costs” in ERP.  This left me wondering, where are the other 23% of companies storing cost information?  An excel spreadsheet? (have mercy!)

 

There’s a lot more in Michelle’s report than this narrow slice of data on PCM.  So, if you don’t subscribe to Aberdeen’s research, you can sign up or just buy the report.  Great data, though, Michelle.  Thanks.

 

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Apr 262012
 

I like American Manufacturing.  I know that it is critical for strategic preparation for future wars in which we may unfortunately find ourselves.  I believe that it is the single most important aspect of the US economy long term.   Politicians talk a lot about about it; the media talks a lot about it; middle class America talks about it a lot.

But, you know who doesn’t talk about manufacturing a lot?… business school students and b-school professors.  Yes, I know this is broad brush with which I am painting, but I have a lot of ground to cover.  I spent two years walking the hallowed halls of Harvard Business School, trying to eschew my engineering roots and tap into the ‘real’ money.  I thought that I was going to be a rock’em sock’em investment banker.  I was a very attentive student and was fascinated by finance.  But, at the end of the day, I could not escape my love of manufacturing, American Manufacturing, a field that adds real value to the world.  (In the end, I left HBS to do something I never thought I would:  start a company and then another, and the first was all about helping American Manufacturing).

However, I was in the minority.  Most of my classmates were going into financial services or consulting.  Manufacturing is just not as cool, sexy, or financially lucrative, on average, for an MBA.  It may not even salve your soul like non-profits did for some of my HBS classmates who left to do that.  For those of you who don’t know, the HBS pedagogical model uses all REQUIRED classes the first year of the two-year program.  Former bankers are taking Finance 101 and engineers are sitting with those bankers in TOM – Technology and Operations Management.  I admit to having had a bit of schadenfreude watching many of my consulting and finance classmates squirm in TOM, which is regarded by many as the hardest and most confusing class at HBS.  But, alas, many of my financial services classmates endured TOM not really caring if they learned anything or got a “3.”  It was the last time that they would have to deal with manufacturing in their lives… well, until they started telling CEO’s of public manufacturing companies how to run their businesses 🙂

But, I am excited now, because I just saw this article posted to one of the LinkedIn groups that I belong to:

Just How Important Is Manufacturing? – Willy C. Shih – HBS Faculty – Harvard Business Review

This HBS Prof is talking boldly about US Manufacturing and its importance.  I’d like to see more of this.  And, I’d like to see career paths for sharp young MBA’s be as lucrative in manufacturing and product companies as they are in consulting and financial services.

Is that possible?  Am I just dreaming?  I’d like to hear some comments.

 

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Apr 232012
 

 

Today, I’d like to talk about when it is prudent to poke the tiger, so to speak. During a client visit a few weeks ago, I learned of two situations the company had experienced involving re-quoting parts with the supplier. Although the situations were similar, they resulted in two exactly opposite outcomes – one happy, one sad. The happy situation went like this:

 

We had the big casting on a housing of our product. One day we were talking in passing about how this casting cost us $500. One of our machinists overheard us and his eyes popped open. He exclaimed, ‘$500! That is only about a $100 casting!’ So, we made a very gentle inquiry of the supplier about this casting’s cost, and before we even mentioned shopping the part, they had dropped the part price to $150. On one hand, we were happy, but on the other, we wondered, were these guys cheating us? How many other parts like this were in our bills of materials?

Later that day, I found out about the sad re-quoting situation:

We were trying to find savings on a bucket of parts and thought we had an interesting design change that could lower cost. Our supplier was happy to recalculate based on the design change as time had played a role in the price of parts. He said, “I think that there will be a $14 per part savings for the design change, but this part was quoted five years ago and the material cost and our costs are now higher. The increase is over $20 on old design and $15 on the new design. I’m sorry for this, but we have to ask for a price increase, because we are upside down on this part.”

These situations highlight a lot of latent problems, forcing me to ask:

  • How did a $150 part get through quoting at $500?
  • Why was material cost not indexed on these parts, so that the OEM and the supplier were protected and unsurprised by raw material price changes?
  • Is the spend reviewed on a regular basis by a spend analytics tool that looks for outliers (positive and negative)?
  • Etc. etc.

These answers to these questions are beyond the time that we have today. What this company needed in both situations was a good, speedy, should-cost process and a tool to support their quoting, re-quoting, and re-design processes. However, there are a few things that this company could have asked immediately (without a should-cost tool)? The following five questions are a powerful and fast filter to determine were a company should look deeper into re-quoting or not.

  1. What is the change in raw material price from the time the part was quoted – You know when the part was last quoted, its composition, and mass. It’s even better if you know the portion of the Piece Part Cost that comes from raw material, but you don’t really need it. There are paid sites such as American Metals Market, MetalMiner, London Metal Exchange, and Plastics News that calculate materials pricing. You can also access free data  from the US government at the Bureau of Labor Statistics. Look up the price of the materials on the date you last quoted and today. Take the part mass and calculate what the difference would be. Then you will be able to avoid poking the tiger of asking for a re-quote when the cost of the raw material has risen significantly (as we see in the second situation above).
  2. Was the part quoted in a bundle or individually? Parts that are quoted in packages and bundles typically have less precise pricing from the supplier than individual parts. The supplier will want to make money on the bundle and may not put in that much effort to see that they are making appropriate profit (not too high or low) on an individual part. There may be more opportunity on a bundled part than on an individually quoted part. But, beware, you risk ‘cherry picking’ the part with the supplier and damaging your relationship with them. Also, you should check whether your contract on a bundled part even allows you to re-quote an individual part, or only the entire bundle.
  3. What is your buyers relationship with the supplier? – Although business is business, people still buy from people and make decisions in a way that is not always wholly rational, i.e. goodwill and bad will matter. If you are dealing with a supplier whose relationship is rocky with your company, make sure that the amount of money you think you will save on your part is worth potentially souring the relationship. Conversely, your part may become a battlefield where the buyer and the supplier fight out an existing cold war that has been brewing between them. Your part may get punished for reasons that have nothing to do with the situation at hand.

    Cost per mass in Product Cost Management Hiller Associates

    Click to Enlarge: Cost per Mass Analysis

  4.  Do a simple cost/mass spend analysis on Piece Part Cost of that commodity – Pricing and cost are not precise sciences, but they do follow general trends. You don’t have to do a full and fancy spend analysis, but you can do a back of the envelop spend analysis that will point out the big opportunities and risks. All you have to do is ask for the costs and masses of 30 -50 parts of same type of commodity that you are interested in re-quoting (e.g. castings, forgings, sheet metal, etc.). You should be able to export this info from your company’s ERP, MRP, SRM, etc. system. Just graph the cost versus mass and graphically consider if there “looks” like there might be an opportunity. This simple method would have prevented the first situation described above.
  5. Do a simple cost/mass spend analysis on the non-raw material costs portion of Piece Part Costs of that commodity– This method is a little more fancy but can highlight outliers a little more accurately. Remember that you already have a raw material cost approximation from the first question. Just calculate the Non_raw Material_Cost = Piece_part_cost – (CostCurrent_Raw_material_price * Part_Mass). Graph the Non_raw Material_Cost versus part mass (like we did in 4). Once again, look to see if your part of interest is or is not an outlier.

    Outliers Product Cost Management Hiller Associates

    Click to Enlarge: Non-Material Cost per Mass Analysis

The great thing about suggestion 4 and 5 is that once you have done the mini-analysis for a commodity, other parts in the that commodity can be compared quickly.

To re-quote or not to re-quote – that is the question. Hopefully, the five considerations explain here today will help you answer that question a little more confidently.

 

 

As an aside… I was having trouble when researching this subject beyond my knowledge on the web. I.E. I could not find other articles on things to consider before asking for a re-quote. Does anyone know of articles that are relevant on the net, or is this only covered in books, or the tribal knowledge of gray haired purchasing agents?

 

 

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Apr 162012
 

Costing of electronic parts is a whole different ballgame from mechanical parts, most of the time.  While there are certainly custom ASICS and other custom electronic components, for the most part, electronics are more and more dominated by standard components (off the shelf processors, resistors, memory, capacitors, LEDs, etc.).  One person at Morey Corporation who I interviewed for my upcoming book project on Product Cost Management, referred to these components affectionately as “popcorn.”  The ME (mechanical engineer) equivalent of this is the beloved category of “hardware” or “fasteners.”

The good news is that there is a commodity market for these EE (electrical engineer) components.  The “market” drives the cost down for you with many (theoretically) interchangeable vendors of the same part.  This is very different from most mechanical parts, which are unique and must be sourced to specific suppliers for custom quotes.  That’s the good news.

The bad news is that in the fast paced EE world, you have to start worrying about things, such as:

  • Pricing Currency — How do I quickly find the lowest cost whenever I buy these components.  Unlike the non-commodity world, the price will change often and quickly (and typically downward), until the component starts becoming obsolete.
  • Obsolescence — Have you ever been looking for a new USB drive or laptop memory for your old computer, only to realize that the 2 GB stick is MORE expensive than the 4 GB stick?  Well, you have encountered the effect of obsolescence in pricing.  So you might ask, how to I know when the price is starting to rise due to obsolescence, because maybe I’ll make a large purchase at that point?
  • Availability — where do I buy enough of what I need now?

Well, never fear, because the helpful folks over at Arena  (a cloud based PLM provider) and Octopart (a search engine for electronic components) are here to help.  Arena has a new (free) tool called PartsList that works like this:

  1. Download the tool here
  2. Put in your BOM (manufacturer and part number) to PartsList
  3. PartsList will link to Octopart to keep you aware of all pricing and availability, identify alternative sources, etc. goodness

You can also directly search for parts in Octopart.   PartsList is FREE for personal use and, as of 4/6/12, was $9/month for commercial use.  You can read more about PartsList on the Arena blog here article about it.

 

(p.s. Do check out Morey Corporation, if you need hardened and rugged electronics.  Not only are they great guys, but they are the real deal — an AMERICAN MANUFACTURER with design and manufacturing in one building in the good ‘ol Midwest.  They make stuff from advanced telematics to engine computers you can drop off a tall ladder on a cement floor without failure, to power inverters the size of card tables that move big equipment.)

 

 

 

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Apr 102012
 

 

On the last blog post (Product Cost Management – What is it?), I talked the different ways that my colleagues and I have seen the meaning of Product Cost Management take shape over our careers and PCM’s development.  I offered what I believe is a good operating definition of PCM:

 

Product Cost Management – An agreed, coherent, and publicized system of culture/goals, processes, people, and tools following the product lifecycle, that ensures the product meets its profit (or cost) target on the day that it launches to the customer.

This definition can certainly be fleshed out further.  I was at a conference a few weeks ago and heard a great presentation on social media by Overdrive Interactive. Part of the presentation was showing their map of the social media sphere that has become viral on the internet and the de facto standard many people use to orient themselves to the social web. I really liked that idea, and I’m a big believer in 1-page maps that give the reader an overview of a complex subject, as well as a starting point to dig for deeper detail.

What does Product Cost Management look like from a graphical viewpoint?   I believe that it looks like the attached map (click on the diagram to enlarge the map or DOWNLOAD IT IN .PDF FORMAT.

Like any other major discipline that product companies follow, PCM contains four main areas:

  1. Culture, Goals, and Incentives
  2. Processes (tied to the product life cycle)
  3. Team Structure and Participants (tied to the product life cycle)
  4. Tools/Software that can help

    World Map of Product Cost Management Hiller Associates

    CLICK TO ENLARGE!

Culture, Goals, Incentives – before attempting to put in place any process, people, or tools, the organization first has to ask the tough strategic questions.   Where is our organization today in the PCM journey? To where does we hope to get and by when? And the big question: What is the priority of PCM and how much investment (honestly) will we make to close the gap from between today’s state to our goal? Once the company answers these questions, it can talk about the strategic structures that drive behavior (roles, incentives, and leadership support).

The next two continents on the PCM world map  (PCM Processes, and PCM Tools/Software) follow the product lifecycle, and need to integrate with the company’s product development process. Different processes and different participants are appropriate at different points in the cycle.

Finally, we have the PCM Tools available to take on the journey.  They fall into different buckets as follows:  (a) homegrown tools (including Excel), (b) general platforms (e.g. PLM, ERP) that may be customized, and (c) specialty Best-In-Class (BIC) tools that focus on PCM processes. In the PCM World Map, many of the major BIC software systems are shown in a 2×2 diagram. We’ll discuss the 2×2 in more detail in a future post, but I don’t want readers to think there is a “magic [best] quadrant” in this 2×2. It is simply a descriptive conceptual diagram

One important thing for people who are navigating the map to realize is that Culture, Process, Team, and Tools are all interconnected and influence one another (see the top right in the header of the map). For example, if you are at the beginning of the PCM journey, it is likely that your company is not ready for all the processes shown. It also may only use one or two of the tools. The company may not have reached a capability level to benefit from some processes, people, or teams.  Despite the inter-connectivity of the system, the best place to start when beginning the PCM journey is with the Culture (see blue arrows on the left of the map).

Like all high level maps, there are cities and even countries shown on it that have more detailed maps of their own.  However, most companies would do well to focus on understanding the geography at the world level first, before hoping on a plane to a specific city.  We can worry about street maps once we decide which cities we are going to visit!

 

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Apr 092012
 

Product Cost Management (PCM) is tricky to define, although many people talk about it. PCM probably means a lot of things to a lot of people, but I have not yet seen a concise definition of what PCM really means. Some people use PCM to refer a to small set of processes that they use in their companies to help control product cost. Others use PCM to refer to something as broad as a mindset for designing products, and still others define PCM as synonymous with something as narrow as a specific tool.  All them are probably right in some sense.

When I was in undergrad, I would have said PCM was about Design for Manufacturability or Design for Assembly. In grad school, I would have said that it included Parametric Cost Modeling, and by the end of my first masters, I had completed a thesison that subject and invented the first practical commercial prototype for a true automated CAD ‘Feature Based Costing’ tool. During my time in industry, at business school, and through the founding of Feature Based Costing Systems (later, we changed the name to aPriori), ‘Feature Based Costing’ dominated my thoughts. But, as that company grew, we realized that a profitable product came from not only generating accurate cost information, other activities like rolling it up and sharing it. I started talking about “Enterprise Cost Management,” which included not only the product costs (Cost of Goods Sold), but the indirect (e.g. SG&A and R&D) costs of the corporation.  But, even these new understandings were not enough. Some companies were successful at controlling product cost and others were not.  Sometimes the successful and unsuccessful had a similar tool set of PCM tools for both generating and rolling-up costs.  What was the differentiation between success and failure?

Then the blinding flash of the obvious hit me one day: Product Cost Management wasn’t just about creating the ultimate fast and easy-to-use costing software or the right cost modeling method. PCM involved the entire ecosystem around the many tools that one might use to control the product cost. That ecosystem includes changing the culture of the organization to drive PCM, setting up a coherent PCM process aligned with the culture, and having the right team to plan and execute PCM. PCM was not about a specific point in the product lifecycle, but threaded throughout the product lifecycle stages. With this in mind, I submit the following as the definition of PCM.

Product Cost Management – An agreed, coherent, and publicized system of culture/goals, processes, people, and tools following the product lifecycle, that ensures the product meets its profit (or cost) target on the day that it launches to the customer.

Such definitions always have the risk of being either too narrow (restricting the definition from important points) or too broad (making them effectively meaningless).  Hopefully, this strikes a balance between the two.  Regardless, I do believe that a picture is worth a thousand words (probably more) so I’ll work on a graphical description of Product Cost Management that is more definitive, detailed, and actionable.

 

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Apr 022012
 

Hello Product Cost Management Aficionados!

I just read a great post by Jim Brown over at Tech Clarity called “Software Intensive Product Survey says More Software in Products means More Problems.”  It heralds another of Jim’s excellent research reports.   This one discusses the role of software in products.  As we all know, electronics (and now software) are making up an increasingly large amount of product cost… and an even larger amount of R&D costs.   I was interested, so I read the full report called Developing Software-Intensive Products: Addressing the Innovation-Complexity Conundrum.

Software Costs More in R&D Costs

What I found really interesting was Figure 5 in Jim’s report which shows the “Negative Business Impacts of Developing Software Intensive Products”.   And, of course what jumped out at me was, you guessed it, COST.  The report shows that 48% of companies integrating more software in products, found that software INCREASES overall Product Development (R&D) costs.   How prevalent is software becoming?  According to page 4 of the report:

“Some people say 60% of innovation in a car is software and others say 90%,.  I am not sure which is true, but it is a high percentage.” — Andre Radon, VP IT Competence Center Engineering Applications, Continental

This made my head bob up and down while laughing.  I was working in product development Ford Motor Company in the late 1990’s and did a rotation in Explorer Calibration.   Ford calls the writing of software “strategy” and the specification of the numbers in the data tables that the software uses “Calibration.”  I am not sure why we didn’t just call it “logic/code” and “data.”  At the time, the Calibrators were setting around 13,000! data points to control the engine computer.  I wonder if it’s double that or more now?    The thing that I remember regarding product software at Ford (both in Calibration and my other assignments) was the question:

“Can we calibrate around that?” — John Q PD Manager, Automotive OEM

Translation:  “Can we write SOFTWARE or change the data tables to get around the problem that we are seeing in analysis or testing, rather than adding or changing HARDWARE?”   This was the default first question to EVERY problem, especially in NVH (noise vibration and harshness).  But, according to Jim’s paper (with which I wholeheartedly agree), software INCREASES product development cost.  So why would Ford managers prudently ask the question above?  That’s simple; it’s because…

Hardware Costs MORE Than Software

How can I know that?  Well, if we look at a Ward’s Auto Report and Ford’s 2010 Annual Report, as a % of Automotive Sales in 2009:

COGS vs. RnD and Engineering Focus in Product Cost Management Hiller Associates

Click to share! Product Cost vs. R&D Cost and the Focus on Each

  • 4.7% of Sales spent on R&D
  •  95.2% of Sales Spent on COGS (Cost of Goods Sold, which is ~= to Product Cost)

Product cost is over 20x more important to Ford than R&D cost!

So why didn’t the managers answering Jim’s survey think about the effect of software on Product Cost, not just R&D cost?  To be fair, Jim did call this out on page 6, saying that companies increase software to “Reduce product Cost.”  However, on the next page, there is a chart with the top eight reasons that companies use software in products. (I reproduced that data here for your viewing to highlight)  NONE of the catagories say Product Cost, although Jim shrewdly points out that “Enable Platform Design” and “Improve Re-use of Mechanical/Electrical Components” (reasons 6 and 8 respectively) theoretically “can reduce [product] cost.”    I agree, but it’s not a direct correlation and these things, which are often are done for other reasons, and Product Cost.  The telling thing to me is that “Reduce Product Cost” was not explicitly called out in ANY of the top eight reasons.
Product Strategies Driving Software in Product Cost Management Hiller Associates

Click to Share! Prod Strategies Driving Software in Products

I would have like to seen an investigation of this relation between:

  1. Software intensity in a product
  2. R&D cost
  3. Product Cost
I think it would have been very interesting to see a couple questions about the how software drives down product.  Or, is it that at the end of the day, most engineering teams use software in lieu of hardware for other non-product cost reasons… or maybe that they don’t really perceive a strong relation between the use of software in products and the reduction of product cost?  But, we did at Ford, right?
I don’t know, but I look forward to Jim’s next report!

 

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