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.


  4 Responses to “Do you hear the voices? (Voices Series, Part 1)”

  1. Nice article Eric. I think that one of the biggest reasons we observe companies not spending an appropriate amount of time considering design alternatives is Schedule. There always seems to be this frantic rush to hurry up and get it done. Sadly, this approach may get products to market ahead of, or, at the same time as the competition, but it is at the expense of profitability. I think if these companies knew there was a solution like aPriori that would allow them to very quickly evaluate design alternatives, and understand the cost of each option, they may decide there is a better way to run their business.

  2. […] 2)  Uncategorized  Add comments May 212012   In last week’s post “Do you hear the voices? (Voices Series, Part 1) ” we talked about the different voices that speak throughout the product life cycle and how […]

  3. […] Do you hear the voices? (Voices Series, Part 1) The Voices of Discord in Product Cost Management (Voices Series, Part 2) Where’s Finance and Accounting in Product Cost Management? (Part 1 of Pete Schmitz at Harley-Davidson) Five Questions to Ask Before You Run off to Re-quote […]

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