Mar 182013
 

There are universalities that seem to cross people and cultures, such as, it’s polite to say “please” and “thank you.” These universalities also occur numerically. For example, designs that follow the Golden Ratiopop up all over the world. Many other aspects of one group versus another may vary, but there are these universal touchstones that pervade the world. The same is true with companies. Granted, one might argue that one company simply is imitating another company and that is why they share a simple practice or the important of a certain number. We believe that this is, indeed, true in most cases. Still, there are a couple of numbers in companies that seem to arise independently in all companies. We are going to talk about some of those universal and independent numbers today with respect to Product Cost Management.

The great universal number in PCM is “10%.” I have met hundreds of companies over the years, both in consulting and when I was the Founder, CEO, and then Chief Product Officer of one of the product cost management software companies. Invariably, a meeting with a company will occur, in which one of the customers will utter the “a” word: accuracy. The dialogue proceeds similar to the following:

CUSTOMER: So, how accurate is your software?
PCM TOOL COMPANY: What do you mean by “accurate?”
CUSTOMER: Uhh, um, well, ya know. How ‘good’ is the number from your software?
PCM TOOL COMPANY: Do you mean do we have miscalculations?
CUSTOMER: No, no, I mean how accurate is your software to the ‘real’ cost?
PCM TOOL COMPANY: What do you consider the real cost?
CUSTOMER: Uhh, um, well, I guess the quotes that I get from my purchasing department from our suppliers.
PCM TOOL COMPANY: Oh, I don’t know, because it depends on how close the quote is to the true cost of manufacturing the part plus reasonable margin.  Are you confident your quotes are correct proxies for the true cost of manufacturing.
CUSTOMER: Hhmmmmmmm… yeah, I think think so
PCM TOOL COMPANY: OK, how close do you expect the costs from our PCM software to be to your quote [or internal factory cost or whatever source the customer believes is truth]?
CUSTOMER: Oh, you know, I think as long as you are +/-10% of the quote, that would be alright.

 

Ding! Ding! Ding! – no more calls, we have a winner! The customer has uttered the universal expectation for all costs produced by a product cost management tool, with respect to the “source of true cost”: +/-10%

The universal expectation of customers of Product Cost Management software is that the PCM tool is accurate to within +/-10% of whatever forecast the customer considers the “true cost.”

This expectation is so common that you would think that every customer in the world had gone to the same university and had been taught the same expectation. Of course, that is not the case, but it is a ubiquitous expectation. How did this universal convergence of expectations come to be? We will probably never know; it’s one of the great mysteries of universe, such as, why do drivers is Boston slow down to 4 mph at the lightest sign of snow or rain?

The more important question is: Is the expectation that the cost from a PCM tool should be +/-10% of a quote realistic? To answer this question, we first have to ask:  How truthful is “the truth?” The truth in this case is supposedly the quote from the purchasing department. The reader may already be objecting (or should be), because there is not just one quote, but multiple quotes. How many quotes does a company get? Well, that depends, but we all know how many quotes a typical company gets: THREE!

The universal number of quotes that purchasing gets is 3, and they believe the “true cost” is within +/-10% of whichever of these 3 quotes they select as truth. 

Three shall be the number of the quoting and the number of the quoting shall be three. Four that shalt not quote; neither shalt they quote two, excepting thou proceedest to three.

Variance Within Supplier Quotes

Do all the  quotes have the same price for the quoted part or assembly? No, of course not. If they were the same, purchasing would only get one quote. So what is the range among these quotes? That is a fascinating question, one that I am currently investigating. So far, my research indicated that the typical range among a set of three quotes is 20-40%. That seems about right from my personal experience.

But, is the “true” price (cost + reasonable margin) contained within the range of the 3 quotes? Not necessarily. If we assume that quotes are normally distributed (another assumption that I am researching), the range would be much bigger in reality. For example, if we had three quotes evenly distributed with the middle being $100 and these quotes had a 30% range, the high quote would be $115 (+15%) and the low, $85 (-15%). This gives us a standard deviation that, conveniently, is $15. At two standard deviations (~95% confidence or “engineering” confidence), we predict that the “true cost” of the part is between a predicted  high quote of $130 and a low of $70. This is a range of 60% (+/-30%). You can see this on Figure 1.

OK, but what about if we  just source a single supplier. Well, there will be variance in this supplier, as well. This variance breaks down into two types: physical noise and commercial noise.

  • Physical noise — the difference in cost that could occur due to physical reasons, such as choosing a different machine (i.e. different overheads) a different routing (sequence of the machines), or even simple human variation from part to part or day to day.
  • Commercial noise – differences in pricing driven by the market, emotions, and transient conditions.
Variance in the Cost Forecast from Quotes Hiller Associates

Figure 1 – Variance in the Cost Forecast from Quotes (click to enlarge)

Physical noise can easily account for a range of 20% (+/-10%) in the quote that a supplier might provide to an OEM. However, physical noise can be quantified and discovered. A supplier can share what routing or machine they are using. The problem is that Commercial noise is very difficult to quantify. How do you quantify when the supplier believes you hurt him in the last negotiation and now he is going to repay you for it, or that he needs your company as a new strategic customer and will underbid to get initial business? Worse yet, Commercial Noise is often LARGER than Physical Noise in the quote! How big is Commercial noise? That is difficult to say, because we can’t measure it very well, but from our discussions with purchasing groups, at minimum, Commercial Noise adds at least another +/-10% .

Physical Noise  Commercial Noise
Comes from selection of different machines, routings. Comes from market conditions, emotions, and transient conditions
Quantifiable in general by understanding the selections. Very difficult quantifiable
+/-10% of the “factory average” +/-20%+ on top of Physical Noise

 

Supplier quotes are just one forecast of true cost. There are other forecasts the organization has.

Cost Estimation Experts

What about those people in the organization with the most manufacturing and product cost knowledge? What is the noise in their estimates compared to a source of alleged truth, such as a quote. We are not sure, but we have asked another question about variance to these experts. When asked the question, “How close are you as a cost estimator to the estimates of other cost estimators in your company, people most often reply, “Probably +/-10-20% depending on the complexity of the part cost estimate or assembly.” So, we might say that the cost estimators have at least a 30% range of quotes themselves.

Historical Costs in ERP

What about the historical costs in ERP? How “accurate” are they? There’s actually at least two problems with data in corporate databases. First, sometimes it is just plain wrong from the beginning of its life in the database. However, even if it is correct initially, it gets out of date very quickly. Material cost, labor rates, efficiency, etc. change. Go ask you purchasing buyer how close a re-quote of a current part that has been in the database for three or four years will be to the original quote. To give you an idea of the magnitude of this problem, consider these findings:

The Accuracy (i.e. variance to quote) of a Product Cost Management Software

Variance in Different Forecasts for Product Cost (click to enlarge)

Variance in Different Forecasts for Product Cost (click to enlarge)

So, after all of the discussion of the variance within other cost forecasts, how “accurate” are the forecasts from a product cost management software? Well, if the internal variance among expert cost estimators independently estimating is 30%, the BEST the PCM tool could do would be +/-15%… IF it is controlled by experts. What happens when non-experts use this software? How much does the range increase? Who knows? Obviously, the more automatic and intelligent the PCM Tool, the less the added variance would theoretically be. But, is this added variance +/-5%, +/-10%, +/-20%?  That is hard to say.

The Reality of Accuracy and Variance in Product Cost Forecasts

Regardless of the answer to the above question, the bigger questions are:

  1. What is your EXPECTATION of how “accurate” your PCM Tool’s cost forecast is to the quote forecast?
  2. Is your expectation reasonable and realistic?

We know the answer to question 1:   Be +/-10% of a my selected quote.

To answer the second question, let’s quickly review what we know:

Source of the Cost Forecast Common Variance Inherent in the Forecast
Range among 3 quotes +/-15%
95% confident interval (engineering confidence in quotes) +/- (15%+15%)
Physical noise within one single supplier +/-10%
Physical noise plus Commercial noise within one single supplier +/- (10%+20%)
Internal range among cost experts +/-30%
Best Case PCM Tool used by experts +/-30%
Non-cost expert using PCM tool +/- (30%+ 5%?)
Common [Universal] expectation of PCM Tool Cost Forecast +/-10%

 

Hhhmmmmmmm… Houston, I think we have a problem.

It just doesn’t seem that +/-10% is a reasonable expectation.

Bringing Sanity Back to Product Cost Management Expectations

What can you do in your company to help reset these unrealistic expectations? There are three things.

  1. First make your colleagues (engineering, purchasing, etc.) aware of the reality of the cost forecasting world. Don’t let them develop uninformed and unrealistic expectations.
  2. Don’t focus exclusively on the end cost, but on the physical and immutable concepts that cost is supposed to quantify: mass, time, tooling.
  3. Start to quantify the internal variance in your own firm’s cost forecasts. Your firm’s internal cost ranges in quotes, internal estimates, etc. may be lower or higher than the numbers presented here. However, you won’t know until you start to investigate this.

Is this a painful realization?  Perhaps, but you are already living with the situation today.  It is not a new problem in the organization.  If you don’t acknowledge the potential problem, you run the risk of misleading yourself.  If you acknowledge the potential problem, you may be able to solve it, or at least make it better.

 

Jan 292013
 

Hiller Associates recently was the keynote speaker at aPriori’s first customer conference.  It was a great opportunity to both teach and learn from experts that came from a wide range of industries and geographies.

Hiller Associates’ President, Eric Hiller, discussed several topics, of which we’ll mention two here.  The entire presentation can downloaded for FREE.  Just click on the slide below and get the presentation:   Best_Practices_for_Starting Your Procuct Cost Management Journey or Improvement.

Variance in Cost Numbers

One of the main themes discussed was the possibility of getting an “accurate” cost, meaning how possible is it to get a cost that is within a certain percentage of a fixed point of reference, such as a supplier quote.  There are several ways to look at this problem that we may discuss in subsequent weeks on this blog.

Eric Hiller at aPriori STARS 1 2012 product cost Hiller Associates

Eric Hiller presenting the keynote speech at the aPriori Customer Conference

However, in summary, the presentation asked the question:  what cost variance is inherent in your system already?   For example, if your 3 quotes from supplier have a range of 30% from highest to lowest, then is it realistic to expect the cost that you calculate in a product cost management software to be closer than 30% away from a random quote?

It was refreshing to see how open the audience was to these concepts.   The reactions to the variance concept went from wide-eyed amazement from people who were new to the cost management field, to thoughtful reflection from the veterans.  In fact, the veterans reacted like men who had been reminded of a truth that they knew all along.  Often, such common truths are forgotten due to immersion in the day-to-day challenges of keeping a company profitable.  We call this concept having a “blinding flash of the obvious” – a BFO.  Everyone in the room had that BFO, and no one wanted to argue about it.  Instead, there were many comments throughout the conference that further explored this concept.

Culture is the biggest loser

Another theme of the presentation was driven by the latest research in Product Cost Management done by Hiller Associates.  Those who follow us regularly know that we segment problems in our consulting work into four root causes:  Culture, Process, Roles/People, and Tools.

Our latest research shows that cultural problems are the clear bottleneck in most firms’ Product Cost Management journeys.  The respondents overwhelmingly agreed.  When Eric ask the attendees which area was their firm’s biggest PCM bottleneck, the conference participants voted as follows, based on a rough estimate of hands in the air:

Best Practices for Product Cost Management Hiller Associates

CLICK TO GET FULL PRESENTATION

  • Culture 60-70%
  • Process 20-30%
  • People/Roles 0-5%
  • Tools     5-10%

That’s fairly shocking at a conference whose organizers are a Product Cost Management TOOL vendor.  [Next time HA will have to set our honorarium higher for taking the pressure off of any problems with the vendor’s product!]  Joking aside, culture is obviously the  biggest problem and it is not an easy thing to change.  In fact, companies often buy a PCM software tool hoping that it will somehow magically fix their bigger cultural problems.

It reminds one of obesity problems.  Many companies have a culture of binging on product cost during design.  In purchasing & manufacturing they continue with cost obesity denial — not know what the cost calorie count is until the parts arrive at the door with an invoice.  However, instead of changing their cost eating and exercising habits, they look for a magical cure in the form of a software tool.  Let’s call this “the shake-weight approach” to product cost management.

We’re not disparaging the shake-weight, or any other home exercise equipment.  Certainly, all home exercise equipment can help you lose weight, just as we are sure that all of the PCM Tools can help one reduce cost.  But, you have to use these tools regularly and properly.  PCM software tools are too much like home exercise equipment.  People buy them thinking that the tool will magically solve cost obesity.   They use the tool twice and then it sits in the corner unloved, unused, and unmaintained… and, yet, people wonder why they are still product cost obese!  It’s not the tool that the problem, it’s your culture.  Much like changing your eating lifestyle, changing the PCM culture is really hard and tricky to do.  That’s why cultural issues are often at the forefront of most of the engagements that we do with clients at Hiller Associates.

However, it was refreshing to see that the attendees at aPriori’s conference did seem to understand this problem, or at least were very open to the idea.   So, maybe we are making progress on this point.  Or, maybe  HA needs a TV show “The Biggest Cost Loser” in which Hiller Associates works with companies to increase product profit with weekly product cost “weigh-ins.”  What TV viewer wouldn’t watch that kind of riveting drama…

Now, get out there and do some product cost push-ups!

If you would like to see the entire presentation from the conference, just click on the slide image above and get the presentation:  “Best Practices for Starting Your Product Cost Management Journey or Improvement.” 

 

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
Jun 252012
 

Today we have the third in our series of insights from the article “Putting it All Together at Harley-Davidson.”

At the end of the article, Pete Schmitz strikes a chord in my heart when talking about supplier selection:

 

 

[Schmitz] Don’t pave a cowpath! We believe in never automating a bad process – first, fix the process, do a solid supplier selection, then automate it. The tools are only so good – at the core it is the philosophy.

I believe this is a brilliant observation.  Too often, companies that want to get involved in Product Cost Management kick start their PCM efforts after a particularly painful event where they missed a profit or product cost target on a specific product.  Often, their first impulse is, “What tool can help me solve this problem?”   That is just human nature, especially in our modern technological society, to look for an instant, easy, off-the-shelf solution to all the things that bring us woe.  Isn’t there an app for that?  For most complex problems in life, there is not an app for it, and if there is, that app does not work in isolation.  To make a tool work well, we have to assume that three other elements are considered:

  1. Culture
  2. Process
  3. Roles

We talked about these three elements and the fourth (Tools) in our discussion on the PCM World Map before.  I would argue that you need to start with Process.  Depending on the maturity of your Product Cost Management culture, you may be able to handle a more or less complicated set of PCM processes.  However, Pete Schmitz at least takes the focus from Tools up to the Process, which is major progress.

His analogy is interesting.  If you have a traffic problem, and the road connecting two places in a winding narrow cowpath, the solution is not to pave the winding road.  Cars move faster than cows and are wider.    Cows make cowpaths seeking the path of least resistance and not being able to remove inherent natural roadblocks and bottlenecks.  But, if you need to move thousands of cars per hour, you would look at the two places and see where the straightest path would be.  Within reason and technical ability, you will invest in removing the natural roadblocks first and then lay down a solid foundation, before paving a wide road.

Think of Product Cost Management like this too.  Buying the software tools to supercharge your process is the last step in your journey.  Consider the diagram to the right.

Fix the process in Product Cost Management Hiller Associates

Don’t Pave the Cowpath –> Simply and Supercharge!

Most people want to buy tools to speed up an existing PCM process.  However, there are usually many inherent problems, including:

  • There is NO Product Cost Management process to begin with
  • The old PCM process assumes a certain level of tools and roles/team attention
  • The old PCM process developed in an emergent way, i.e. no one ever design it; it just happened.
  • The old PCM process assumes a much lower priority on profit and product cost and the company wants in the future.
Assuming your firm is already clear on your PCM goals, the firm first should lay out the PCM process that will accomplish those goals, which are specific to its corporate culture.

As shown on the diagram, when you focus exclusively on the new tool, the firm will simply move from the existing process on the left to the the upper right diagram.  Here, the firm keeps the old byzantine cowpath process that was constructed with more primitive (or no) PCM tools in mind.  At best, the firm is just slightly speeding up the wrong process with new tools.  However, often the firm will realize no benefit from the new PCM tools, and they may even slow the process down further!

Compare this to the diagram at the bottom right.  Here, the process has been re-designed and value streamed with the the availability of newer tools in mind.  The firm has removed old process steps that are no longer value added.  In the bottom right process, the same PCM tools can much better supercharge a clean straight process.

Don’t pave the cowpath; plan the Product Cost Management autobahn.

 

Eric

Note: there is no PCM Tool today that can handle all of the many varied use cases most firms have for Product Cost Management.    You may likely need more than one of them and some of your own internal tools.  This is no reason for despair, though.  By realizing this and picking the PCM toolset that seamlessly threads into your PCM process, this is your opportunity to out distance your competition.

 

Jun 182012
 

To continue my thoughts from last week’s blog regarding the article  “Putting it All Together at Harley-Davidson“, I’ve put together some additional insights below.

Keep Your Product Cost Management Promises and Don’t Force Others into Promises They Can’t Keep

I am reminded of a story about, Saint Augustine of Hippo, a brilliant theologian, who meets a young boy along the Mediterranean sea sea shore  one day.  As the story goes, Augustine had gone for a walk to clear his prodigious brain, trying to fathom the Christian mystery of the Trinity.  He sees a little boy running back and forth between the sea and a hole that the boy dug on the beach.  The boy uses a little bucket to transfer water from the sea to the hole.  Augustine asks the little boy what he is doing, and the boy replies that he is draining the ocean.  Augustine laughs at him and tells him that his goal is ludicrous, and he’ll never do it.    At this, the little boy replies to the great Doctor of the Church, “I’ll accomplish MY goal before you get to yours!”

Spiritual implications aside, the secular point is that there are goals that cannot be achieved.  In the article, Schmitz talks about his time at Honda:

“Plus, at Honda we learned to never miss a target, to never make a commitment that we couldn’t keep.”

That is a subtle, but important point.  I don’t believe the bigger problem is people not keeping realistic commitments, but forcing the team for sign up to unrealistic commitments.  The culture of US business has morphed to a state where everyone must accept “stretch” goals, some of which are ridiculous.  In addition, eager managers make assumptions about the execution of projects.  Getting a project authorized is the equivalent to assuming that that the Boston Red Sox will hit 3 home runs per inning for a whole game.  Managers who accept such ludicrous targets are “inspiring leaders with a ‘can-do’ attitude;”  while those who cry foul on silly expectations are “negative” and “not team players.”   The article on Harley seems to say that Honda has at least partially overcome this problem and is a bit more realistic in goal setting and acceptance.

Reality Cannot Be Fooled Repeatedly for Very Long

There are “stretch” goals, and then there are miracles.  For example, consider the picture below.  Boiling the ocean in Product Cost Management Hiller AssociatesThis leads us to ask, how do you know if your goal is too aggressive in Product Cost Management?   I don’t have an exact answer, but I would suggest that people think of goal setting like tolerance stack up.   Managers should remember back to the days when they were engineers.  If a design is so delicate that all parts must have extremely tight tolerances and must be heated/cooled to assemble, would you say this is a design that will ever work in the real world of production?  No.  Alright, so when you are setting your product cost targets, reduction targets, or any other target, consider what intermediate goals must be reached to accomplish the overall target.   It is a lot easier to assess the chance of accomplishing the more narrow intermediate goals than the big longer term goal.  If you need flawless execution on each intermediate goal to achieve the overall goal, you may want to consider whether or not you are boiling the ocean.

Part 3 in this series is coming soon.

May 212012
 

In last week’s post “Do you hear the voices? (Voices Series, Part 1) ” we talked about the different voices that speak throughout the product life cycle and how they relate to Product Cost Management. This week, we’ll talk about some voices give bad advice and expectations. As the diagram to the left shows (click to enlarge), there are at least two typical conversations happening in the product life cycle. The conversation at the top shows the voices that are beneficial to Product Cost Management and help lead to a profitable product. The conversation at the bottom has some of the same voices, but also replaces some of the voices with new, discordant voices, who more often than not, lead to an unprofitable product.

Voices in Product Cost Management Hiller Associates

CLICK TO ENLARGE Good and Bad Product Cost Conversations

Hope is Not a Strategy

Organizations have a variety of excuses for why they don’t let the Voice of Reason limit the finance team’s desires for product cost or profit. The same is true for not listening to the Voice of Intent (seriously evaluating alternatives in concept design and costing them), and for having no Voice of Engineering (not doing product cost management in engineering or being lax on cost roll-ups). These voices are replaced by a new voice:  the Voice of Hope!
“Hope” — that sounds pretty positive, doesn’t it? However, as Rick Page taught us in his book, if hope is not a strategy for sales, why would a company think it is a good strategy for its Product Cost Management? The difference between a conversation on product cost with the Voices of Reason / Intent / Engineering vs. a conversation with only the Voice of Hope is the difference between a profitable and unprofitable product.

The Voice of Resignation (…or Eeyore)

Eeyore Voices in Product Cost Management Hiller Associates

Voice of Resignation

This brings us to the Voice of Partners and the Market, i.e. your suppliers and factory who have to actually deliver your new product. The supplier or plant will determine the price at which they are willing to sell to you.

People often add pernicious voices to the conversation that are manic depressive opposites.   The first is the Voice of Resignation.  If you have kids, or if you ever were a kid, you may know this as the Voice of Eeyore.   Eeyore is the lovable, but chronically dejected donkey in Winnie the Pooh.    This voice says, “I don’t care what your ‘should-cost’ says.  This is what the market will sell for, so I guess that I have to buy at that price.”

The Voice of the Bullying (…800 lbs and growing)

The manic brother of the Voice of Resignation is the Voice of Bullying.  However, instead of Tigger as the opposite of Eeyore, we have another mascot for this voice — the 800 pound gorilla.  After all, Tigger is more of an annoyance than a bully.    The Voice of Bullying

Gorillas in Product Cost Management Hiller Associates

The 800 Lbs Customer Purchaser

says:  “We’re the 800 pound gorilla customer, and we’ll use our weight to force some cost reductions with the supplier.”  Is the price requested reasonable?  The 800 pound gorilla doesn’t care, because he needs the price to be what he wants it to be for one of several reasons that are beyond explanation in this post.  I plan to discuss the reasons more fully in a subsequent post, but for now we’ll just list them as the following:

  1. Cost was never targeted properly in the first place (a.k.a. the Voice of Hope was listened to over the Voice of Reason)
  2. Engineering let things get out of control (a.k.a. the Voice of Sound Cost Engineering was replaced with the Voice of Hope… or apathy)
  3. The Voice of the Ghost-of-Product-Costs-Past haunts purchasing (a.k.a. the demand for post-launch cost reductions)
So, how do we silence, or better yet, learn from the Voice of Resignation and the Voice of Bullying, while keeping them in control?  I’ll leave that for next time.
Apr 232012
 

 

Today, I’d like to talk about when it is prudent to poke the tiger, so to speak. During a client visit a few weeks ago, I learned of two situations the company had experienced involving re-quoting parts with the supplier. Although the situations were similar, they resulted in two exactly opposite outcomes – one happy, one sad. The happy situation went like this:

 

We had the big casting on a housing of our product. One day we were talking in passing about how this casting cost us $500. One of our machinists overheard us and his eyes popped open. He exclaimed, ‘$500! That is only about a $100 casting!’ So, we made a very gentle inquiry of the supplier about this casting’s cost, and before we even mentioned shopping the part, they had dropped the part price to $150. On one hand, we were happy, but on the other, we wondered, were these guys cheating us? How many other parts like this were in our bills of materials?

Later that day, I found out about the sad re-quoting situation:

We were trying to find savings on a bucket of parts and thought we had an interesting design change that could lower cost. Our supplier was happy to recalculate based on the design change as time had played a role in the price of parts. He said, “I think that there will be a $14 per part savings for the design change, but this part was quoted five years ago and the material cost and our costs are now higher. The increase is over $20 on old design and $15 on the new design. I’m sorry for this, but we have to ask for a price increase, because we are upside down on this part.”

These situations highlight a lot of latent problems, forcing me to ask:

  • How did a $150 part get through quoting at $500?
  • Why was material cost not indexed on these parts, so that the OEM and the supplier were protected and unsurprised by raw material price changes?
  • Is the spend reviewed on a regular basis by a spend analytics tool that looks for outliers (positive and negative)?
  • Etc. etc.

These answers to these questions are beyond the time that we have today. What this company needed in both situations was a good, speedy, should-cost process and a tool to support their quoting, re-quoting, and re-design processes. However, there are a few things that this company could have asked immediately (without a should-cost tool)? The following five questions are a powerful and fast filter to determine were a company should look deeper into re-quoting or not.

  1. What is the change in raw material price from the time the part was quoted – You know when the part was last quoted, its composition, and mass. It’s even better if you know the portion of the Piece Part Cost that comes from raw material, but you don’t really need it. There are paid sites such as American Metals Market, MetalMiner, London Metal Exchange, and Plastics News that calculate materials pricing. You can also access free data  from the US government at the Bureau of Labor Statistics. Look up the price of the materials on the date you last quoted and today. Take the part mass and calculate what the difference would be. Then you will be able to avoid poking the tiger of asking for a re-quote when the cost of the raw material has risen significantly (as we see in the second situation above).
  2. Was the part quoted in a bundle or individually? Parts that are quoted in packages and bundles typically have less precise pricing from the supplier than individual parts. The supplier will want to make money on the bundle and may not put in that much effort to see that they are making appropriate profit (not too high or low) on an individual part. There may be more opportunity on a bundled part than on an individually quoted part. But, beware, you risk ‘cherry picking’ the part with the supplier and damaging your relationship with them. Also, you should check whether your contract on a bundled part even allows you to re-quote an individual part, or only the entire bundle.
  3. What is your buyers relationship with the supplier? – Although business is business, people still buy from people and make decisions in a way that is not always wholly rational, i.e. goodwill and bad will matter. If you are dealing with a supplier whose relationship is rocky with your company, make sure that the amount of money you think you will save on your part is worth potentially souring the relationship. Conversely, your part may become a battlefield where the buyer and the supplier fight out an existing cold war that has been brewing between them. Your part may get punished for reasons that have nothing to do with the situation at hand.

    Cost per mass in Product Cost Management Hiller Associates

    Click to Enlarge: Cost per Mass Analysis

  4.  Do a simple cost/mass spend analysis on Piece Part Cost of that commodity – Pricing and cost are not precise sciences, but they do follow general trends. You don’t have to do a full and fancy spend analysis, but you can do a back of the envelop spend analysis that will point out the big opportunities and risks. All you have to do is ask for the costs and masses of 30 -50 parts of same type of commodity that you are interested in re-quoting (e.g. castings, forgings, sheet metal, etc.). You should be able to export this info from your company’s ERP, MRP, SRM, etc. system. Just graph the cost versus mass and graphically consider if there “looks” like there might be an opportunity. This simple method would have prevented the first situation described above.
  5. Do a simple cost/mass spend analysis on the non-raw material costs portion of Piece Part Costs of that commodity– This method is a little more fancy but can highlight outliers a little more accurately. Remember that you already have a raw material cost approximation from the first question. Just calculate the Non_raw Material_Cost = Piece_part_cost – (CostCurrent_Raw_material_price * Part_Mass). Graph the Non_raw Material_Cost versus part mass (like we did in 4). Once again, look to see if your part of interest is or is not an outlier.

    Outliers Product Cost Management Hiller Associates

    Click to Enlarge: Non-Material Cost per Mass Analysis

The great thing about suggestion 4 and 5 is that once you have done the mini-analysis for a commodity, other parts in the that commodity can be compared quickly.

To re-quote or not to re-quote – that is the question. Hopefully, the five considerations explain here today will help you answer that question a little more confidently.

 

 

As an aside… I was having trouble when researching this subject beyond my knowledge on the web. I.E. I could not find other articles on things to consider before asking for a re-quote. Does anyone know of articles that are relevant on the net, or is this only covered in books, or the tribal knowledge of gray haired purchasing agents?

 

 

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