Apr 152013
 

Hiller Associates received a question this week from a business school asking us what the revenue of the product cost management market is. That was a very interesting question, and one that we have thought about before. However, we’ve never actually sat down to think about the question formally. So rather than answer the person privately, we thought it might be helpful to everyone to discuss this in a public forum.

 

Product Cost Management Software Companies Hiller Associates

Companies included in the Revenue Aggregate

There’s good news and there is bad news with respect to the estimation of the size of the Product Cost Management market. The good news is that the market is fairly self contained, i.e. there are only a certain limited number of players in that software market. However, that’s where the good news ends. There are several challenges to estimating the market size:

  • Private companies -80% of the players in the product cost management software market are privately held companies, either venture funded, or privately held by a small group of founding owners and managers. Therefore, their revenue numbers are closely guarded information that is not publicly available. This includes the PCM company that our managing partner, Eric Hiller, founded and at which he was the CEO and then the Chief Product Officer for many years (aPriori).
  • Bundling – the second challenge comes with the fact that some of the larger players bundle product cost functionality into the price of another larger product. For example, Solidworks Cost is a bundled-free option that is included whenever someone buys their professional or premium level Solidworks CAD product.

There is is one other good piece of news, which is that Hiller Associates knows most of the players in the market and speaks with them regularly.  For some of them, we do know the revenue, and for others, we have a good idea. Obviously, we cannot share revenue numbers of an individual company, but this inside information will help us move the estimate from a wild guess to an educated guess.

Taking a look at the figure on the left, you will see the companies that we have included in the estimate. These are all the main players that we know of in the market. If there are others that we’ve missed, we’re very happy to learn about them and consider if we should add them to the market sizing.

2012 Revenues in the Product Cost Management Software Market

Those of you who follow this blog or have worked with Hiller Associates know that our philosophy is that point estimates are very dangerous and, often, not even that useful. Knowing the uncertainty around a cost number is just as important as having a point estimate of what that number is. We feel this holds true with any financial quantity. Therefore, we will provide a range of the size of this market.  Please see the figure on the right, which shows are estimate of the total revenue of the company’s above for 2012. When given the uncertainty factors that we have discussed above, we feel the total market has a large range. Total revenue could be as low as $60 million or as high as, perhaps, $115 million.

Current market revenue of Product Cost Management Hiller Associates

Click to Enlarge!

Other questions that people should ask are how much of this revenue comes from services and how much of this revenue comes from actual licensing of product. Some of the companies included are primarily product companies, and most of the services that they offer are tightly bound around the product. Such services would include training on the software, implementation, and customization. However, there are others in the group that also maintain general consulting businesses. For example, several of these companies offer classes about product cost or  subsets of product cost management, such as design for manufacturing & assembly (DFM/DFA).  These are general classes which only relate peripherally to their products.

Estimate Methodology

To do our estimate, our methodology was to estimate the revenue of each of the included companies individually. We also did an estimate of the service percentage of their revenue on an individual company basis. Then we added up the aggregate numbers. You will notice from the estimate figure to the right that when all the numbers for service and product revenue or aggregated, there is approximately a 60/40% split between product and service respectively. This ratio of product vs. service revenue seems approximately correct, per our experience in the market.

Software vs Services in Product Cost Management Hiller AssociatesIt’s important to understand, that this estimate is four the actual revenue of these companies in 2012. It does not reflect the total addressable market for product cost management software, which we believe is woefully on realize that this moment. This is the first our discussions about revenue in the product cost management software market.

NEXT TIME: Growth Rate in the Product Cost Management Software Market

 

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Mar 182013
 

There are universalities that seem to cross people and cultures, such as, it’s polite to say “please” and “thank you.” These universalities also occur numerically. For example, designs that follow the Golden Ratiopop up all over the world. Many other aspects of one group versus another may vary, but there are these universal touchstones that pervade the world. The same is true with companies. Granted, one might argue that one company simply is imitating another company and that is why they share a simple practice or the important of a certain number. We believe that this is, indeed, true in most cases. Still, there are a couple of numbers in companies that seem to arise independently in all companies. We are going to talk about some of those universal and independent numbers today with respect to Product Cost Management.

The great universal number in PCM is “10%.” I have met hundreds of companies over the years, both in consulting and when I was the Founder, CEO, and then Chief Product Officer of one of the product cost management software companies. Invariably, a meeting with a company will occur, in which one of the customers will utter the “a” word: accuracy. The dialogue proceeds similar to the following:

CUSTOMER: So, how accurate is your software?
PCM TOOL COMPANY: What do you mean by “accurate?”
CUSTOMER: Uhh, um, well, ya know. How ‘good’ is the number from your software?
PCM TOOL COMPANY: Do you mean do we have miscalculations?
CUSTOMER: No, no, I mean how accurate is your software to the ‘real’ cost?
PCM TOOL COMPANY: What do you consider the real cost?
CUSTOMER: Uhh, um, well, I guess the quotes that I get from my purchasing department from our suppliers.
PCM TOOL COMPANY: Oh, I don’t know, because it depends on how close the quote is to the true cost of manufacturing the part plus reasonable margin.  Are you confident your quotes are correct proxies for the true cost of manufacturing.
CUSTOMER: Hhmmmmmmm… yeah, I think think so
PCM TOOL COMPANY: OK, how close do you expect the costs from our PCM software to be to your quote [or internal factory cost or whatever source the customer believes is truth]?
CUSTOMER: Oh, you know, I think as long as you are +/-10% of the quote, that would be alright.

 

Ding! Ding! Ding! – no more calls, we have a winner! The customer has uttered the universal expectation for all costs produced by a product cost management tool, with respect to the “source of true cost”: +/-10%

The universal expectation of customers of Product Cost Management software is that the PCM tool is accurate to within +/-10% of whatever forecast the customer considers the “true cost.”

This expectation is so common that you would think that every customer in the world had gone to the same university and had been taught the same expectation. Of course, that is not the case, but it is a ubiquitous expectation. How did this universal convergence of expectations come to be? We will probably never know; it’s one of the great mysteries of universe, such as, why do drivers is Boston slow down to 4 mph at the lightest sign of snow or rain?

The more important question is: Is the expectation that the cost from a PCM tool should be +/-10% of a quote realistic? To answer this question, we first have to ask:  How truthful is “the truth?” The truth in this case is supposedly the quote from the purchasing department. The reader may already be objecting (or should be), because there is not just one quote, but multiple quotes. How many quotes does a company get? Well, that depends, but we all know how many quotes a typical company gets: THREE!

The universal number of quotes that purchasing gets is 3, and they believe the “true cost” is within +/-10% of whichever of these 3 quotes they select as truth. 

Three shall be the number of the quoting and the number of the quoting shall be three. Four that shalt not quote; neither shalt they quote two, excepting thou proceedest to three.

Variance Within Supplier Quotes

Do all the  quotes have the same price for the quoted part or assembly? No, of course not. If they were the same, purchasing would only get one quote. So what is the range among these quotes? That is a fascinating question, one that I am currently investigating. So far, my research indicated that the typical range among a set of three quotes is 20-40%. That seems about right from my personal experience.

But, is the “true” price (cost + reasonable margin) contained within the range of the 3 quotes? Not necessarily. If we assume that quotes are normally distributed (another assumption that I am researching), the range would be much bigger in reality. For example, if we had three quotes evenly distributed with the middle being $100 and these quotes had a 30% range, the high quote would be $115 (+15%) and the low, $85 (-15%). This gives us a standard deviation that, conveniently, is $15. At two standard deviations (~95% confidence or “engineering” confidence), we predict that the “true cost” of the part is between a predicted  high quote of $130 and a low of $70. This is a range of 60% (+/-30%). You can see this on Figure 1.

OK, but what about if we  just source a single supplier. Well, there will be variance in this supplier, as well. This variance breaks down into two types: physical noise and commercial noise.

  • Physical noise — the difference in cost that could occur due to physical reasons, such as choosing a different machine (i.e. different overheads) a different routing (sequence of the machines), or even simple human variation from part to part or day to day.
  • Commercial noise – differences in pricing driven by the market, emotions, and transient conditions.
Variance in the Cost Forecast from Quotes Hiller Associates

Figure 1 – Variance in the Cost Forecast from Quotes (click to enlarge)

Physical noise can easily account for a range of 20% (+/-10%) in the quote that a supplier might provide to an OEM. However, physical noise can be quantified and discovered. A supplier can share what routing or machine they are using. The problem is that Commercial noise is very difficult to quantify. How do you quantify when the supplier believes you hurt him in the last negotiation and now he is going to repay you for it, or that he needs your company as a new strategic customer and will underbid to get initial business? Worse yet, Commercial Noise is often LARGER than Physical Noise in the quote! How big is Commercial noise? That is difficult to say, because we can’t measure it very well, but from our discussions with purchasing groups, at minimum, Commercial Noise adds at least another +/-10% .

Physical Noise  Commercial Noise
Comes from selection of different machines, routings. Comes from market conditions, emotions, and transient conditions
Quantifiable in general by understanding the selections. Very difficult quantifiable
+/-10% of the “factory average” +/-20%+ on top of Physical Noise

 

Supplier quotes are just one forecast of true cost. There are other forecasts the organization has.

Cost Estimation Experts

What about those people in the organization with the most manufacturing and product cost knowledge? What is the noise in their estimates compared to a source of alleged truth, such as a quote. We are not sure, but we have asked another question about variance to these experts. When asked the question, “How close are you as a cost estimator to the estimates of other cost estimators in your company, people most often reply, “Probably +/-10-20% depending on the complexity of the part cost estimate or assembly.” So, we might say that the cost estimators have at least a 30% range of quotes themselves.

Historical Costs in ERP

What about the historical costs in ERP? How “accurate” are they? There’s actually at least two problems with data in corporate databases. First, sometimes it is just plain wrong from the beginning of its life in the database. However, even if it is correct initially, it gets out of date very quickly. Material cost, labor rates, efficiency, etc. change. Go ask you purchasing buyer how close a re-quote of a current part that has been in the database for three or four years will be to the original quote. To give you an idea of the magnitude of this problem, consider these findings:

The Accuracy (i.e. variance to quote) of a Product Cost Management Software

Variance in Different Forecasts for Product Cost (click to enlarge)

Variance in Different Forecasts for Product Cost (click to enlarge)

So, after all of the discussion of the variance within other cost forecasts, how “accurate” are the forecasts from a product cost management software? Well, if the internal variance among expert cost estimators independently estimating is 30%, the BEST the PCM tool could do would be +/-15%… IF it is controlled by experts. What happens when non-experts use this software? How much does the range increase? Who knows? Obviously, the more automatic and intelligent the PCM Tool, the less the added variance would theoretically be. But, is this added variance +/-5%, +/-10%, +/-20%?  That is hard to say.

The Reality of Accuracy and Variance in Product Cost Forecasts

Regardless of the answer to the above question, the bigger questions are:

  1. What is your EXPECTATION of how “accurate” your PCM Tool’s cost forecast is to the quote forecast?
  2. Is your expectation reasonable and realistic?

We know the answer to question 1:   Be +/-10% of a my selected quote.

To answer the second question, let’s quickly review what we know:

Source of the Cost Forecast Common Variance Inherent in the Forecast
Range among 3 quotes +/-15%
95% confident interval (engineering confidence in quotes) +/- (15%+15%)
Physical noise within one single supplier +/-10%
Physical noise plus Commercial noise within one single supplier +/- (10%+20%)
Internal range among cost experts +/-30%
Best Case PCM Tool used by experts +/-30%
Non-cost expert using PCM tool +/- (30%+ 5%?)
Common [Universal] expectation of PCM Tool Cost Forecast +/-10%

 

Hhhmmmmmmm… Houston, I think we have a problem.

It just doesn’t seem that +/-10% is a reasonable expectation.

Bringing Sanity Back to Product Cost Management Expectations

What can you do in your company to help reset these unrealistic expectations? There are three things.

  1. First make your colleagues (engineering, purchasing, etc.) aware of the reality of the cost forecasting world. Don’t let them develop uninformed and unrealistic expectations.
  2. Don’t focus exclusively on the end cost, but on the physical and immutable concepts that cost is supposed to quantify: mass, time, tooling.
  3. Start to quantify the internal variance in your own firm’s cost forecasts. Your firm’s internal cost ranges in quotes, internal estimates, etc. may be lower or higher than the numbers presented here. However, you won’t know until you start to investigate this.

Is this a painful realization?  Perhaps, but you are already living with the situation today.  It is not a new problem in the organization.  If you don’t acknowledge the potential problem, you run the risk of misleading yourself.  If you acknowledge the potential problem, you may be able to solve it, or at least make it better.

 

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Feb 212013
 

Last week we talked about the struggle in corporate strategy between Core Competency structures and Lean manufacturing. Whereas Core Competency thinking naturally leads to more outsourcing and extended supply chains, Lean manufacturing would advocate for a geographically tight supply chain, often with more vertical integration.

So, what does this have to do with Product Cost Management. The answer is “knowledge.”

The Lack of Manufacturing Knowledge In Design

One of the biggest complaints that I get from my clients is that their teams have lost or are rapidly losing product cost knowledge in the last 10 years. This is especially acute with design engineering teams, but also effects other parts of the organization, such as purchasing. Years ago, the engineering curriculum at universities became so overloaded that manufacturing began to be pushed to the side in the education of most engineers (excepting the specific “manufacturing” engineering major). In fact, at most top engineering schools today, there is only one high level survey course in manufacturing that is part of the required curriculum.

However, manufacturing and its evangelistic design missives (design-to-cost, design-for-manufacturability, design-for-assembly, etc.) were still learnable skills that the young engineers and others could pick up on the job, over time. This is because most product companies were not only in the business of final assembly, but also in the business of sub-assembly, as well as manufacturing components from raw materials. These companies employed large amounts of manufacturing engineers who were resources for the design and purchasing teams. Even for parts and subassemblies that were purchased, the suppliers were likely close by the design centers and had long standing relationships with the OEMs.

Designers and purchasing people could literally walk down to a manufacturing floor in an internal plant or drive a few minutes to a supplier. Conversely the manufacturing engineer would walk upstairs to question engineering about a design. This is nearly impossible when suppliers are often in different countries and the firm that designs does little manufacturing themselves

The Effect of Lack of Manufacturing Knowledge on PCM Tools

One of the ways that industry has tried to remedy this situation is with sophisticated Product Cost Management software. This software codifies a lot of the tribal knowledge that resided in the manufacturing engineers head. However, these tools assume that the tool users have (1) the will and (2) the skill set to properly use a PCM Software.

There is no doubt that the PCM and DFM/DFA tools today are far more advanced than they were, even ten years ago.  However, the value one derives from a tool is not a function of the tool’s capability alone.   There is a bottleneck problem of using a tool to its full potential.  We could say that the value the PCM tool actually gives to the organization equals:

Value of PCM Tool = (Will to use tool) * (Ability to use tool) * (Potential of the tool)
 

People often forget about the ability component, but this is true with any tool.  People buy expensive tools, e.g. golf clubs, hoping to improve their performance.   However, 90% of the time, they cannot even use the set clubs they have to their full potential.  Worse yet, often more expensive or sophisticated tools are more powerful and have the potential to give more value, but they are often less forgiving of errors.  If you don’t know how to use them, they will HURT your performance.

In the past, with a Lean (vertically integrated and geographically close) supply chain, people used primitive PCM tools (often only spreadsheets).  On a scale of 1 (worst) to 10 (best), on average what I hear from industry is that there capability to use the tool was higher, but the tool was limited and cumbersome.  The users, including design engineers, knew what decisions to make in the tool, but the tool was cumbersome.   Currently, we have more of the opposite problem.  The PCM tools are better and much easier to use, but most design engineers are somewhat baffled on how to make what seems like the simplest of manufacturing input decisions in the tools.  The “Will to use the Tool” is another problem altogether that is beyond our discussion today.  However, my experience, in general, would be represented by the following table:

Tool_effectiveness

These results will vary company to company, and even, from design team to design team within the company.  Regardless, I wonder if we are at a breakeven state from where we were in the past today in the value we get from PCM tools… or maybe, we have even lost ground.  The sad thing is  that the PCM tools today ARE more user friendly and requires less of an expert to use.  However, is the loss of manufacturing knowledge in design engineering is so bad that it has overwhelmed the PCM tooling ease-of-use-improvements?

What Can You Do to Help the Situation in Your Company?

Obviously, nothing is as good as the osmosis of manufacturing learning that occurs from a tightly coupled, geographically close, and vertically integrated supply chain.  However, the state of your firm’s supply chain is likely out of your control personally. There is some positive movement with the re-shoring and re-integration trends in industry, in general. However, there are steps you can take to improve the value your firm derives from PCM tools.

  • Send Engineers Back-to-School – do you offer (or better yet, mandate) classes in Product Cost Management, DFM/DFA, Target Costing, etc. for your design team? This should be part of the continuing education of the design engineer. I am not talking about training on the PCM tools themselves (although that is needed, too), but general classes on how different parts are made, the different buckets of cost, the design cost drivers for each manufacturing process, etc.
  • Design Cost Reviews – This is a very low tech way to create big wins. Design reviews in which design engineers review each other’s work and offer cost saving ideas should be a regular facet of your PCM process. Even better: include the engineer’s purchasing counterpart, company manufacturing experts, and a cost engineer to lead the review
  • Embed Experts – Does the design team have at least one advanced manufacturing engineer or cost engineering expert for no more than 20 design engineers? If not, you should consider funding such a resource. Their salary will easily be paid for by (a) the cost reductions they they help your team identify for products already in production, (b) the costs that help the team avoid in designs before production, and (c) the speed their efforts will add to time-to-market by helping the team avoid late changes and delays due to cost overruns.

In the past, vertical integrated, geographically close supply chains helped Product Cost Management in a passive way.  The pendulum may be swinging back to that structure.  However, even if it does, don’t rely on the “passive” Product Cost Management to help. Take the active measures described above and get more value out of your PCM Software investment.

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Feb 042013
 

People complain about the profitability of products, especially early in production, but how often do products actually miss their profitability at launch?

According to the latest research by Hiller Associates, most companies miss product cost targets.  We asked almost forty  people from a variety of corporate functions “How often do you meet or beat product cost targets at launch?”   The results follow the familiar 80/20 rule of many business phenomena.  On 17% of respondents said that their companies meet cost targets Often or Very Often.

Product Cost Results goals at launch Hiller Associates

CLICK TO ENLARGE

That is not an impressive showing.  We would not accept 17% as a pass completion percentage from a NFL quarterback.  That’s not even a good batting average in baseball.  So why do we put up with this in our companies?  It’s also interesting that almost the same percentage of respondents (15%) don’t know enough about product profitability to even guess how well their companies are doing.

Companies are understandably careful with releasing actual product profit numbers.  Still, it would be great to have a more in-depth academic study done, in which actual financials were analyzed to answer the same question.

Percent meeting product cost summary Hiller AssociatesHow often does your company meet its product cost targets?  Does anyone know in your company know? These are questions you cannot afford not to ask. Is your firm the 17%… or the 83%.  If you are in the 83%, consider starting or improving your efforts in Product Cost Management.

 

 

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Jan 292013
 

Hiller Associates recently was the keynote speaker at aPriori’s first customer conference.  It was a great opportunity to both teach and learn from experts that came from a wide range of industries and geographies.

Hiller Associates’ President, Eric Hiller, discussed several topics, of which we’ll mention two here.  The entire presentation can downloaded for FREE.  Just click on the slide below and get the presentation:   Best_Practices_for_Starting Your Procuct Cost Management Journey or Improvement.

Variance in Cost Numbers

One of the main themes discussed was the possibility of getting an “accurate” cost, meaning how possible is it to get a cost that is within a certain percentage of a fixed point of reference, such as a supplier quote.  There are several ways to look at this problem that we may discuss in subsequent weeks on this blog.

Eric Hiller at aPriori STARS 1 2012 product cost Hiller Associates

Eric Hiller presenting the keynote speech at the aPriori Customer Conference

However, in summary, the presentation asked the question:  what cost variance is inherent in your system already?   For example, if your 3 quotes from supplier have a range of 30% from highest to lowest, then is it realistic to expect the cost that you calculate in a product cost management software to be closer than 30% away from a random quote?

It was refreshing to see how open the audience was to these concepts.   The reactions to the variance concept went from wide-eyed amazement from people who were new to the cost management field, to thoughtful reflection from the veterans.  In fact, the veterans reacted like men who had been reminded of a truth that they knew all along.  Often, such common truths are forgotten due to immersion in the day-to-day challenges of keeping a company profitable.  We call this concept having a “blinding flash of the obvious” – a BFO.  Everyone in the room had that BFO, and no one wanted to argue about it.  Instead, there were many comments throughout the conference that further explored this concept.

Culture is the biggest loser

Another theme of the presentation was driven by the latest research in Product Cost Management done by Hiller Associates.  Those who follow us regularly know that we segment problems in our consulting work into four root causes:  Culture, Process, Roles/People, and Tools.

Our latest research shows that cultural problems are the clear bottleneck in most firms’ Product Cost Management journeys.  The respondents overwhelmingly agreed.  When Eric ask the attendees which area was their firm’s biggest PCM bottleneck, the conference participants voted as follows, based on a rough estimate of hands in the air:

Best Practices for Product Cost Management Hiller Associates

CLICK TO GET FULL PRESENTATION

  • Culture 60-70%
  • Process 20-30%
  • People/Roles 0-5%
  • Tools     5-10%

That’s fairly shocking at a conference whose organizers are a Product Cost Management TOOL vendor.  [Next time HA will have to set our honorarium higher for taking the pressure off of any problems with the vendor’s product!]  Joking aside, culture is obviously the  biggest problem and it is not an easy thing to change.  In fact, companies often buy a PCM software tool hoping that it will somehow magically fix their bigger cultural problems.

It reminds one of obesity problems.  Many companies have a culture of binging on product cost during design.  In purchasing & manufacturing they continue with cost obesity denial — not know what the cost calorie count is until the parts arrive at the door with an invoice.  However, instead of changing their cost eating and exercising habits, they look for a magical cure in the form of a software tool.  Let’s call this “the shake-weight approach” to product cost management.

We’re not disparaging the shake-weight, or any other home exercise equipment.  Certainly, all home exercise equipment can help you lose weight, just as we are sure that all of the PCM Tools can help one reduce cost.  But, you have to use these tools regularly and properly.  PCM software tools are too much like home exercise equipment.  People buy them thinking that the tool will magically solve cost obesity.   They use the tool twice and then it sits in the corner unloved, unused, and unmaintained… and, yet, people wonder why they are still product cost obese!  It’s not the tool that the problem, it’s your culture.  Much like changing your eating lifestyle, changing the PCM culture is really hard and tricky to do.  That’s why cultural issues are often at the forefront of most of the engagements that we do with clients at Hiller Associates.

However, it was refreshing to see that the attendees at aPriori’s conference did seem to understand this problem, or at least were very open to the idea.   So, maybe we are making progress on this point.  Or, maybe  HA needs a TV show “The Biggest Cost Loser” in which Hiller Associates works with companies to increase product profit with weekly product cost “weigh-ins.”  What TV viewer wouldn’t watch that kind of riveting drama…

Now, get out there and do some product cost push-ups!

If you would like to see the entire presentation from the conference, just click on the slide image above and get the presentation:  “Best Practices for Starting Your Product Cost Management Journey or Improvement.” 

 

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Jan 292013
 

 

If you would like to download the presentation (Best Practices for Starting Your Product Cost Management Journey or Improvement)  for FREE, please fill out the form below and click the button.

A link to the .pdf of the presentation will then appear below that you can click on.

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AFTER you fill out the form and click “Download File” the link to the file WILL BE (IS?) above!

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Jan 162013
 

It’s one of the most famous studies in the world of product development and probably the most famous study in the history of Product Cost Management.  It was done in the 1960’s (reportedly) by DARPA (The US Defense Advanced Research Projects Agency of the United States Government).  It’s so famous that it is typically referred to as “The DARPA Study.”  Some claim that the entire software category of Product Lifecycle Management has used the study for its primary justification for being.

But, if it is so famous… where is it?

I have searched for the study a couple times on the internet.  It is easy to find The DARPA Study of product cost referenced loosely, but I could not find the original study, or even a formal citation… and as we know, if you can’t find something after thirty minutes of searching on Google, it does not exist, right?

Fortunately, I was able to dust off my engineering masters thesis and find the following studies that corroborate DARPA’s alleged claim.

Cost Committed vs spent in Product Cost Management Hiller Associates

CLICK TO ENLARGE

DARPA’s claim what bold and powerful and if we paraphrased it, we would say:

“80% of a product’s cost is determined in the first 20% of activities in design and development”

I have even found a great webpage that lists FOUR PAGES of references to studies, corroborating DARPA’s results:

Design Phase Cost Rational

… but it does not have a reference to the original DARPA Study.

So, can anyone help?  Can someone send me:

  1. A link to “The DARPA Study” on the web? AND/OR
  2. A .pdf of the study? AND/OR
  3. At least the proper academic citation to the study?

Anyone, Anyone, Bueller, Bueller, Bueller…

Cost Committed vs. spent for product cost hiller associates

CLICK TO ENLARGE

 

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Dec 182012
 

 

Hiller Associates has teamed up with CIMdata , a global leader in Product Lifecycle Management consulting and PLM industry analyst coverage to bring you the first annual Product Cost Management Survey.

It takes less than 10 minutes and you will be rewarded by receiving a free copy of the results and report of the learnings that we gain about product cost.

 

 

Product Cost Management Survey

 

 

 

http://www.esurveyspro.com/Survey.aspx?id=03984de4-e017-455d-914b-507bb529c308

 

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Dec 102012
 

I just read an article on the site “Strategy + Business” called Building Cars by Design.  It caught my eye for two reasons.  First, the fact that a strategy site would deign to talk about engineering concepts was a pleasant surprise.  Second, the article discussed Design-to-Cost and Design-to-Value.

If we strip off the automotive context, the main premises of the article from a Product Cost Management point of view are as follows:

  • Design-to-Cost means designing a car to a specific absolute cost
  • Design-to-Cost is bad because it does not take into account “value”
  • Design-to-Value needs to be used instead of Design-to-Cost, i.e. the product company needs to think about what features that customers value and then deliver these.

I applaud the authors for opening up a discussion on these topics.  However, I feel this article is incomplete and does not tell the whole story about these concepts.  It also doesn’t really say how to do any of these things or point the reader to somewhere he can further learn how.  Here’s my specific suggestions for improvement.

  • Define Design-to-Cost properly, please – Maybe this is just a bit of nomenclature nit-picking, but I have never thought Design-to-Cost means designing a product to a specific cost.   That is what “Targeting Costing” advocates.  Design-to-Cost is about considering cost as a design parameter in your product development activities.  I.E. the design engineer balances cost with other goals (performance, quality, etc.) with the goal of delivering any group of features at the lowest cost possible.
  • Define How to Calculate “Value” to the Customer – The authors say [paraphrasing] that a company should *just* find out what the customers value and then design a product that delivers those things.  I am sure most companies do want to do this, but they don’t know HOW.  I realize that how to calculate value is too complex for the article, but the authors don’t even provide a resource for the reader to learn more.  For example, I studied under Dr. Harry Cook and I am a friend and business colleague of Dr. Luke Wissmann.  At very least, the authors could have pointed the reader to a book on the subject, such as the one Wissmann and Cook wrote:  Value Driven Product Planning and Systems Engineering.
  • What if the Customer Can’t Afford the Value? – It’s difficult to know what the authors mean (even theoretically) by design-to-value.  Regardless, the authors seem to assume that the customer can always afford this value, but I don’t believe this is true, especially in the a second or third world context, which is the focus of the article.

Regarding the last point, I will do my best to illustrate the problem.  Take a look at the figure below in which I graph the value the customer gets from the product versus the price the customer pays for the product.  Presumably, the authors in the article are saying that customers would be willing to pay up to the point that the slope of the value/price decreases substantially (the curve flattens).  But, that assumes the customer has the money to spend – kind of a Field of Dreams Strategy, i.e. “If you build in value, they will pay.”

Product Value versus features and cost Hiller Associates

Click on picture to ENLARGE!

But, what if the customer truly does value a set of features, but he just doesn’t have the funds to purchase all of the value?  In this case, we have to concede that there is a Minimum Viable Product (MVP) needed for the customer to purchase. This term, MVP, is most often used in software development and start-ups.  It is the minimum set of features and functionality that a product must have to have ANY value to the customer.    If you can’t master design-to-cost in your product so that it both includes the MVP features the customer needs  and allows you make adequate profit under the price ceiling of your customer, the product will not be successful.

If the customer has less funds than the MVP to deliver in your product, they can’t afford it.  Similarly, even if the customer has more funds than the MVP requires, but less than when the value/cost curve flattens, you cannot employ a blind strategy of maximizing value to the flattening point of the curve and price near it.  You are still going to have to set your price below your customer’s funds to succeed.

So, are the authors of the article talking about design-to-value to the point that the value/price flattens or to the point where the price ceiling of the customer intersects the curve?

Anyone? Anyone?  Bueller? Bueller? Bueller?

 

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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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