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.