Apr 292013
 

If you are a Product Cost Management person with an inner nerd like us, then you probably love and the Lord of the Rings trilogy by JRR Tolkien. One of the iconic characters in the book is the king in exile, wondering the wilds as a Robin Hoodesque type of character, a man named Aragorn.  One of the things that makes this character so compelling is the fact that he, and his brothers-in-arms, the Dunedain Rangers, secretly wander the wilds protecting those who are blissfully unaware of the evil all around them.  

Why do we love Aragorn, who goes by the nom de guerre “Strider” so much? It’s because Aragorn is unpretentious, self-sufficient, self-sacrificing, and yet dangerous and mysterious at the same time. Aragorn gets things done, even when those around him don’t realize it.  And when those around him do get to know him, they are astounded at just how powerful, efficient, and clever he is.

Yes, Strider is a misunderstood man, as Mr. Butterbur, the bartender at the Prancing Pony, the inn at Bree says,

He’s one of them rangers. Dangerous folk they are — wandering the wilds. What his right name is I’ve never heard, but around here, he’s known as Strider.

Strider and the rest of the Rangers don’t really have a home, and so it is also with Product Cost Management in most organizations. It’s very rare to find Product Cost Management a department that is not a part of a larger organization. And, it is always seems to be the red-headed stepchild of that organization.  No one really knows exactly who these guys are or what they do, except that “I think they know a lot about cost and manufacturing stuff.”  Product Cost Management never seems to fit in with the organization in which it has been placed, and everyone is always wondering if it really belongs in another organization.

So where does product cost management belong in the organization? That’s a difficult question because Product Cost Management relies so heavily on information from four different organizations. In order to do their work of profit maximization, expert in PCM deep domain knowledge of the following:

  • What is the geometry a part, a subsystem, a product, and how does the geometric features, tolerance, and materials of these physical items relate to their costs?
  • What is the costing structure of the organization, what are its overhead rates, what are its labor rates?
  • What suppliers does the organization have and what are the cost structures of these organizations? What are their manufacturing capabilities?
  • What is the organization’s internal manufacturing capabilities?

Where Product Cost Management lives in the company Hiller Associates

These are very broad pieces of information that are flung across the organization. If we look at the figure above, we see that these pieces of information are hidden in the four main functions of a manufacturing company: engineering, finance, purchasing, and manufacturing. Product cost management, like the Rangers in JRR Tolkien’s trilogy, seems to live in the no man’s land or wilderness between these organizations, where few people from any of the four organizations are comfortable operating.

Why are most people so uncomfortable operating in this nexus? Well, that’s a subject for our next post.

 

  5 Responses to “The Rangers of the Wilds – Where does product cost management live in the organization?”

  1. Thank you for the praise, Kalrav.

  2. I agree with the Ranger persona attached to the PCM operative. In our experience though, if one person in an organization exists with the knowledge and skills at the confluence of the four disciplines of Engineering, Finance, Manufacturing, and Purchasing, then that person can drive an effective PCM deployment.

    The most successful PCM operations are not placed in with the other disciplines. They are stand-alone and report directly to the Operations VP and are staffed with PCM specialists. They are staffed and managed with engineers who know accounting, manufacturing and purchasing procedures through direct experience or in-department training.

    • Alice,

      Thank you for your thoughtful comment. I agree with your suggesting that PCM should report at a higher level. I am curious, how many times (in absolute number and as relative % of manufacturing companies) have you guys seen PCM actually reporting as you suggest? I.E. how often does PCM operate as an antonymous entity reporting directly to a high level exec?

      Eric

  3. […] Finance and Accounting in Product Cost Management? (Part 1 of Pete Schmitz at Harley-Davidson) The Rangers of the Wilds – Where does product cost management live in the organization? Project Cost Management vs. Product Cost Management World Map of Product Cost […]

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