Mar 202014
 

Hiller Associates posted the following article at ENGINEERING.COM yesterday.  You can read it there at this link, or just keep reading below!

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Another solid piton in the cliff of making product cost mainstream in CAD / PLM Products?

CATIA users can now get a faster and more effective way to design and source composites products with the highest profit by bringing the estimation ability closer to the designer’s native environment. Galorath Incorporated debuted its newest integration of SEER® for Manufacturing with the Dassault Systems 3DEXPERIENCE® Platform in CATIA at the JEC Composites conference in Paris. The new product is called the SEER Ply Cost Estimator.

Who is involved?

Hiller_Associates_Seer_Catia

Galorath Incorporated grew out of a consulting practice focused on product cost estimation, control, and reduction that began in the late 1970

s. Over the last 30 years, Galorath built their costing knowledge into the SEER suite of software products. SEER is one of the independent product cost estimating software companies.

Dassualt Systems is one of the “big 3” Product Lifecycle Management (PLM) companies in the world.

Hiller Associates spoke with Galorath CEO Dan Galorath, Vice President of Sales & Marketing Brian Glauser, and SEER for Manufacturing product lead Dr. Chris Rush and got a full product demo.

What does this integration do?

The integration allows users of CATIA to use SEER’s costing software for composite materials within the CATIA environment. In CATIA, the engineer designs a lay-up for a composite part, generating a Ply Table (a critical design artifact for composite parts that specifies material, geometry, and some manufacturing info). That activates the integrated SEER Ply Cost Estimator so that the designer (or the cost engineer or purchasing person aiding him) can set up more part-specific costing choices and preferences within the CATIA environment.

When ready, the user pushes the cost analysis button. The information is processed by SEER Ply Cost Estimator which sends the ply table data and other information to the interfacing SEER-MFG software to compute cost. The cost data is returned and presented to the user, once again within a native CATIA screen.

How broad is the capability?

Click to ENLARGE!

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Currently, the integration of SEER is applicable for parts made of composite materials. It’s a strong starting point for the integration partnership because SEER has a long experience in the field of costing composites, working with companies in the defense and aerospace verticals. Composites are also becoming more mainstream in other industries, such as automotive and consumer products. Galorath has been a major player in the US Government’s Composites Affordability Initiative (CAI), a 50/50 government/industry funded consortium including Boeing, Lockheed and Northrop Grumman that was formed to drive down the costs of composites. Galorath has also worked with Airbus in the area of composites parts costing.

Galorath’s Brian Glauser says that the SEER Ply Cost Estimator has hundreds of man-years invested, much from previous work with CAI and with aerospace companies that resulted in several of the modules already in the SEER-MFG standalone product.

The first version of the SEER Ply Cost Estimator handles many composites manufacturing processes, materials, concepts of complexity, and both variable and tooling costs. However, it does not yet directly cost the assembly of one part to another.

The initial integration will be to CATIA v5, but SEER and CATIA have signed a v6 agreement as well. That integration will follow later.

Galorath (and likely Dassault) are hoping that the SEER Ply Cost Estimator will be well received by customers and help drive many product cost benefits. If this happens, there may be demand from Dassualt’s end customers not only to improve the SEER Ply Cost Estimator, but to expand the SEER/CATIA integration to other manufacturing processes covered in SEER’s stand-alone software products such as machining, plastics, sheet metal and assembly processes.

What does it mean for Functional Level Groups?

Philippe Laufer, the CEO of CATIA was quoted saying :

“Using Galorath’s SEER for Manufacturing in CATIA…will help companies perform early trade-off analysis on the use of various materials and composites processes before manufacturing even takes place.”

Well, that has been one of the goals in Product Cost Management for a long time. If your company uses composites, the tool has the following possibilities:

  • Engineering – identify which design choices are driving cost and by how much
  • Purchasing/Manufacturing – get an early warning of what to expect from suppliers before asking for quotes or estimates (should-cost)
  • Cost Engineering –focal point for the cross-functional discussion about cost to drive participation, especially from engineering

It’s important to realize that this integration will have its limitations, as with any costing product. First, the current integration applies only to composites. While expensive, composites are only one type of part on the Bill of Material (BOM). You will have to go beyond the current integration of SEER/CATIA to cost the full BOM, perhaps to SEER’s standalone costing product or to those of its competitors.

Second, remember that cost is far harder to “accurately” estimate than many physical performance characteristics. While meeting an absolute cost target is important, even more important are the following:

  1. Continuous Design Cost Improvement – If your company consistently designs lower cost products because you have superior cost estimation information, you WILL beat your competitors.
  2. Correct Cost and Margin Negotiation – If your company is better at negotiating quotes because it can give suppliers a better understanding of what it will cost them to make your part and you can negotiate a margin that is not too high, but adequate to keep your suppliers healthy, you WILL beat your competitors1.

What does it mean for the C-Level?

Philippe Laufer of CATIA also says:

“This [the SEER Composites integration] leads to finding out the most efficient way of manufacturing a product while meeting cost, performance, functionality, and appearance requirements.”

The C-suite doesn’t really care about composites or ply tables in and of themselves, but it does care about revenue and profit. Of course every well-marketed product will claim to improve these metrics. Regarding product cost, the good news is that Galorath and Dassault are aiming at a big target. Companies that use a lot of composites can have very high costs. For example, Boeing and Airbus have Cost of Goods Sold of 84.6% and 85.5% and Earnings before Tax of 7.2 and 3.6%, respectively2. Those COGS figures are big targets on top of a highly leveraged COGS/Profit ratio.

What does it mean for Product Cost Management becoming mainstream in the enterprise software stack?

We asked Dan Galorath how long it would be before Product Cost Management was as much of the PLM ecosystem as finite element, manufacturing simulation, or environmental compliance. He replied:

“Cost estimation software will never be on every designer’s workstation, but I don’t believe that is what it means for Product Cost Management to be considered ‘mainstream.’ It’s not fully mainstream yet, but a greater need is being driven by outsourcing and the tight business environment. The procurement folks can’t only rely on internal manufacturing knowledge like they used to. They need tools like SEER to fill the gap and move the cost knowledge base forward.”

We agree with Mr. Galorath. This is another step, another piton to secure Product Cost Management onto the PLM cliff, as PCM continues to climb this steep hill.

This is the first integration point between independent Product Cost Management software companies and the PLM/ERP world since September 2012, when Siemens PLM purchased Tsetinis Perfect Costing3. PTC has built some level of cost tracking ability into Windchill, and Solidworks (owned by Dassault) has developed the first couple versions of a costing calculation module for their product.

There is still a lot of ground to cover. There are quite a few independent product cost management software tools that have costing intellectual property that can accelerate the process, especially if the big PLM companies acquire them or partner with them. When that will happen is anybody’s guess, but for now it looks like CATIA users, at least, have a viable solution for composites costing… and maybe more in the future.

1 For more information, see the Hiller Associates Industry Week Article: Your Should-cost Number is Wrong, But It Doesn’t Matter

2 Per www.morningstar.com, trailing 12 months COGS, 3/13/2014

3 Siemens buys Perfect Costing Solutions (Tsetinis), Hiller Associates, September 2012

Jan 232014
 
BOM Away from Hiller Associates

Yesterday, we began a series of articles at one of our media partners, www.ENGINEERING.com.  Instead, of focusing on Product Cost Management, we are focusing on another maddeningly difficult problem with critical implications to the Firm:  structuring the Bill of Material to promote ease of use… and re-use.  We will reprint the article below, and you can view the original here:

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A few months ago, unleaded client and asked me an interesting question.   That question was how does one reconcil the tension between specific parts or hardware vs. the functional use in the product of those parts.    This client was from a major fortune 500 company with a bill of material (BOM) containing thousands of parts on each product.  I was a bit taken aback, at first, by this question.  Although it is a very difficult question and subject, I assumed that most major companies were old hands at dealing with this tension.  I was wrong.

This reminded me that something that might seem old hat or common sense to one person, might be very interesting to another.  For example, when I graduated from the university and went to work for Ford Motor Company, I was taught that the Ford part numbering system.  Ford uses a system for parts that is an intelligent part numbering system, in which the part number makes it obvious which product programs , functional type of hardware, and what version of the part is being described

Hiller Associates - Intelligent Part Numbers

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This system of numbering parts has been around for goodness knows how long.  It is no great secret in the auto industry.  I’m sure every person at Chrysler, GM, the foreign auto companies know the Ford system of numbering parts.  In fact, apparently , eBay even teaches us about the Ford part numbering system.  It’s very straightforward and makes complete sense.  As a young engineer, fresh out of school, who didn’t know any better, I assumed that every company had a similar intelligent part numbering system.  However, when I gained a little bit more experience and maturity, I realized that Ford’s ingenious but simple system was not so common sense at all throughout industry.  In fact, most companies I have met in manufacturing have nothing more than a sequential part numbering system that tells nothing about the part for which you were looking.

The point here is not for me to glorify the Ford part numbering system.  I’m sure there are companies with even better and more intelligent part numbering systems out there.  In fact, we don’t even have to go back into the horrors of the group technology fad in the late eighties or early nineties to know that!  No, my point is that relatively simple and logical ways of classifying (but not over classifying things!) on the BOM can really help us in our management of engineering parts and the product.

Therefore, in the next few weeks, I plan to post a series of articles that talk about these ways that we can view the bill of material and help ourselves and our company.  I look forward to hearing what other experts in the product life cycle management will have to say in comments.

Jul 102013
 

 

Hiller Associates has been invited to become an author on ENGINEERING.com.   The Canadian company, headquartered in Ontario, has become one of the most influential voices in engineering worldwide.  ENGINEERING.com reaches thousands of people, who work in the many disciplines of engineering, every day with the freshest and best content on a variety of subjects, including:

 

 

  • Designer Edge
  • Design Software
  • Electronics
  • 3D Printing
  • Education
  • Careers in engineering

Eric Hiller, managing partner of Hiller Associates said,

We are grateful to ENGINEERING.com for the opportunity to share our insights in Product Cost Management and other topics that sit at the nexus between finance and engineering with the readers of ENGINEERING.com.  ENGINEERING.com has a great readership of influential people who are driving the next generation of products around the world and who range from individual contributors to engineering executives.  We look forward to continuing to work with ENGINEERING.com.

Hiller Associates is writing for the ENGINEERING.com feature area called “Designer Edge,” which contains articles on techniques and tools for better design engineering.  HA kicked off it’s authorship with an article focusing on the challenges that engineers face when presented with supplier quotes that the engineers have to understand versus their own internal should-cost estimates.  CLICK on the the title of the article below to read the article at ENGINEERING.com.

engineering.com_logo_new_tagline

 

 

 

Comparing Quote Apples with Estimate Oranges

 

John Hayes, President of ENGINEERING.com, said,

We welcome Eric ‘s authoritative and often humorous voice on the important, yet rarely discussed, topic of product costing.

Hiller Associates will republish the ENGINEERING.com article in its entirety on our own Product Profit and Risk blog later this week.

 

 

May 222013
 

As we posted on Monday, Hiller Associates has a new article in IndustryWeek titled:

If Your Company Does Product Cost Reductions, It’s Already Too Late

Here’s the full re-print of the article:

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Refocusing product cost management efforts from cost reduction to cost avoidance is less comfortable but far more profitable.

Executive Summary

  • Product cost is the largest expense for manufacturing and the key to profit.
  • Companies today focus on reducing cost after start of production, rather than meeting their product cost targets initially at launch.
  • A pure cost avoidance strategy is far more profitable than a pure cost reduction strategy.
  • Product cost management teaches us that the most profitable strategy is a combined strategy of both avoidance and reduction, with the majority of resources focused on avoidance.
  • The combined strategy requires culture change and process design, before hiring people or buying software. It is challenging, but the added profit gains are worth the effort

Product cost, which is roughly equivalent to cost of goods sold on the income statement, is the biggest expense for manufacturing companies, typically 70% to 90% of revenue. You can see COGS as a percent of sales for a random sample of companies in the table below.Cost of Goods Sold Hiller Associates

Given the magnitude of product cost, one would think that manufacturing companies would have the process of controlling product cost down to a fine art. Sadly, this is not true, and meeting cost targets at start of production in most companies is black art with the predictability of the stock market.

In this article, we will talk about two different strategies that companies use to control product cost. Let’s call them “cost reduction” and “cost avoidance.”

Cost Reduction vs. Cost Avoidance

Figure 1 shows a graph of product cost over time in the product life cycle. In the cost reduction strategy, the company goes through product development putting little or no effort into controlling product cost. Cost increases as parts are designed and added to the bill of material. The product is almost assured to exceed its product cost targets at the start of production. After start of production, the cost reduction efforts begin in earnest through a variety of techniques, such as lean, value analysis/value engineering, purchasing demanding year over year cost reductions, etc.

Hiller Associates Cost_Avoidance vs Reduction

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A cost avoidance strategy is exactly the opposite of cost reduction. In cost avoidance, a large amount of effort is spent as early as possible in product development to meet the product’s cost target at launch. However, post launch, little effort is spent on year-over-year savings.

On the graph, we have shown the extremes of the cost reduction vs. cost avoidance strategies. Most companies are doing something in between. However, on which strategy do you think most companies focus? It’s pretty obvious from the graph, correct? Most companies obviously are going to focus on cost avoidance, correct? Right?

Why people reduce cost instead of avoiding it

The sad truth is that most companies focus the majority of the resources they use for product cost control after launch, not before. Why is this? Many who have worked in product development have heard management and others disparage cost avoidance as “not real.” Cost reductions can easily be measured; cost avoidance cannot. For example, I was paying $10 and now I am paying $8. That’s tangible and real. But, if I say, I am paying $7 now, but had I not been careful in my design, sourcing, and manufacturing decisions, I likely would have paid $10, management considers that ephemeral.

This attitude of most management is detrimental to the company’s profit. Can you imagine living your personal lives like this? Let’s say you need to get cable TV service. Would you search around carefully and find the TV channel package you wanted for $60/month? Or, would you do the following: First, do minimal shopping around and take a package for $100/month. Then, a year later, you investigate to find the “low hanging fruit” of a new deal for $90/month. Another year later, you beat on your cable supplier to reduce the price to $80/month. Next year, the “easy wins” are gone, so you really work hard to find a deal for $70/month.

We don’t shop this way in our personal lives, but most companies manage cost in this way. They do it because accountants can measure reductions. Reductions are real. People get rewarded and promoted for reductions.

Why focusing solely on cost reductions doesn’t work

Looking at Figure 2, we can split the difference between the cost reduction line and the cost avoidance line into two parts. The first is the triangular region. Even if, after years of cost reduction efforts, we were able reduce cost to the point at which the cost avoidance line starts at launch, we have still failed. In has taken years to reduce cost, and that triangular region has a name: lost profit.

Cost Avoidance Maximum Profit vs. Cost Reduction Hiller Associates.

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It is actually worse than this in reality. We will NEVER get down to the same price as the cost avoidance line. We know from the legendary DARPA study from the 1960s that the vast majority of product cost is “locked in” very early in product development. Products are systems, and it’s very hard to extract cost fully without changing the whole system. Furthermore, the cost of making the change is much higher, post launch. Per a 2010 Aberdeen’s study[i], engineering changes made after release to manufacturing cost 75% more than those made before release. These trapped costs that we cannot get out are shown in the rectangular region on Figure 2.

What’s the solution? Do both and flip the focus

So far in the article, we have been talking about a 100% cost reduction strategy vs. a 100% cost avoidance strategy. The field of product cost management would teach us to focus on what practically works and generates maximum profit. In this case, the solution is to do the following two things.

  1. Do BOTH cost avoidance and cost reduction– As shown by the orange line on the graph, the most profit can be made if you meet or come close to your product cost target at start of production and then focus some effort on reduction after launch. Realize that this means that management needs to expect LESS reduction each year in production (e.g. 1% to 2% a year, not 3% to 5% a year).
  2. Flip the focus of the majority of product cost management resources before production begins– Today 70% to 90% of product cost management resources are focused on reduction. Management needs to flip the focus so the majority of effort is on avoidance.

These improvements require cultural changes in how people are incentivized and motivated. Management needs to cast the vision, educate, and walk the walk. This also requires that companies have a solid process for product cost management. Most do not. A common pit that most companies fall into when attempting this transition is to focus first on hiring more resources or buying software tools, rather than first designing a process and starting cultural change. The right people are critical, and tools can greatly enable the process. However, if the cultural and process elements are not in place FIRST, the company will waste a lot of time and money in failed attempts at product cost management and re-starts to the effort.

These are not easy changes to make, but they are worth the effort.

Consider the table at the beginning of the article again. If your company has 80% cost of goods sold and 5% net margin, then reducing COGS to 79% means a 20% increase to profit! What do you think, managers and executives? Is 20% increase in profit worth the effort? We can ponder that question in another article.

In the meantime, the next time someone disparages cost “avoidance,” show them this article and tell them, “You call it ‘cost avoidance’; I call it maximizing profit.”

 

May 062013
 

In last week’s post we talked about where Product Cost Management sits in the organization . We concluded that Product Cost Management lives in a weird no man’s land between purchasing, engineering, finance, and manufacturing. Because the area is a wilderness, we used the analogy the people seriously pursuing Product Cost Management in companies are similar JRR Tolkien’s legendary Rangers in the Lord of the Rings trilogy . The Rangers go about doing good and benefiting the general public, even when the public does not recognize the good they are doing.  Sometimes, the general public even considers these solitary trackers and warriors as meddling, or even, sinister. We even compared the best product cost management folks to the most famous of all Rangers, Aragorn, son of Arathorn .

Several people wrote us about this article, very pleased with the analogy comparing product cost management people to Tolkien’s Rangers. They also validated our assertion that Product Cost Management in the organization, lives between other major functions.  We must say that EVERYONE was on board with the post and feeling very good about it.

This week we’re going to burn through all that good will and make everybody angry!

We’ll do this by explaining why people from every one of the major functions in a manufacturing company are ill-equipped for Product Cost Management.  Are we doing this for the schadenfreude* of internet lulz? No, we’re doing it because we believe these paradoxes are true. These are the unspoken but often thought, truths that need to come to the light of day.

*For a PG-13 musical definition of schadenfreude from Avenue Q, click here.

It’s unfortunate we have to say this, but we’re not embarrassed of it either.  First, one disclaimer:

The statements below are obviously generalizations of the functions within the organization, as well as of the people of that make up those functions. Throughout our firm’s long experience in industry with Product Cost Management, we have met many individuals within each of these functions that do not fit the stereotypes below. However, the paradox below truths hold in general.  Any resemblances to any person, living or dead, is purely coincidental.

Why each major function in a manufacturing company is so poor at Product Cost Management

Engineering

The short answer is, that engineering really doesn’t care about product cost that much. Product cost is a distant second or third , or maybe a fourth priority, compared to other product attributes such as time-to-market, quality , or performance.   We say this despite the fact that we have data of our own, as well as data from other analyst firms, that show that when asked about product cost, product development executives will prioritize it near the top (usually 1st or 2nd). However, our experience in practice is that when the rubber meets the road, product cost is not the first or second priority. On a personal level, the paradoxical thing is that engineering is actually better equipped than almost any other function to do a good job at Product Cost Management.

Product Cost Abilities by Functional Group

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The reason for this is that a major challenge of Product Cost Management is linking the physical characteristics of a part (e.g geometry, features, mass , time to produce the part, etc.) to the financial (dollars and cents). Engineering lives and breathes the physical world. Engineers are trained to understand the physical world and to control it from the very first day they stepped foot into engineering school . They’re not afraid of the physical world . The problem is that product cost, despite the statements of most engineering executives, really is one of the last priorities to address when you’re in the middle of a product development program.

Finance

Finance relationship to PCM is the exact opposite of engineering . Finance DOES have the incentive to control product costs. In fact it, it’s their whole world.  The problem is, most finance people are not from an engineering background, and are, quite frankly, terrified of the physical world of 3D CAD , features , and even if the manufacturing floor.  To them, it is very uncomfortable to leave the safety of dollar numbers on an excel spreadsheet. They are also often hampered by the accounting classes they took in college.  Specifically, Financial Accounting thinking has come to dominate the way they perceive Managerial Accounting in a way that is wholly inappropriate.  Accounting , in reality, has a backwards looking allocation-of-cost viewpoint, rather than the forward looking predictive cost paradigm, which is needed for product cost management . The problems with the current accounting paradigm are certainly worth a future blog post, if not magazine articles or whole books !

Purchasing

Purchasing often suffers from the same malady as finance. They don’t understand the physical world very well. Many buyers also have a bit of a multiple-personality problem when dealing with product cost. On one hand, buyers are suspicious that the supplier is not telling them the truth and charging them too much. On the other hand, if a Product Cost Management person or another should-cost source provides the buyer with a product cost for a part that doesn’t match with the supplier gives them, the buyer often immediately concludes that the should-cost (not the quote) must necessarily be wrong . Riddle me that? They also have a a commodity worldview.  It’s more beneficial for them to focus on large groups of parts within a commodity, as opposed to single parts within a product that is being developed.  Finally, the incentive of RELATIVE cost reductions (i.e. “year over year” cost reductions) sets up a very bad dynamic with Product Cost Management.  PCM is first focused on making sure the product comes to launch AT the right cost, rather than reducing cost year over year later.  All these topics are worthy of extensive articles, in and of themselves, but that must wait.

Manufacturing

In some ways, manufacturing is probably currently better equipped to deal with Product Cost Management than anyone else in the organization .  Manufacturing people are usually comfortable with the physical attributes of the product, just as engineering people are (although they do not have the depth of knowledge in this respect that engineering typically does). Manufacturing does care about cost, just as finance does. They also have a practical nature like purchasing and are quite likely to be comfortable dealing with suppliers.  However, there are PCM challenges and paradoxes for manufacturing, as well.  First of all, due to rampant outsourcing in most organizations, the only manufacturing left in many companies is final assembly. Therefore, the manufacturing guys are often absent from the PCM ballgame. Their concern about how they’re going to assemble the parts together for the final product, not how to make the parts. Secondly, manufacturing is a very busy place, concerned with the here and now and fighting fires, rather than more strategic pursuits such as Product Cost Management.

What to do?

PCM_Funtion_SummarySo, we’re all in a bit of a pickle functionally with Product Cost Management. The table to the right gives a summary of the paradoxes we face functionally. It also adds one global problem that we talked about last week, which is  that PCM doesn’t really fit nicely within any of these functions.

Given these structural problems in the organization’s functional cultures, is it any surprise that most companies struggle with Product Cost Management?

What’s the solution? It’s probably too complex of a problem for one Silver bullet. However, hopefully in the next post we can propose at least one possible way to move beyond the organizational problems and paradoxes discussed today.

 

 

Apr 222013
 

 

Good Morning PCM world,

Another reader sent in questions with respect to the article 2012 revenues of the Product Cost Management market.   However, this question was a little more broad:

 

Is there any difference between Project cost management and Product cost management from your your point of view?

That’s a very simple but good question.  We had not considered addressing it before the question came in.  The short answer is “YES!,” there is a big difference.  The big difference is as simple as the two words:

PRODUCT vs. PROJECT

We have defined Product Cost Management before here as:

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.

The definition of “Project Cost Management” is more murky.  The wiki entry on Project Cost Management is less than satisfying.  Here is the main definition portion of the entry:

“Project cost management (PCM) is a method which uses technology to measure cost and productivity through the full life cycle of enterprise level projects.[citation needed] PCM encompasses several specific functions of project management that include estimating, job controls, field data collection, scheduling, accounting and design.”

Other resources for a definition are Ecosys EPC, the Project Smart blog, Hard Dollar Software, and TutorialsPoint.  Based on the knowledge from these sources, we would define Project Cost Managemenet as:

Project Cost Management – Project cost management is a group of techniques, including budgeting, forecasting/estimating, change control, field data collection, scheduling, accounting and design, and reporting that are used together to ensure that a project is completed at its target cost and on schedule.  It is most often associated with the construction industry.  In construction projects, it would include tracking of both project costs and the costs of the materials for structure being built.  In the world of manufacturing, it would only include the costs of the project such as R&D and SG&A.

Note that in the definition we make a distinction between two very different industries:  Manufacturing vs. Construction.  In construction, we are most often making one thing — some sort of structure WHILE we are in in the midst of the project itself.  In manufacturing, we are undertaking the project in order that we make many copies of a product in the future (when production begins).  In manufacturing, we call the project, “Product Development,” including sourcing, testing, design, manufacturing planning, etc.   In manufacturing, which is our primary focus on this blog, there is a fundamental difference in Product vs. Project cost management that goes all the way to the income statement itself.

Income Statement and Product Cost Hiller Associates

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See the figure to above to understand the focus of Product vs. Project Cost Management on an example income statement for a manufacturing company.  The question then probably arises in everyone’s minds:  Do we need both and which one is more important?  That’s beyond this article, but maybe we can talk about it further in the future, if there is interest.  We’ve left you some clues to answer those questions yourself in the figure above.

In the meantime, somebody call the Project Cost Management guys and tell them they are infringing our acronym!  Everyone knows that the *real* PCM stands for PRODUCT Cost Management!

 

 

Feb 192013
 

IndustryWeek.com has just published a new article authored by Hiller Associates title:

Product Selection versus Product Development (What the product development team can learn from shopping on Amazon.com)

 Synapsis:

The process of product selection that people do in their personal lives (e.g. shopping on Amazon) is strikingly similar to the process of product development that people encounter in their professional lives. Interestingly, people are often better at making the complex decisions associated with product selection than they are at similar decisions in product development.

There are three things we can learn professionally from our product selection experience on Amazon:

  • Make the priority of your product attribute needs clear.
  • Simultaneously and continuously trade-off attributes to optimize the products value.
  • Information about the product only matters if it is urgent, relevant and/or unique, not just “new.”

 To read the whole article, simply click on the link above to go to www.IndustryWeek.com, or simply continue reading the full text below.

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Product Selection versus Product Development

What the product development team can learn from shopping on Amazon.com

We just finished the biggest shopping season of the year from Thanksgiving to Christmas.  A lot of people were making a lot of decisions about where to spend their hard earned money – mostly for the benefit of others with gifts.   During that same period design engineers around the world were rushing to finish up pressing projects – and, probably as fast as possible, because they had a lot of vacation left to use, before the end of the year.

We make decisions every day in our personal and professional lives.  But, do we make decisions the same way in both worlds?   I don’t believe so.   People might argue that decisions made at work involve much more complexity.  After all, how much product development is really going on in most homes?  However, a lot of product selection is going on in people’s personal lives.  When considering complex product purchases, product selection starts to resemble product development in many ways.  Let’s take a look at how people (including design engineers) make decisions when shopping (product selection) vs. how they make decisions in the corporate world (product development).

Consider the ubiquitous Amazon.com.  Customers’ product selection experience on Amazon is overwhelmingly positive:  Amazon scores 89 out of 100 in customer satisfaction, the top online retailer score in 2012.  But product selection is *easy* right?  Wrong.  Look at Figure 1.  Product Selectors on Amazon must consider multiple product attributes and, moreover, these attributes mirror the considerations of a product developer very closely.   Product Selectors must consider performance, cost, delivery time, quality, capital investment, etc., without any salesman or other expert to guide them.   But the really amazing thing is that the Product Selectors using Amazon are able to both prioritize these product attributes and consider them simultaneously.

Product selection on Amazon Hiller Associates

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So, how do the same people who are Amazon customers typically consider product attributes in the corporate world?  Very differently is the short answer, as we see in Figure 2.  First of all, people at work do not tend to trade-off product attributes simultaneously, but in series.  Moreover, often each functional group in a product company (marketing, engineering, manufacturing, etc.), tends to be concerned with one dominating attribute, almost to the exclusion of other product attributes.  How does the typical series-based consideration of product attributes that is common in the corporate world compare to the simultaneous trade-off approach that the customers of Amazon use?   Exact numbers are difficult to find, but some sources say only 60% of products are successful.  While not a precise comparison, the difference seems meaningful:  Amazon scores 89 of 100 on the customer satisfaction index, whereas product companies have 60% successful products.

product development in series hiller associates

CLICK ON PICTURE TO ENLARGE

Why is this?   Don’t people get college degrees to be great product engineers, buyers, etc.?  Don’t they get paid well to do these jobs?  In contrast, most people have limited knowledge of the products they select on Amazon and spend hundreds or thousands of their own dollars to buy them.

There are at least three reasons why the product selection and product development processes differ, and the corporation can learn from all three.

Clear attribute prioritization

Which product attribute is more important:   time-to-market, product cost, or performance?  There’s no right or wrong answer, in general, but there is a right answer for any given situation.    The question is: does the product developer KNOW the priorities of different attributes.  As an individual shopper, you may not explicitly write down the prioritization, but you know it. Your preferences and value system are welded into your DNA, so it is clear.  However, companies are not individuals, but collectives of them.  It is the responsibility of the product line executive to make these priorities clear to everyone.

This is similar to requirements engineering, but at a strategic level.  Requirements are typically specific and only apply to a narrow aspect of the product.  I am talking about the high level product attribute priority.  Ask your product line executive:  “In general, as we go through our development, what should typically ‘win’ in a trade-off decision.”  If the executive cannot give you a concise and simple answer, he has some work to do to earn his big salary.  For example, he should be able to say something, such as “We must meet all minimum requirements of the product, but we need to get to market as fast as possible, so we meet or beat our delivery date.  Oh, and we need to keep an eye on product cost.”

The product executive needs to write the priorities down and share them with all.  In this case, he might write:

  1. First Priority: Time-to-market
  2. Constraint: minimum performance requirements met
  3. Second Priority:  Product Cost

This doesn’t mean the product executive will not change the priority later as the conditions change, but for now, the whole organization is clear on the priorities.  This sounds very simple, but most people in product development are unsure of what the clear priorities are.  Therefore, they make up their own.

Simultaneous attribute trade-off and value optimization

The second thing that we learn from Amazon shopping is to consider all the constraints and targets for product attributes simultaneously.  As we see looking at Figure 1 versus Figure 2, people naturally do this on Amazon, but organizations typically let a different priority dominate by functional silo.   There are often arbitrage points (optimums in the design space) that will allow excellent results in one attribute, by only sacrificing minimally on another attribute.  For example, the product executive may have said time-to-market is first priority, but he is likely to be happy to sacrifice one unit of time-to-market for an increase of 10 units of performance.  This doesn’t mean that the organization is changing their priorities, but that the strategic priorities discussed above simply function as a guiding light that the product development team pivots around to find the point of maximum value for the customer.

Filter for relevant information, not just more or new information

Recent research is revealing the dangerous downsides of our always-on, always-new, always-more information society.  To be sure, social media, like all technologies has the potential for adding a lot value.  The question is: do you control the information or does it control you.  The research featured in Newsweek shows three problems that have grown in importance over the last decades:

  • “Recency” Overpowering Relevance – The human brain tends to vastly overweight new information in decisions vs. older information, and our modern digital world throws tons of new information at us.
  • Immediacy vs. Accuracy – the flip side of the first problem is that real-time nature of our online world pushes people to make quick decisions.  Accuracy and thoughtfulness are seen as inefficient delays, especially in today’s corporate environment.
  • Information Overload – More information does not lead to better decisions according to research.  Humans quickly reach a point where people make bad decisions because they have too much information.  They cannot process it all and do not properly filter it.  The brain literally shuts off certain processing centers, which causes bad decisions.

What can Your Product Development Team Do to Promote Better Decisions?

To answer this, let’s first ask how Amazon is able to overcome these challenge.  To overcome the Recency vs. Relevancy challenge, Amazon ensures that recency is not the default option for the display of Amazon customer reviews.  Instead, helpfulness of the review (relevance), as judged by other customers, is the default order.  Amazon does not push immediacy.  There are no annoying pop-ups offering a deal, if you buy in ten minutes. Certainly, Amazon does make buying easy and fast, but shopping at Amazon from the comfort of one’s home is a relaxing experience that promotes thoughtfulness.  Finally, Amazon does not overload the customer with information. This is no small task, given that Amazon may offer literally hundreds of items to the customer among which he must decide.   Amazon does this by presenting the information on a huge variety of products in a standard way, and by providing simple and powerful filters that discard large amounts of extraneous information.

In order to overcome these new information challenges in your own product development work, ask yourself these three questions:

Information relevance in product cost hiller associates

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  1. Relevancy – How relevant is this new information.  If I had received this information on day one of my design cycle, how much of a difference would it have made in my decisions up until now?  Is the information relevant or just “new?”
  2. Urgency – Do we need to make this decision today?  How long do we have to consider the problem before the decision must be made?
  3. Uniqueness – Is this new piece of information truly unique or just a variation of something I know already?  If it is a repeat, file it mentally and/or physically with the original information, and forget about it. It is it truly unique, consider whether the new information would be a primary influencer of you design or not.  Most of the time information is just that: information, not relevant unique knowledge.  In this case, once again, file and forget.

The world of online journals, social media, corporate social networks, and interconnected supply-chain applications is here to stay.  It brings a world of new opportunity for better and more up to date information for product development.  It also brings a deluge of extraneous information, and we need to accept this and learn to manage this.  Amazon.com manages these challenges well.  Your product development team can manage these challenges too using the principles outlined above.

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.

 

Dec 102012
 

I just read an article on the site “Strategy + Business” called Building Cars by Design.  It caught my eye for two reasons.  First, the fact that a strategy site would deign to talk about engineering concepts was a pleasant surprise.  Second, the article discussed Design-to-Cost and Design-to-Value.

If we strip off the automotive context, the main premises of the article from a Product Cost Management point of view are as follows:

  • Design-to-Cost means designing a car to a specific absolute cost
  • Design-to-Cost is bad because it does not take into account “value”
  • Design-to-Value needs to be used instead of Design-to-Cost, i.e. the product company needs to think about what features that customers value and then deliver these.

I applaud the authors for opening up a discussion on these topics.  However, I feel this article is incomplete and does not tell the whole story about these concepts.  It also doesn’t really say how to do any of these things or point the reader to somewhere he can further learn how.  Here’s my specific suggestions for improvement.

  • Define Design-to-Cost properly, please – Maybe this is just a bit of nomenclature nit-picking, but I have never thought Design-to-Cost means designing a product to a specific cost.   That is what “Targeting Costing” advocates.  Design-to-Cost is about considering cost as a design parameter in your product development activities.  I.E. the design engineer balances cost with other goals (performance, quality, etc.) with the goal of delivering any group of features at the lowest cost possible.
  • Define How to Calculate “Value” to the Customer – The authors say [paraphrasing] that a company should *just* find out what the customers value and then design a product that delivers those things.  I am sure most companies do want to do this, but they don’t know HOW.  I realize that how to calculate value is too complex for the article, but the authors don’t even provide a resource for the reader to learn more.  For example, I studied under Dr. Harry Cook and I am a friend and business colleague of Dr. Luke Wissmann.  At very least, the authors could have pointed the reader to a book on the subject, such as the one Wissmann and Cook wrote:  Value Driven Product Planning and Systems Engineering.
  • What if the Customer Can’t Afford the Value? – It’s difficult to know what the authors mean (even theoretically) by design-to-value.  Regardless, the authors seem to assume that the customer can always afford this value, but I don’t believe this is true, especially in the a second or third world context, which is the focus of the article.

Regarding the last point, I will do my best to illustrate the problem.  Take a look at the figure below in which I graph the value the customer gets from the product versus the price the customer pays for the product.  Presumably, the authors in the article are saying that customers would be willing to pay up to the point that the slope of the value/price decreases substantially (the curve flattens).  But, that assumes the customer has the money to spend – kind of a Field of Dreams Strategy, i.e. “If you build in value, they will pay.”

Product Value versus features and cost Hiller Associates

Click on picture to ENLARGE!

But, what if the customer truly does value a set of features, but he just doesn’t have the funds to purchase all of the value?  In this case, we have to concede that there is a Minimum Viable Product (MVP) needed for the customer to purchase. This term, MVP, is most often used in software development and start-ups.  It is the minimum set of features and functionality that a product must have to have ANY value to the customer.    If you can’t master design-to-cost in your product so that it both includes the MVP features the customer needs  and allows you make adequate profit under the price ceiling of your customer, the product will not be successful.

If the customer has less funds than the MVP to deliver in your product, they can’t afford it.  Similarly, even if the customer has more funds than the MVP requires, but less than when the value/cost curve flattens, you cannot employ a blind strategy of maximizing value to the flattening point of the curve and price near it.  You are still going to have to set your price below your customer’s funds to succeed.

So, are the authors of the article talking about design-to-value to the point that the value/price flattens or to the point where the price ceiling of the customer intersects the curve?

Anyone? Anyone?  Bueller? Bueller? Bueller?

 

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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