Dec 182012
 

 

Hiller Associates has teamed up with CIMdata , a global leader in Product Lifecycle Management consulting and PLM industry analyst coverage to bring you the first annual Product Cost Management Survey.

It takes less than 10 minutes and you will be rewarded by receiving a free copy of the results and report of the learnings that we gain about product cost.

 

 

Product Cost Management Survey

 

 

 

http://www.esurveyspro.com/Survey.aspx?id=03984de4-e017-455d-914b-507bb529c308

 

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Nov 052012
 

 

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

PRODUCT COST MANAGEMENT AS A LINK BETWEEN ENTERPRISE SYSTEMS

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

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Oct 292012
 

Last week Hiller Associates published an article on Should-cost in one of the leading online magazines for manufacturing companies, IndustryWeek.com.   Below is a synopsis  of the article.  However, you may want to just read the article here:

Your Should-cost Number is Wrong, But It Doesn’t Matter

Should cost is not perfect, but it does not matter, because its purpose is to be a leverage tool to improve negotiated cost, regardless of the should-cost number’s absolute accuracy.

  • What is should cost?
  • Methods of should cost?
  • Uses of should cost, specifically to reduce the price of products one buys
  • No one expected Peter Lynch to achieve his absolute return predications for a stock
  • How to use should cost as pricing pressure
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Sep 112012
 

Today is a day of solemn remembrance for Americans and many around the world who remember the 9-11 attack on the the United States of America.  However, there is at least one person who likely quite happy today for a very different reason: Andreas Tsetinis. Siemens Acquisition of  Tsetinis Perfect Cost Hiller Associates   Andreas is the Founder and CEO of Perfect Costing Solutions who makes Tsetinis Perfect Pro-Calc and Perfect Calcard.  In the biggest Product Cost Management (PCM) news of the day, Siemens PLM (specifically the Industry Automation Division) has announced the acquisition of Perfect Costing Solutions.

What is Tsetinis and What are Its Products?

For those of you who are not familiar with Tsetinis & Partner (parent of Perfect Costing Solutions), it is an integrated product cost company of software tools and consulting services. Siemens Acquisition of  Tsetinis Perfect Cost Hiller Associates Many people consider the software tool side of the Tsetinis business, Perfect Costing Solutions, the recognized market leader in Europe for the PCM.  In the last couple of years, the product Perfect Pro-Calc has also been making inroads in the US.  Perfect Costing Solutions makes two software products:

  1. Perfect Pro-Calc – This is a cost estimation tool used primarily by costing experts.  It is fed by manual input that allows predictions of cost for mechanical and some electrical parts.  Perfect Pro-Calc also includes that ability to roll up costs in a hierarchical BOM structure that the user defines.
  2. Perfect CalCard – This is a software focused on capital tooling (injection molding, casting, and stamping) cost estimation by tooling experts.  It has the capability of accepting 3d solid CAD models as input to the costing process, although, I am personally not aware how advanced this ability is.
Per the Perfect Costing Solutions website, “today over 240 companies in the automotive sector and other industries successfully use our products.”  Perfect Costing Solutions has 50 employees according to the Siemens press release.

What does this mean for Product Cost Management?

Product Cost dominos Hiller Associates

The last year, starting from September of 2011, has been a very eventful year in Product Cost Management.  First, Solidworks unveiled its first foray into the PCM world:  Solidworks Cost — the first tool, besides aPriori, that can cost parts directly from geometry.  Then PTC announced Windchill Cost.  Windchill is not a cost generation tool, but is a cost management / roll-up tool that builds off of Windchill.  It allows customers roll-up costs generated by other softwares or methods and track and analyze these costs.  Now we have the very first Product Cost Management acquisition (Perfect Costing Systems, Gmbh) by a major Product Lifecycle Management player (Siemens).  This begs many questions, among them:

  • Will the PLM companies begin to dominate the PCM space and crowd out the pure plays?
  • Will Siemens attempt to build CAD Feature Based Costing abilities into Perfect Pro-Calc?
  • What does this mean to PCM software companies; will other players acquire specialized PCM software companies?

I am going to see if I can get an answer to these questions.  In an eerie coincidence, just this week, Jim Brown of Tech Clarity and I were just discussing me writing an article about where Product Cost Management might settle out in the enterprise software landscape.  It sounds like it’s time for me to write that article…

What does the rest of the PCM world think about the Siemens acquisition of Perfect Costing Systems.  Please let us all know by commenting!

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Jul 232012
 

Last week we began talking about a common problem in many projects, including Product Cost Management: the withholding of needed data for analysis and modeling.  We also talked about the many reasons, some legitimate and some not, why people refuse to share data. Those reasons are summarized in the graph below.

Then I introduced one way of working through the data withholding problem.  I call this technique Habeas Corpus Data.

Excuses for no data in Product Cost Hiller Associates

Reasons people withhold data [CLICK TO ENLARGE}

It’s very simple and works like this:

  • Politely and ardently make your case to the data gatekeeper as to why they should share the data with you.
  • If you are rebuffed, ask your management or project champion to see if he can break the data roadblock.
  • If you are still ignored, simply nod politely and stop asking. Instead, go and make an assumption for what the data should be.
  • Present your findings (based on your assumptions for the withheld data) in the presence of the data prison warden (be it the individual or organization that is withholding).
  • Sit back and watch the chaotic scrambling of the data warden.

This is the typical flow of the Habeas Corpus Data process, but in reality, the result will be slightly different depending on the real reason that the person or organization is guarding the data. In our post today, we are going to go through each reason and talk about the result that Habeas Corpus Data has in each case.

1. Data truly requires confidentiality / conflict of interest

This is the best and, really, the only legitimate reason that data should ever be withheld. Fortunately, it’s also the rarest. Very little data really needs to be kept confidential, especially to another member of the same product program or a consultant who is under a Non-Disclosure Agreement (NDA) already.

Effect of Habeas Corpus Data: The data holder probably feels guilty already for having to withhold the data. If the data is legitimately confidential, he will likely give you an indication of how good your assumptions are saying something such as: “Well, I can’t tell you the exact values, but you’re not making a bad guess.” Or “Well, I can’t tell you the exact values, but I would reconsider your numbers, because they aren’t remotely close.”

The more important effect of Habeas Corpus Data happens when the person or organization is using “confidentiality” as an excuse for one of the other five reasons. This is the common result. In this case, the data warden will start complaining about your results, to which you will politely reply, “Oh, well I had to make an assumption, but if you have actual data that is better, I am happy to redo the analysis with quality assumptions.” This is basically checkmate for you. The data warden will either immediately produce the data, or mumble something vague about having to check with his manager about seeing if he can share the data. This is your permission to promptly follow up a day later to see if that “permission” has been received.

2. Legitimate concern that colleagues / partners understand the sensitivity

Sometimes data is not officially confidential in the sense that it cannot be technically shared with someone of your clearance, but the data warden is personally concerned that you do not understand the sensitivity of the data.

Effect of Habeas Corpus Data:  Habeas Corpus Data will almost always make the data warden reconsider his reservations. He may initiate a discussion with you directly or with your executive champion to re-emphasize the gravity of the data he will now share, but you will get your data.

3. Does not know the data asked for

Sometimes the person you ask does not have the data.

Effect of Habeas Corpus Data:  The question is, “should” he have the data?  If the answer is no or maybe, consider who else might have the data. However, if the data would normally reside in the bailiwick of the person or organization, the organization may welcome your assumptions as the first steps in researching the needed data and may ask you to work with them in refining your assumptions.

4. Too busy or lazy to assemble data

Effect of Habeas Corpus Data:   If the reason that the person or organization does not know the data is because they are busy with other things or the organization is simply negligent, Habeas Corpus Data will force them to prioritize digging out the data that they do have in their organization.  If they do not currently have the data they will typically prioritize the due diligence required to get it. Otherwise, they will be forced to accept your assumptions.

5. Job security / authority protection

Sadly, the two most common reasons people withhold data are the two most illegitimate reasons. First, many people see data and/or knowledge [which is valuable] as one of the biggest contributors to personal job security. This may seem strange to some younger readers, who have grown up in the world of the internet and social media.  In the internet world, sharing (not hoarding) ideas makes one popular and successful. On the other hand, consider the importance of “content” (the fancy internet word for data) ownership and rights. Many people do not want to share the data they have personally appropriated from the organization, believing they will be less important without the data.

Effect of Habeas Corpus Data:   Even if he personally still does not want to share data, if the audience with whom you share results includes the data warden’s colleagues, it is highly likely that one of them will force the Data Warden to relent. They will not want you using incorrect assumptions that produce incorrect results. If these results are used and lead to a bad decision, the executives will start investigating the analysis chain and discover that the Data Warden’s organization had data and were aware of the analysis, but refused to share.  Habeas Corpus Data typically makes the fear of being seen as a data hoarder greater than the fear of losing your job from sharing data.

6. Fear of exposure of mistakes

Everyone makes mistakes, but some people are more sensitive than others about having their errors exposed. Without the proper data, it is very difficult to prove that a decision was right or wrong in the past. Obviously, you are rarely explicitly looking for mistakes in Product Cost Management. However, with the right data, you may well uncover honest mistakes from the past, or simply new opportunities to re-source, re-route, or re-design a part or product. Many people are uncomfortable with someone finding out that their original decisions were not optimal and/or they just don’t want the hassle of having to deal with a certain part again.

Effect of Habeas Corpus Data:  The effect of Habeas Corpus Data in this case is similar to the effect it has on “5. Job security / authority protection.” Habeas Corpus Data typically makes the fear of being seen as a data hoarder greater than the fear of discovering a past mistake or opportunity discovered.

Is Habeas Corpus Data Too Harsh?

Habeas Corpus product cost data Cost Hiller AssociatesMake no mistake, Habeas Corpos Data is a powerful technique. However, readers should not view it, nor practice it with the attitude of being a “data extortionist.” Much like the martial art of Judo, Habeas Corpus Data is really the “gentle way” compared to your other alternatives, escalating the data withholding in a loud way to the executive ranks of a company.  As I discussed above, Habeas should not be used until you have personally made your case to the data gatekeeper and asked your immediate management or project champion to see if he can break the data roadblock.  Like Judo, Habeas Corpus Data will often allow you to control your data withholding opponent without harming them. It allows them to gracefully back down from their recalcitrant position in a way that will allow them to save face in front of your executives and theirs.

 

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Jul 192012
 

Data.

At the end of the day, the data and assumptions that we use in Product Cost Management, specifically in cost models, is as (or more) important than the equations and the approach to modeling itself.  The classic example in cost modeling is raw material rates ($/kg for steel, plastic, etc.). A close second and third in importance are the labor rate ($/man-hour) for work in a given manufacturing activity and direct overhead rates ($/machine-hour).

Good, trustable data can be very hard to find in a company, even when everyone in the company wants to help the cost modeling effort. However, a bigger problem is not the unavailability of data, but the unwillingness of people to share the needed data with you. If you have ever been involved in a Product Cost Management (PCM) effort, especially one involving cost modeling or implementing a PCM tool, you have certainly encountered this problem.  Certain people and whole organizations will be unwilling to share data with other organizations and/or with you personally as the PCM professional who is trying to help the firm.

So, what do you do when you run into this data stonewall? Today, I would like to share a very powerful but simple technique that I discovered years ago. Some may call this technique by another name, but I call it “Habeas Corpus Data.”

Why People Withhold Data

As a young researcher at University of Illinois, I was flabbergasted the first time that I was on an internship and someone became squirrely or delaying regarding data.  At a university, of course, the goal is to freely share and promote good data to advance the common good of learning and research.  However, in organizations this is not the case.  Over the next few years, I realized that withholding data was the norm, not the exception in many organizations.  The natural question one asks when told “no” is “why?”  I have been given a lot of excuses, ranging from the presumably plausible to the outright ludicrous.  However, they mostly break down into the six categories shown in the pie chart below.  Furthermore, in my experience they break down in the proportions shown.

Excuses for no data in Product Cost Hiller Associates

Reasons people withhold data [CLICK TO ENLARGE}

As you can see, the first three categories, are legitimate concerns that need to be addressed.  However, you will also note that this is a minor part of the pie.  The lion’s share of the reasons given are simply excuses that should not be tolerated.  The most frustrating thing is that no matter how illegitimate the real reason for withholding data is, the withholder will tell you a covering lie.

So, what do you do when you find the data door locked? Easy! You use Habeas Corpus Data to storm the castle.

Habeas Corpus Data

Many of the readers may remember Habeas Corpus from junior high civics class as the Latin phase meaning “you must present the person in court.”  This legal idea originated in 12th century England and means that you cannot hold someone in detention without first showing sufficient cause.  Or, as William Blackstone explained in 1305 “The King is at all times entitled to have an account, why the liberty of any of his subjects is restrained, wherever that restraint may be inflicted.”  [Maybe that means you are the King and the data are your subjects?… oh, if only Product Cost Management were so glorious!]

Just as the court demands a reason for imprisonment of a citizen, so too you demand a real reason why the data is being held hostage. But, how do you expose the data despot for the unlawful detainment?  Here’s the key to the prison cell:

Make and assumption and present the results from your work.

For example, if purchasing will not cough up a supplier’s labor and overhead rates for the cost model on which you are working, you assume a labor and overhead rate based on your past experience and expertise in PCM.  It does not even matter if your assumption is close to the real numbers.  When you present your results for the costs of the product or part, the warden of the data prison will very likely be present.  You should make sure of it, which will be easy, because he is likely be a key stakeholder in the product cost project.   As this point, you are effectively calling his hand, and he will have to lay down his cards and show the true reason why he is withholding data.

Why does Habeas Corpus Data have this effect on the warden of the data?  First, he will be shocked you were able to proceed with your work without his data.  More importantly, he will get very worried how your results (which are based on your assumptions, not his) will affect his job.  The exact effect that Habeas Corpus Data will have depends on which of the six reasons for withholding data is the real underlying reason the person should have admitted in the first place.

Stay tuned next week, and I will will let you know the specific effect Habeas Corpus Data has based on the true each reason for data withholding.

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May 142012
 

Lately, it’s become popular to talk about “voices” in business, e.g. the “Voice of the Customer.”  With all the voices, it is difficult not to wonder if one is listening in on a business meeting, or a group of choral composers arguing over the score’s balance, psychologists trying to diagnose a patient, or a kitschy show with karaoke singers trying to go pro.    I believe that the “voice” nomenclature is the new new way to say “stakeholders,” a term that was the new way to describe the groups of people and forces of the universe that prioritize your product decisions and limit its possibilities.

All frivolity aside, the Voices framework is not a bad one. Instead of arguing over what we call the rose, I’d like to focus on WHO and WHAT those voices are with respect to Product Cost Management. Click on the diagram to the right. In this graphic, I show three categories across the product development cycle:

Voices in Product Cost Management Hiller Associates

Click to Enlarge! Voices in Product Cost Management

  1. What are the ‘Voices’ in the discussion of product cost and profit
  2. What are the target costs or cost statuses that the voices dictate or influence
  3. What are the ways that people can estimate the cost target or cost

The First Voices in the Discussion Had Better Be Balanced

The first two voices are the Voice of the Customer and the Voice of the Business.  The Voice of the Customer is supposed to tell you what consumers will pay for a certain bucket of product features and attributes based on perceived customer value.  Understanding the weird customer dialects isn’t so easy because customers won’t give you an exact number for the price they expect, such as $44.85.  If customers do give you an exact number, the number should still be considered fuzzy because customers have a hard time conceiving the value of your intended offer.   It is traditionally marketing’s job to read these tea leaves in order to decipher the Voice of the Customer.
The second voice, the Voice of the Business, gives us the Product Target Price and Product (System) Level Cost Target.  To illustrate, the CEO or Group VP comes in and says, “We need X total revenue and Y market share,” and the VP of Finance comes in and says “We need to have Z profit margin on the product.”   Great! Right?  Well, yes, but this is a TOP-DOWN cost target, or as the EE‘s in the room would say, an “open loop” control.  Normal people refer to this as an “estimate” or a “guess” (a.k.a. a hope).
Trade-offs in Product Cost Management Hiller Associates

Click to Enlarge! Product Fiscal Planning Triangle

The hopeful nature of the top-down product cost target is why the next voice in the discussion is so important:  the Voice of Reason.  What modern businesses don’t like to think about (or have been taught not to by consultants) is that there is a fairly rigid triangle (see the figure to the left) linking the price you must charge (or the customer will pay), the feature set (value) you will deliver in the product, and the product’s cost (margin).  If you set two of the corners of the triangle, the third will move to compensate.  I am not saying that people cannot do better on their product cost, but there are limits.

The key is to ALSO estimate what is theoretically possible for product cost in a BOTTOMS UP way — given REASONABLE assumptions.
The bottoms-up estimate moves you from an open loop control to a closed loop control (with feedback for adjustment), as the EE’s would say.  If the top-down and the bottoms-up costs are too far apart, somebody needs to throw a flag.  The first figure above shows the methods one can use to get an early bottoms-up product cost estimate.  Another voice that is often not heard is the Voice of Intent.  People often just assume a design alternative and immediately launch into full scale engineering.  But the old DARPA study told us that 80% of cost is decided in the first 20% of decision making.  So, the solution is pretty obvious.
Spend significant effort and time in the concept design stage seriously generating, considering, and costing a series of alternatives with your cross-functional team of design, manufacturing, purchasing, etc.
Spend the money needed on comparative teardowns of carryover systems you plan to cost reduce and systems with new features you plan to design versus similar systems of your competitors’ products.  Spend time together in a workshop evaluating your design alternatives and estimating your costs (raw material, manufacturing, shipping, etc.).  You do not need triple point precision — you only need a good enough estimate to allow you to compare one alternative to another.   Then you should give a REVISED Product Cost Target to management and marketing.   Very little cost has been spent up to this point, so if a program needs to be stopped or modified, now is the time!

Keep the Conversation Going

The next voice that should be in the product cost discussion is the Voice of Engineering.  Often, the discussion on product cost just stops for months or years until suppliers send in the first quotes at the end of the detailed design phase.  However, the conversation should continue.  Where is the engineering team in their cost roll-ups?  Have they discovered problems and barriers that will force costly changes, or have they found clever ways to beat the cost target?

Shrink the Triangle with Should-Cost and Spend Analytics

The Voice of Partners and the Market refers to the price your suppliers (or your internal plant) will charge you to produce your design.  If you want to get the best prices, it is important to understand another triangle:  the Purchased Cost Triangle (to the right).   The corners of this triangle are the price the supplier or plant quotes, the final cost you negotiate with the supplier/plant, and your should-cost calculations.  Here’s the secret:  this triangle is much more flexible and stretchy than the product fiscal planning triangle above.   Powered by the number and quality of your should-cost and spend analytics estimates, you want to drive all three vertexes together and converge.   Product cost is a difficult and fuzzy world; it’s even fuzzier when you have no facts (or even well-reasoned estimates) to rely upon.

Triangulating in Product Cost Management Hiller Associates

Click to Enlarge! Purchased Cost Triangle

If you want your Negotiated Costs to reflect the actual costs of manufacturing plus a reasonable supplier margin, invest heavily in good Should Cost and Spend Analytics.

If that’s too hard or too expensive… well, it’s only your product’s profit anyway, right?

Time to Pay the Piper

For the most part, the final voices settle things.  The Voice of Realization happens when you actually start to make the product and do the formal accounting to see what the product actually costs.  Sadly, this is where most companies spend the lion share of their product cost management effort. This is not to say that there are not opportunities to reduce costs after launch.  However, this is not where companies should be spending a lot of Product Cost Management effort.  Cost is pretty much set at this point, and companies should be working on the NEXT product.

The last voice is the Voice of Regulation / Responsibility.  In general, the Voice of Regulation should be known up front, in regards to disposal fees or other government penalties and taxes for which the company is responsible.  On the other hand, the Voice of Responsibility is trickier. The company should take its warranty predictions very seriously.  Most products, though, tend to have surprises, and they are typically not positive surprises.  Sometimes, the Voice of Responsibility speaks with legal authority (e.g. contractual warranty), but it should also speak to the corporate conscience to do the right thing for the customer, even when the company is not legally bound.

Next week….

This week we talked about how things SHOULD work.  However, the framework and solutions presented are not how many companies DO work.  Next week, we’ll talk the ad hoc and emergent system by which most companies operate, and what problems this causes.

 

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Apr 302012
 

Michelle Boucher from Aberdeen Research just put out another nice piece of research on Product Cost Management.  (Actually, it’s not about PCM specifically.)  It’s called Product Development Single Source of Truth:  Integrating PLM and ERP.   The report delves into perennial topic of Enterprise Resource Planning (ERP) and (or versus) Product Lifecycle Management (PLM).

I have worked closely around these enterprise categories for the last 10 years, but I admit I may not be an expert of Michelle’s level.  However, from my seat in the ballpark, it feels like the open warfare between PLM and ERP has now morphed into a cold war or maybe cautious Glasnost and the realization of each other’s right to exist.    Michelle’s report doesn’t focus on the war between the software categories but on the end customers.  The end customers know that both ERP and PLM must exist in a corporation, but they have the problem of figuring out how ERP and PLM should best work together.

The general interoperability of ERP and PLM is beyond my interest in this post.  What is interesting is that there is research in the report on Product Cost Management, even if the report does not call it out specifically.   Here’s a few pieces of data that I have surgically excised from much larger tables from a much larger report.

How important is Product Cost Versus Other Pressures?

Top Pressures Driving Improvements to How Products Are Developed Hiller Associates

CLICK to Enlarge: Top Pressures Driving Improvements to How Products Are Developed

Readers of Jim Brown’s blog on PLM may remember that I did a post on this very topic a few months ago.  You can read it here.  Take a look at the figure to the right.  It appears that my intuition was right, at least with the preeminence of time-to-market as the number one priority to product development.  However, I was surprised to see that Product Cost Management came in number two in importance, albeit 25% less important than time-to-market (using time-to-market as a base).  Regardless, that is encouraging.  So, one wonders again why more companies don’t have stronger PCM efforts?

Does PLM and/or ERP Help with Product Cost Management?

One of the tables in Michelle’s report shows the effect of a company having PLM and the effect of PLM’s level of integration with ERP on many different performance metrics.  One of those metrics is whether a company meets its product cost targets or not.   Take a look at the chart to the right.  This is very interesting for two reasons.

ERP and PLM Hiller Associates

CLICK to Enlarge: Performance Benefits of Integrating PLM and ERP

First, we see a range of meeting product cost targets of 65%-72%.  Really?  In my own research on about 40 operational companies in many different industries, the mean percent of time that companies meet product cost targets at launch is 20-30% — HALF of what Aberdeen is seeing.  I wonder what the disconnect is in my data versus theirs?

Second, the report shows mean (average) of the respondents that fell in each category on the chart (having ERP but no PLM system, having PLM and ERP but unintegrated, and having both in some level of integration).  As expected, the companies with some level of integration do better, but is this statistically relevant?  What is the standard deviation on this data?  I ask this because the range of answers I get when I ask companies how often they meet product cost targets is from 0-100% of the time.

Is PLM or ERP is Storing Product Cost Data?

ERP and PLM Hiller Associates

CLICK to Enlarge: Data sent from ERP to PLM

Looking at the graph to the right, notice that none of the couple hundred Aberdeen respondents were pushing any cost data from PLM to ERP.  They were pushing some data from ERP to PLM.  I have shown the pieces that they are storing in ERP and pushing to PLM.  One could argue that the “Sourcing Data” that they pushing to PLM may be quite relevant in Product Cost

Management.  However, I wonder how relevant the “Costs / Actual Costs” are to PCM, given that ‘actual’ costs imply old carryover costs, which are fairly irrelevant to new designs or re-designs.

According to Aberdeen, 77% of companies do store “Item Costs” in ERP.  This left me wondering, where are the other 23% of companies storing cost information?  An excel spreadsheet? (have mercy!)

 

There’s a lot more in Michelle’s report than this narrow slice of data on PCM.  So, if you don’t subscribe to Aberdeen’s research, you can sign up or just buy the report.  Great data, though, Michelle.  Thanks.

 

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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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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:

  1. Software intensity in a product
  2. R&D cost
  3. 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!

 

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