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

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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.

 

 

Jun 182012
 

To continue my thoughts from last week’s blog regarding the article  “Putting it All Together at Harley-Davidson“, I’ve put together some additional insights below.

Keep Your Product Cost Management Promises and Don’t Force Others into Promises They Can’t Keep

I am reminded of a story about, Saint Augustine of Hippo, a brilliant theologian, who meets a young boy along the Mediterranean sea sea shore  one day.  As the story goes, Augustine had gone for a walk to clear his prodigious brain, trying to fathom the Christian mystery of the Trinity.  He sees a little boy running back and forth between the sea and a hole that the boy dug on the beach.  The boy uses a little bucket to transfer water from the sea to the hole.  Augustine asks the little boy what he is doing, and the boy replies that he is draining the ocean.  Augustine laughs at him and tells him that his goal is ludicrous, and he’ll never do it.    At this, the little boy replies to the great Doctor of the Church, “I’ll accomplish MY goal before you get to yours!”

Spiritual implications aside, the secular point is that there are goals that cannot be achieved.  In the article, Schmitz talks about his time at Honda:

“Plus, at Honda we learned to never miss a target, to never make a commitment that we couldn’t keep.”

That is a subtle, but important point.  I don’t believe the bigger problem is people not keeping realistic commitments, but forcing the team for sign up to unrealistic commitments.  The culture of US business has morphed to a state where everyone must accept “stretch” goals, some of which are ridiculous.  In addition, eager managers make assumptions about the execution of projects.  Getting a project authorized is the equivalent to assuming that that the Boston Red Sox will hit 3 home runs per inning for a whole game.  Managers who accept such ludicrous targets are “inspiring leaders with a ‘can-do’ attitude;”  while those who cry foul on silly expectations are “negative” and “not team players.”   The article on Harley seems to say that Honda has at least partially overcome this problem and is a bit more realistic in goal setting and acceptance.

Reality Cannot Be Fooled Repeatedly for Very Long

There are “stretch” goals, and then there are miracles.  For example, consider the picture below.  Boiling the ocean in Product Cost Management Hiller AssociatesThis leads us to ask, how do you know if your goal is too aggressive in Product Cost Management?   I don’t have an exact answer, but I would suggest that people think of goal setting like tolerance stack up.   Managers should remember back to the days when they were engineers.  If a design is so delicate that all parts must have extremely tight tolerances and must be heated/cooled to assemble, would you say this is a design that will ever work in the real world of production?  No.  Alright, so when you are setting your product cost targets, reduction targets, or any other target, consider what intermediate goals must be reached to accomplish the overall target.   It is a lot easier to assess the chance of accomplishing the more narrow intermediate goals than the big longer term goal.  If you need flawless execution on each intermediate goal to achieve the overall goal, you may want to consider whether or not you are boiling the ocean.

Part 3 in this series is coming soon.

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