World Map of Product Cost Management

Apr 102012

On the last blog post (Product Cost Management – What is it?), I talked the different ways that my colleagues and I have seen the meaning of Product Cost Management take shape over our careers and PCM’s development. I offered what I believe is a good operating 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.

This definition can certainly be fleshed out further. I was at a conference a few weeks ago and heard a great presentation on social media by Overdrive Interactive. Part of the presentation was showing their map of the social media sphere that has become viral on the internet and the de facto standard many people use to orient themselves to the social web. I really liked that idea, and I’m a big believer in 1-page maps that give the reader an overview of a complex subject, as well as a starting point to dig for deeper detail.

What does Product Cost Management look like from a graphical viewpoint? I believe that it looks like the attached map (click on the diagram to enlarge the map or DOWNLOAD IT IN .PDF FORMAT.

Like any other major discipline that product companies follow, PCM contains four main areas:

Culture, Goals, and Incentives
Processes (tied to the product life cycle)
Team Structure and Participants (tied to the product life cycle)
Tools/Software that can help
CLICK TO ENLARGE!

Culture, Goals, Incentives – before attempting to put in place any process, people, or tools, the organization first has to ask the tough strategic questions. Where is our organization today in the PCM journey? To where does we hope to get and by when? And the big question: What is the priority of PCM and how much investment (honestly) will we make to close the gap from between today’s state to our goal? Once the company answers these questions, it can talk about the strategic structures that drive behavior (roles, incentives, and leadership support).

The next two continents on the PCM world map (PCM Processes, and PCM Tools/Software) follow the product lifecycle, and need to integrate with the company’s product development process. Different processes and different participants are appropriate at different points in the cycle.

Finally, we have the PCM Tools available to take on the journey. They fall into different buckets as follows: (a) homegrown tools (including Excel), (b) general platforms (e.g. PLM, ERP) that may be customized, and (c) specialty Best-In-Class (BIC) tools that focus on PCM processes. In the PCM World Map, many of the major BIC software systems are shown in a 2×2 diagram. We’ll discuss the 2×2 in more detail in a future post, but I don’t want readers to think there is a “magic [best] quadrant” in this 2×2. It is simply a descriptive conceptual diagram

One important thing for people who are navigating the map to realize is that Culture, Process, Team, and Tools are all interconnected and influence one another (see the top right in the header of the map). For example, if you are at the beginning of the PCM journey, it is likely that your company is not ready for all the processes shown. It also may only use one or two of the tools. The company may not have reached a capability level to benefit from some processes, people, or teams. Despite the inter-connectivity of the system, the best place to start when beginning the PCM journey is with the Culture (see blue arrows on the left of the map).

Like all high level maps, there are cities and even countries shown on it that have more detailed maps of their own. However, most companies would do well to focus on understanding the geography at the world level first, before hoping on a plane to a specific city. We can worry about street maps once we decide which cities we are going to visit!

Product Cost Management – What is it?

Product Cost Management 33 Responses »

Apr 092012

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.

Pennies vs. Pounds (Software drives R&D cost… what about Product Cost)

Product Cost Management 4 Responses »

Apr 022012

Hello Product Cost Management Aficionados!

I just read a great post by Jim Brown over at Tech Clarity called “Software Intensive Product Survey says More Software in Products means More Problems.” It heralds another of Jim’s excellent research reports. This one discusses the role of software in products. As we all know, electronics (and now software) are making up an increasingly large amount of product cost… and an even larger amount of R&D costs. I was interested, so I read the full report called Developing Software-Intensive Products: Addressing the Innovation-Complexity Conundrum.

Software Costs More in R&D Costs

What I found really interesting was Figure 5 in Jim’s report which shows the “Negative Business Impacts of Developing Software Intensive Products”. And, of course what jumped out at me was, you guessed it, COST. The report shows that 48% of companies integrating more software in products, found that software INCREASES overall Product Development (R&D) costs. How prevalent is software becoming? According to page 4 of the report:

“Some people say 60% of innovation in a car is software and others say 90%,. I am not sure which is true, but it is a high percentage.” — Andre Radon, VP IT Competence Center Engineering Applications, Continental

This made my head bob up and down while laughing. I was working in product development Ford Motor Company in the late 1990’s and did a rotation in Explorer Calibration. Ford calls the writing of software “strategy” and the specification of the numbers in the data tables that the software uses “Calibration.” I am not sure why we didn’t just call it “logic/code” and “data.” At the time, the Calibrators were setting around 13,000! data points to control the engine computer. I wonder if it’s double that or more now? The thing that I remember regarding product software at Ford (both in Calibration and my other assignments) was the question:

“Can we calibrate around that?” — John Q PD Manager, Automotive OEM

Translation: “Can we write SOFTWARE or change the data tables to get around the problem that we are seeing in analysis or testing, rather than adding or changing HARDWARE?” This was the default first question to EVERY problem, especially in NVH (noise vibration and harshness). But, according to Jim’s paper (with which I wholeheartedly agree), software INCREASES product development cost. So why would Ford managers prudently ask the question above? That’s simple; it’s because…

Hardware Costs MORE Than Software

How can I know that? Well, if we look at a Ward’s Auto Report and Ford’s 2010 Annual Report, as a % of Automotive Sales in 2009:

COGS vs. RnD and Engineering Focus in Product Cost Management Hiller Associates

Click to share! Product Cost vs. R&D Cost and the Focus on Each

4.7% of Sales spent on R&D
95.2% of Sales Spent on COGS (Cost of Goods Sold, which is ~= to Product Cost)

Product cost is over 20x more important to Ford than R&D cost!

So why didn’t the managers answering Jim’s survey think about the effect of software on Product Cost, not just R&D cost? To be fair, Jim did call this out on page 6, saying that companies increase software to “Reduce product Cost.” However, on the next page, there is a chart with the top eight reasons that companies use software in products. (I reproduced that data here for your viewing to highlight) NONE of the catagories say Product Cost, although Jim shrewdly points out that “Enable Platform Design” and “Improve Re-use of Mechanical/Electrical Components” (reasons 6 and 8 respectively) theoretically “can reduce [product] cost.” I agree, but it’s not a direct correlation and these things, which are often are done for other reasons, and Product Cost. The telling thing to me is that “Reduce Product Cost” was not explicitly called out in ANY of the top eight reasons.

Product Strategies Driving Software in Product Cost Management Hiller Associates

Click to Share! Prod Strategies Driving Software in Products

I would have like to seen an investigation of this relation between:

Software intensity in a product
R&D cost
Product Cost

I think it would have been very interesting to see a couple questions about the how software drives down product. Or, is it that at the end of the day, most engineering teams use software in lieu of hardware for other non-product cost reasons… or maybe that they don’t really perceive a strong relation between the use of software in products and the reduction of product cost? But, we did at Ford, right?

I don’t know, but I look forward to Jim’s next report!