Hiller Associates has been invited to become an author on ENGINEERING.com. The Canadian company, headquartered in Ontario, has become one of the most influential voices in engineering worldwide. ENGINEERING.com reaches thousands of people, who work in the many disciplines of engineering, every day with the freshest and best content on a variety of subjects, including:
- Designer Edge
- Design Software
- Electronics
- 3D Printing
- Education
- Careers in engineering
Eric Hiller, managing partner of Hiller Associates said,
We are grateful to ENGINEERING.com for the opportunity to share our insights in Product Cost Management and other topics that sit at the nexus between finance and engineering with the readers of ENGINEERING.com. ENGINEERING.com has a great readership of influential people who are driving the next generation of products around the world and who range from individual contributors to engineering executives. We look forward to continuing to work with ENGINEERING.com.
Hiller Associates is writing for the ENGINEERING.com feature area called “Designer Edge,” which contains articles on techniques and tools for better design engineering. HA kicked off it’s authorship with an article focusing on the challenges that engineers face when presented with supplier quotes that the engineers have to understand versus their own internal should-cost estimates. CLICK on the the title of the article below to read the article at ENGINEERING.com.
Comparing Quote Apples with Estimate Oranges
John Hayes, President of ENGINEERING.com, said,
We welcome Eric ‘s authoritative and often humorous voice on the important, yet rarely discussed, topic of product costing.
Hiller Associates will republish the ENGINEERING.com article in its entirety on our own Product Profit and Risk blog later this week.
Related posts:
Hiller Associates & CIMdata Publish Most Extensive Research to Date on Product Cost Management
New! IndustryWeek Article by Hiller Associates: Product Selection versus Product Development (What the product development team can learn from shopping on Amazon.com)
SEER Composites Brings Cost Estimating to CATIA
Comparing Quote Apples with Estimate Oranges
20 Responses to “Hiller Associates becomes an author on Engineering.com”
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David White • Especially where refractory repairs on furnaces are concerned! You can have three different people (companies) looking at your furnaces and depending upon their experience level, receive three totally different quotes on the scope of work. Then you will almost always get three different material recommendations. You are right most new engineers or maintenance managers are not educated in the refractories that are best suited for their particular type of furnace or alloy and most certainly newer guys in the business do not understand what to look for when repairing a furnace refractory lining.
@ David,
Yes, I suspect the problem hits almost any product. However, the more rare the product or service being quoted, the more difficult to evaluate the fairness of the quote.
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Which is why whenever possible engineers should put out a performance spec or a repair spec for people to bid by. This at least puts everyone attempting to bid the same thing
Eric Arno Hiller • Fair enough. To be honest, if someone is asking for a complex product to be made and does not have a good performance spec or a repair spec, they should not be surprised when people overbid, either honestly because the supplier doesn’t know what to quote, or dishonestly because the supplier is trying to take advantage of the customer. It seems grossly negligent not to have a good performance spec or a repair spec.
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George Spiller SAYS:
The frustration is self imposed. Most suppliers that are trying to quote would agree that the specification that is given to define the work being quoted is non existant or inadequate
at best. The frustration is related to the fact that the differing quotes highlights whose work contribution is missing
Perhaps so.
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George Spiller SAYS:
One of the features associated with the “captive” japanese supplier systems is that the “unchanging” selling price is quoted long before sufficient details are available to create
a detailed quote. This practice results in the “unchanging” selling price even when significant new manufacturing cost are imposed. As a mitigation their system will also enable supplier cost reduction inputs even when they are less than appropriate. As an example an oil filter is high quality when it doesn’t leak on the driveway even though it has significant internal bypass of the filter element.
This seems like an over constrained system. If the part is priced wrongly due to uncertainty, one can take a variety of countermeasures:
1 if possible, to cost reduce without loss of performance or quality.
2 to cost reduce with loss of quality.
3 to cost reduce with loss of performance.
4 the part properly, retaining quality and performance
If I understand what you say the Japanese do, that only allows for 2, and maybe 1. Why artificially prohibit the viable options for 3 or 4?
– Eric
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Chuck Hodges SAYS:
Good information–wish this was taught in engineering school, oh well.
And it’s not even as simple as that, because one also needs to factor in payment terms, delivery time, delivery flexibility, cancellation charges, etc. Supplier quality, reputation, financial strength are also issues. And for bigger OEMS, aggregating volumes with fewer suppliers also can yield both discounts but also lower overhead to manage the supplier.
It may be better to buy a part for $23 from a reputable vendor who offers NET 60 terms and return privileges than pay $22 from a shady vendor who wants COD and the order is NCNR. We see this mistake made all the time, especially in China but domestically as well. And we also see engineer-friendly vendors who provide excellent design-in support hoping to lock in business at a higher price at lesser terms.
Of course there are supply chain experts who can negotiate to pay $21 from the best vendor at NET 90 day terms
@ Chuck,
That is a very good point. All these things are factors too. I would love to see a simple sheet used in companies that provides a simple estimate that turns all these factors into additive costs for a total cost of ownership. TCO is hardly a new concept. Academics and consultants talk about it a lot. However, in practice, I rarely see a TCO model for all these factors — even in Fortune 500 companies!
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Chuck Hodges SAYS:
In the tier 1 contract manufacturing world we used to do these calculations to the nth degree, and so would our sophisticated customers. Anything impacting cash flow adversely was always looked at especially hard–payment terms, inventory take back terms etc–as well as anything impacting upside / downside flexibility like the dreaded NCNR.
That said, negotiations usually were “I’d like the best price AND the best terms,” and both sides got adept and addicted to the age old CM game of Hide the PPV..
Yes, I agree with these points. It’s the same with any project in the manufacturing world.
1. Very few people can even do a Discounted Cash Flow
2. Even fewer really internalize DCF. They are obsessed with breakeven or payback period
Number 2 is probably a restatement of what you said, i.e. that people’s REAL discount rate if far higher than 18-20%. They want the project to pay off in 1 or 2 years.
The construction people do get this on their project and some plant CAPEX people do, but when it comes to a project in sourcing or product development there are 2 extremes:
1. It’s “obvious” or the “right thing to do” OR
2. Well, we have to have an ROI in 1 year!
There is no tolerance for “well, it will be 4 years to payback, but in the 10 year life of the benefit, we have an IRR of 40%.
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Chuck Hodges SAYS:
Exactly–peoples real discount rates are often whatever it takes to get a payback this quarter!
Ah, IRR, my favorite of all the ROI metrics, so powerful but so few people understand it.
Actually, I am a big believer in always doing an absolute AND a relative measure. Understanding both gives me the clearest picture. IRR is relative (a % improvement). NPV is about absolute improvement.
For example, I would rather do a $10,000,000 project with a 25% IRR than a $1,000,000 project with a 30% IRR.
I always want to see both IRR and NPV.
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Chuck Hodges SAYS:
Agree on seeing both, but since they are essentially inverse functions (IRR is the hurdle rate for a zero NPV, right?) on the same cash flow it’s trivial to derive both from the same data set (gotta love Excel). Or am I missing a subtlety here (I’ got my MBA from Just-run-the-___ing-P&L University so my formal training is a little lacking even if my hands-on experience is huge)?
Yes, you are correct. But the important things is looking at the results, such as:
Project 1 ($1,000,000 NPV, 20% IRR)
Project 2 ($10,000 NPV, 30% IRR)
Many people would just look at IRR and say, oh well, 30% is better. However, there is a fixed cost in time and management energy to do a project, so in most cases Project 1 is a better choice. Without NPV, you would never know.
Eric
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Chuck Hodges SAYS
Side comment on TCO models. Where TCO theory vs practice usually breaks down is in pay me now, save later aspects. Basically most companies’ (and individuals’) real hurdle rate for Time Value of Money is a lot higher than the theoretical numbers.
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Owen Fortune SAYS
I find this argument to be a bit unrealistic.
First, one can usually assume that at least some of your potenial suppliers are companies you have worked with before and that both sides “speak the same language”. If not, there is usually time to go back to companies whose quotes you have questions about, and get them to either conform their quote to a format that is useful to you, or drop them from this particular project.
Secondly, confusing or misleading quotations are often a product of poorly written specifications by the buyer. There is nothing to stop either side from picking up the telephone and threshing the matter out.
Formal procedures and rigid protocols are a poor substitute for just asking questions.
@ Owen
Perhaps, you have a better and more sharing purchasing dept. that I have often dealt with. My experience is that suppliers will typically provide the following:
100% will provide the Total Cost
60-70% will break out shipping
20-30% will provide raw material mass or cost
10-20% will provide “major” cost bucket (e.g. Raw Material $20, Casting $10, Machining $25, Logistics $5)
1-5% will provide cycles times
1% will provide a detailed costs for each machine/process
I agree that many people don’t specify well or ask questions. However, many suppliers will refuse to give a breakdown beyond Part Cost and Logistics.
I think you draw a false dichotomy between (1) specifying well + following up with questions and (2) having a simple process that you everyone follows.
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