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:


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.

Jan 312013

One of my fellows in the world of product cost and design, Mike Shipulski, just posted the following:

The Middle Term Enigma



The general synopsis of it is:

  1. Firms focus more and more on the short term
  2. The “short term” is shorter and shorter.
  3. Short term leads to minimization and typically damages long term success
  4. On the other hand, the firms (especially execs) fear the long term plan as expensive and risky
  5. So why not focus on the “medium term”

Our Opinion:

Mike is right.  The short term thinking kills companies and actually wastes a lot of time and money – paradoxically.

I would offer the following addition:  Short, Medium, and Long term all have their places, but there has to a be a thoughtful and maintained plan for each. You just can’t make a plan today and then look at it in a year.  Every 2-3 months, you should be re-assessing and moving the plan accordingly.  However, you should not see whipsawing, but just gentle, organic fine tuning as you gain more information.

I also would like for Mike to define the Short, Medium, and Long term.  I realize that this changes product to product, but a general guideline would be helpful.


Nov 052012


Last week, Hiller Associates published an article in Tech-Clarity with the title:


Here’s an outline of the article:

  • Siemens PLM recently bought Perfect Costing Solutions from Tsetinis & Partner.  What does this mean?
  • To answer this, let’s first ask, what IS Product Cost Management and what does PCM software really “do”?
  • Now that we know what PCM software really does, who would value this in the Enterprise Software world?
  • There are look’s of possible categories of enterprise software that could value PCM software, but the most likely are PLM and ERP.
  • Product Cost Management software  is really a bridge linking the engineering language of physical things to the rest of the organization (purchasing, supply chain, finance, manufacturing, etc.) who primary speak the financial language of dollars.
  • If independent PCM software companies are not bought by a large PLM or ERP player, what are the other possible options for their future?

Here’s a teaser diagram from the article, just because who doesn’t like maps?

Product Cost Management Bridge from PLM to ERP Hiller Associates

Click to Enlarge! The position of PCM Software in the Enterprise World


My thanks to Jim Brown and Tech-Clarity for the publishing platform to discuss this subject – Eric Arno Hiller

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


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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