Apr 152013
 

Hiller Associates received a question this week from a business school asking us what the revenue of the product cost management market is. That was a very interesting question, and one that we have thought about before. However, we’ve never actually sat down to think about the question formally. So rather than answer the person privately, we thought it might be helpful to everyone to discuss this in a public forum.

 

Product Cost Management Software Companies Hiller Associates

Companies included in the Revenue Aggregate

There’s good news and there is bad news with respect to the estimation of the size of the Product Cost Management market. The good news is that the market is fairly self contained, i.e. there are only a certain limited number of players in that software market. However, that’s where the good news ends. There are several challenges to estimating the market size:

  • Private companies -80% of the players in the product cost management software market are privately held companies, either venture funded, or privately held by a small group of founding owners and managers. Therefore, their revenue numbers are closely guarded information that is not publicly available. This includes the PCM company that our managing partner, Eric Hiller, founded and at which he was the CEO and then the Chief Product Officer for many years (aPriori).
  • Bundling – the second challenge comes with the fact that some of the larger players bundle product cost functionality into the price of another larger product. For example, Solidworks Cost is a bundled-free option that is included whenever someone buys their professional or premium level Solidworks CAD product.

There is is one other good piece of news, which is that Hiller Associates knows most of the players in the market and speaks with them regularly.  For some of them, we do know the revenue, and for others, we have a good idea. Obviously, we cannot share revenue numbers of an individual company, but this inside information will help us move the estimate from a wild guess to an educated guess.

Taking a look at the figure on the left, you will see the companies that we have included in the estimate. These are all the main players that we know of in the market. If there are others that we’ve missed, we’re very happy to learn about them and consider if we should add them to the market sizing.

2012 Revenues in the Product Cost Management Software Market

Those of you who follow this blog or have worked with Hiller Associates know that our philosophy is that point estimates are very dangerous and, often, not even that useful. Knowing the uncertainty around a cost number is just as important as having a point estimate of what that number is. We feel this holds true with any financial quantity. Therefore, we will provide a range of the size of this market.  Please see the figure on the right, which shows are estimate of the total revenue of the company’s above for 2012. When given the uncertainty factors that we have discussed above, we feel the total market has a large range. Total revenue could be as low as $60 million or as high as, perhaps, $115 million.

Current market revenue of Product Cost Management Hiller Associates

Click to Enlarge!

Other questions that people should ask are how much of this revenue comes from services and how much of this revenue comes from actual licensing of product. Some of the companies included are primarily product companies, and most of the services that they offer are tightly bound around the product. Such services would include training on the software, implementation, and customization. However, there are others in the group that also maintain general consulting businesses. For example, several of these companies offer classes about product cost or  subsets of product cost management, such as design for manufacturing & assembly (DFM/DFA).  These are general classes which only relate peripherally to their products.

Estimate Methodology

To do our estimate, our methodology was to estimate the revenue of each of the included companies individually. We also did an estimate of the service percentage of their revenue on an individual company basis. Then we added up the aggregate numbers. You will notice from the estimate figure to the right that when all the numbers for service and product revenue or aggregated, there is approximately a 60/40% split between product and service respectively. This ratio of product vs. service revenue seems approximately correct, per our experience in the market.

Software vs Services in Product Cost Management Hiller AssociatesIt’s important to understand, that this estimate is four the actual revenue of these companies in 2012. It does not reflect the total addressable market for product cost management software, which we believe is woefully on realize that this moment. This is the first our discussions about revenue in the product cost management software market.

NEXT TIME: Growth Rate in the Product Cost Management Software Market

 

Feb 212013
 

Last week we talked about the struggle in corporate strategy between Core Competency structures and Lean manufacturing. Whereas Core Competency thinking naturally leads to more outsourcing and extended supply chains, Lean manufacturing would advocate for a geographically tight supply chain, often with more vertical integration.

So, what does this have to do with Product Cost Management. The answer is “knowledge.”

The Lack of Manufacturing Knowledge In Design

One of the biggest complaints that I get from my clients is that their teams have lost or are rapidly losing product cost knowledge in the last 10 years. This is especially acute with design engineering teams, but also effects other parts of the organization, such as purchasing. Years ago, the engineering curriculum at universities became so overloaded that manufacturing began to be pushed to the side in the education of most engineers (excepting the specific “manufacturing” engineering major). In fact, at most top engineering schools today, there is only one high level survey course in manufacturing that is part of the required curriculum.

However, manufacturing and its evangelistic design missives (design-to-cost, design-for-manufacturability, design-for-assembly, etc.) were still learnable skills that the young engineers and others could pick up on the job, over time. This is because most product companies were not only in the business of final assembly, but also in the business of sub-assembly, as well as manufacturing components from raw materials. These companies employed large amounts of manufacturing engineers who were resources for the design and purchasing teams. Even for parts and subassemblies that were purchased, the suppliers were likely close by the design centers and had long standing relationships with the OEMs.

Designers and purchasing people could literally walk down to a manufacturing floor in an internal plant or drive a few minutes to a supplier. Conversely the manufacturing engineer would walk upstairs to question engineering about a design. This is nearly impossible when suppliers are often in different countries and the firm that designs does little manufacturing themselves

The Effect of Lack of Manufacturing Knowledge on PCM Tools

One of the ways that industry has tried to remedy this situation is with sophisticated Product Cost Management software. This software codifies a lot of the tribal knowledge that resided in the manufacturing engineers head. However, these tools assume that the tool users have (1) the will and (2) the skill set to properly use a PCM Software.

There is no doubt that the PCM and DFM/DFA tools today are far more advanced than they were, even ten years ago.  However, the value one derives from a tool is not a function of the tool’s capability alone.   There is a bottleneck problem of using a tool to its full potential.  We could say that the value the PCM tool actually gives to the organization equals:

Value of PCM Tool = (Will to use tool) * (Ability to use tool) * (Potential of the tool)
 

People often forget about the ability component, but this is true with any tool.  People buy expensive tools, e.g. golf clubs, hoping to improve their performance.   However, 90% of the time, they cannot even use the set clubs they have to their full potential.  Worse yet, often more expensive or sophisticated tools are more powerful and have the potential to give more value, but they are often less forgiving of errors.  If you don’t know how to use them, they will HURT your performance.

In the past, with a Lean (vertically integrated and geographically close) supply chain, people used primitive PCM tools (often only spreadsheets).  On a scale of 1 (worst) to 10 (best), on average what I hear from industry is that there capability to use the tool was higher, but the tool was limited and cumbersome.  The users, including design engineers, knew what decisions to make in the tool, but the tool was cumbersome.   Currently, we have more of the opposite problem.  The PCM tools are better and much easier to use, but most design engineers are somewhat baffled on how to make what seems like the simplest of manufacturing input decisions in the tools.  The “Will to use the Tool” is another problem altogether that is beyond our discussion today.  However, my experience, in general, would be represented by the following table:

Tool_effectiveness

These results will vary company to company, and even, from design team to design team within the company.  Regardless, I wonder if we are at a breakeven state from where we were in the past today in the value we get from PCM tools… or maybe, we have even lost ground.  The sad thing is  that the PCM tools today ARE more user friendly and requires less of an expert to use.  However, is the loss of manufacturing knowledge in design engineering is so bad that it has overwhelmed the PCM tooling ease-of-use-improvements?

What Can You Do to Help the Situation in Your Company?

Obviously, nothing is as good as the osmosis of manufacturing learning that occurs from a tightly coupled, geographically close, and vertically integrated supply chain.  However, the state of your firm’s supply chain is likely out of your control personally. There is some positive movement with the re-shoring and re-integration trends in industry, in general. However, there are steps you can take to improve the value your firm derives from PCM tools.

  • Send Engineers Back-to-School – do you offer (or better yet, mandate) classes in Product Cost Management, DFM/DFA, Target Costing, etc. for your design team? This should be part of the continuing education of the design engineer. I am not talking about training on the PCM tools themselves (although that is needed, too), but general classes on how different parts are made, the different buckets of cost, the design cost drivers for each manufacturing process, etc.
  • Design Cost Reviews – This is a very low tech way to create big wins. Design reviews in which design engineers review each other’s work and offer cost saving ideas should be a regular facet of your PCM process. Even better: include the engineer’s purchasing counterpart, company manufacturing experts, and a cost engineer to lead the review
  • Embed Experts – Does the design team have at least one advanced manufacturing engineer or cost engineering expert for no more than 20 design engineers? If not, you should consider funding such a resource. Their salary will easily be paid for by (a) the cost reductions they they help your team identify for products already in production, (b) the costs that help the team avoid in designs before production, and (c) the speed their efforts will add to time-to-market by helping the team avoid late changes and delays due to cost overruns.

In the past, vertical integrated, geographically close supply chains helped Product Cost Management in a passive way.  The pendulum may be swinging back to that structure.  However, even if it does, don’t rely on the “passive” Product Cost Management to help. Take the active measures described above and get more value out of your PCM Software investment.

Feb 112013
 

There were a lot of comments last week to the article we posted with the title: Only 17% Percent of Companies Meet Product Cost Target

Many people complained about the dearth of knowledge of the design engineer in Design for Manufacturability.  In the discussion, we also started to propose some solutions to overcome this problem.  However, one comment that sparked my interest was a comment about WHY design engineers often overtolerance parts that went beyond “they don’t know any better.”   The comment paraphrased was:

A big problem we have is that we are making parts directly from the CAD model. A lot of Catia based models have a general tolerance of +- .005 [in.] on the entire part .including fillet radii and edge breaks. …these features have to be penciled off with a ball end mill instead of using a standard tool with a radius on it can kill profit on a job when you miss it when quoting.

That is a fascinating observation.  There is no doubt that the Product Lifecycle Management companies will be pleased as punch that people are finally taking their drum beating on “model is master” seriously.  FYI – I agree that the model should be master and that drawings should be generated from the 3d master data.  However, this improvement to PLM adherence highlights what happens when new technology (a tool) is foisted upon a problem without without understanding the current processes and outcomes that the incumbent tool is satisfying.  In this case, the old tool is paper drawings.  With the incumbent tool, there was a title standard block that for companies, and that title block would give helpful bounding constraints such as:

Unless otherwise specified:

All dimensions +/- o.o1 inches

All radius and fillets +/1 0.02 inches

Etc.

That helpful and protective title block may not be there with a 3d, model onl,y strategy.  All the evangelism on “tolerance by exception” goes right out the window what the CAD system now has default values that are overtoleranced by definition.  The CAD system itself becomes… The Evil Robot Overtolerancer.

The good news is that the Evil Robots can be controlled, and you don’t even need anyone named Yoshimi to help you do it.  However, it will require some thought, before you change the default tolerances in your CAD system.  Some considerations to think about are:Yoshimi Product Cost Hiller Associates

  • What were the default tolerances in the title block on your drawings when the drawing was master?
  • Can these tolerances be reduced?
  • How surgically will your CAD system allow you to set default tolerances?
  • Do you need different tolerence ‘templates’ depending on the primary manufacturing process.  E.G. tolerance defaults may be very different for a casting that is machined than for a piece of sheet metal.
  • How will you make your design engineers aware of these new default tolerances?

Whatever decision you make, make sure all the right people are at the table to make it together, including design engineering, the drafting team (if separate from design), purchasing, and manufacturing (including suppliers, if parts are made externally).  If done thoughtfully and correctly, the setting of default tolerance will bring the Evil Robot Overtolerancer under control.  If these changes are made in a vacuum or carelessly, you may find that you have made the Evil Robot 10x more powerful as an agent of chaos and profit destruction.

You want to be dealing with the friendly Autobots, not the Decepticons, right?

transformers product cost hiller associates

That’s today’s Product Cost Killing Tip!

If you have Product Cost Killing tips that you would like to share, please send them to answerstoquestions@hillerassociates.com.

 

 

 

 

 

 

May 072012
 

I happened to stumble upon an article on SpendMatters from a few weeks ago by Sheena Moore:

Friday Rant: What’s in a Brand? For Tiffany’s new “Rubedo” Cuff, a Preposterous Mark-Up

The article about the manufacturing cost versus the price of a new bracelet at Tiffany. If you don’t know what Tiffany is, you’re probably unmarried and have not been dating. Some say you can’t put a price on love; Tiffany disagrees and will help you do it! The first great thing about the article is Sheena’s calling out of Tiffany’s deceiving marketing.  Apparently, they told her the bracelet is made of a golden “metal” called “Rubedo.”  No ladies it’s not gold; it’s something better; it’s Rubedo. (Rubedo is actually just an alloy that helps Tiffany water down the gold to make more $$$. Sheena and I had a good laugh about this on the phone).

Sheena’s article caught my eye for two reasons. First, I’m just really cheap, and the idea of a $7,500 bracelet made of 55% Copper and 31% Gold flabbergasted me. However, more interesting than my miserly instincts was that Sheena does a nice little product cost analysis of the bracelet. In doing so, she highlights another form of fool’s gold:  Material Cost Multipliers.

The Material Cost Multiplier

Material Cost Multipliers are a simple idea. They postulate that one can first calculate the cost of a product’s raw material and multiply it by a number to get the overall “Piece Part” cost.   But wait, you may object: how can this be valid? Why would someone vastly oversimplify the product cost calculation like that? That’s simple: calculating actual cycle times and tooling costs for each machine needed in the product’s manufacture is HARD, and it requires a lot of manufacturing knowledge.

Material Cost Multipliers just sweep all that nastiness under the rug… or into the multiplier, in this case. They have the following assumptions:

  • Assumption 1: Parts is Parts. Remember the old Wendy’s commercial making fun of the contents of Chicken McNuggets? No? Well I do, and you can too, by watching the video below.

The Material Cost Multiplier inherently assumes that all parts that you are manufacturing require the same processes and have the same complexity of design. For example, assume that our Tiffany bracelet and this Gucci Earring had the same mass:

Product Cost Bling Hiller Associates

Assume these had the same mass!

Would you guess that both of these items take the same effort to make? If you said  ‘no,’ you are right.

  • Assumption 2:  The Biggest Loser – The Material Cost Multiplier also assumes that the part mass is very highly correlated to the part’s processing costs. Therefore, the more mass you lose, the more your processing cost goes down in DIRECT correlation.  There is no doubt that many manufacturing costs do have a correlation to the mass of the part, but many do not. For example, the polishing or burnishing of the Tiffany bracelet is much more dependent on the surface area burnished, the complexity of the surface, and the hardness (composition) of the material than the mass of the item.

The Cost of the Tiffany Bracelet

Sheena received notice from a colleague that material is only about 25% of the cost of an item. So, Sheena first did a nice material cost analysis of the bracelet. She says that the cost of material is $1,500.  Although, she does not account for scrap or loss, this is a pretty good assumption, given that this type of material which can be re-melted.  Also, the manufacturing process is likely a net form process, where there is virtually no loss in specific design).  I would, however, question the assumption that:

  • Material Cost = 25% * Piece Part Cost.
  • Or, Materal Cost * 4 = Piece Part Cost. Basically, 4 is her Material Cost Multiplier.

First of all, that seems backwards in the world of simple metal part manufacturing which, in my experience would be more likely to have:

  • Material Cost = 75% * Piece Part Cost
  • Materal Cost * 1.33 = Piece Part Cost).

In fact, I think the processing costs are even lower than my general assumption. Just looking at the picture of the bracelet, my guess is that this is made by a routing such as:

Extrusion Routing for Jewelry Hiller Associates

CLICK TO ENLARGE! Tiffany Bracelet Mfg Routing

Extrusion is very efficient and cheap, especially for a straight cylinder. I would shoot from the hip and say the processing is definitely under $20 (probably under $10). Let’s say we have the $1500 raw mat’l cost + $20 processing/logistics + $100 for marketing (which might be outrageously high). That’s a $1,600 Fully Burdened Cost for the high class Wonder Woman wrist bracer (you’ll need 2 for Halloween).  At a price of $7,500, just one bracelet is generates $5,900 PROFIT (370+% margin)! I did a product cost analysis in one of the commercial Product Cost Estimation tools for a very similar looking part to the Wonder Woman Tiffany Bracer, and I got a result of $5.25 (Extrusion = $2.20, Flaring = $0.7, Marking = $0.50, Polishing = $1.30, Packaging – $0.55). My former co-founder’s wife owns a florist and gift shop and once told me told me once that typical mark-up for jewelry is ~50%, so the bracelet should be priced (at max) at $3,200, not $7,500.

So are Material Cost Multipliers bad?

No, they are not necessarily bad or inaccurate… but they often can be because they are misapplied. It’s important to know:

  1. What processes will be used to make a product?  Each major process probably needs its own multiplier for accuracy.
  2. What physical part attribute most strongly drives cost in each process?
  3. Make sure if someone gives you a multiplier that it is based on these considerations?

Consider the differences:

  • Sheena’s general manufacturing Material Cost Multiplier  = 4x –>Processing Cost = $6,000!
  • Eric’s general simple part metal manufacturing Material Cost Multiplier  = 1.33x –>  Processing Cost = $1,900!
  • Eric’s manufacturing “judgment” from experience and given the the routing Eric assumed Processing Cost = $20 –> Material Cost Multiplier = 0.013x!!!
  • The Product Cost Estimation Tool’s estimate of Processing Cost = $5.25 –> Material Cost Multiplier = 0.003x!!!

There is no doubt in my judgment that the Product Cost Estimation tool is the closest to reality. Regardless, a fast back-of-the-envelope calculation is far better than nothing. I am a big fan of common sense and back-of-the-envelope reality checks. I applaud Sheena’s effort, which, honestly, is more than many design engineers or purchasing engineers would do in considering the profit impact of their decisions.

Conclusions

  1. Material Cost Multipliers are useful, but can be dangerous. They should be applied by experts or with expert guidance.
  2. My analysis shows that Sheena is even MORE correct in that the bracelet is not worth it.
  3. Kudos to Tiffany for Jedi Mind Tricking girls into believing a $1,600 bracelet is worth 3x as much.
  4. Ladies, your boyfriend’s/fiancee’s/husband’s willingness to buy you the Tiffany Rubedo bracelet may mean he’s filthy rich, desperate, or not too smart… but it may not necessarily mean he loves you.  Admittedly, that’s just my guess… but then again, I’m a product cost guy, not the love Dr.)

Eric

p.s. Guys, perhaps you would be interested in buying the woman of your dreams the Hiller Associates RubedA bracelet. It’s just like the Tiffany RubedO bracelet, but MINE is 35% gold, not 31% like Tiffany.  The only difference is my bracelet will say “H&CO” where Tiffany’s says “T&CO”, and likewise mine says Hiller’s, instead of “Tiffany’s”.  It’s a bargain at $4,999, versus Tiffany’s $7,500.   H&CO:  “Don’t just show her your love; show her your intelligence.”

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:

  1. Culture, Goals, and Incentives
  2. Processes (tied to the product life cycle)
  3. Team Structure and Participants (tied to the product life cycle)
  4. Tools/Software that can help

    World Map of Product Cost Management Hiller Associates

    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!

 

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