Buying the shake weight as the solution to your bad product cost eating habits
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.
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:
- 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.”