2012 June » Hiller Associates Product Cost Management

Don’t Pave the Cowpath; Plan the Autobahn (Part 3 of Pete Schmitz at Harley-Davidson)

Product Cost Culture, Product Cost in Industry, Product Cost Management, Purchasing / Sourcing No Responses »

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:

Culture
Process
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.

What are you trying to boil? (Part 2 of Pete Schmitz at Harley-Davidson)

Product Cost Culture, Product Cost in Industry, Purchasing / Sourcing No Responses »

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. This 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.

Where’s Finance and Accounting in Product Cost Management? (Part 1 of Pete Schmitz at Harley-Davidson)

Product Cost Culture, Product Cost in Industry, Product Cost Management, Purchasing / Sourcing 8 Responses »

Jun 112012

I just read the article “Putting it All Together at Harley-Davidson” in the July 2012 [July??] Blue Heron Journal. The article is a profile on Pete Schmitz, a Honda veteran in Product Cost Management, who now works at Harley-Davidson. According to the article,:

“[Schmitz] combines procurement, design, manufacturing and cost expertise in a unique job function. Reporting up ultimately to Harley’s CFO, Schmitz describes his ten year Finance Product Cost Manager position as ‘the cat bird’s seat…we are the neutral third party in product development – getting the whole organization to work together.”

That perked up my ears right away. As many of our readers may know, Harley Davidson is a classic case study in the positive effects of successful Product Cost Management. It was an exciting article to me for several reasons. I would like to explore them in the next few days in some shorter posts. The first insight that I gained from the article is the following:

Finance Must be Involved with Purchasing and Engineering

According to the article, Harley is at the mature stage of Product Cost Management making their efforts truly cross-functional. Specifically, the finance (maybe accounting too?) people are involved directly with the engineering and purchasing groups. That is impressive. If you are familiar with Product Cost Management efforts, you know how difficult it can be just to get engineering and purchasing to work together. However, getting finance and accounting meaningfully involved is even harder in my experience. That is unfortunate, because often finance and accounting have so much of the existing data that the cost management team needs to make valid cost models, do spend analytics, etc.

I am not sure why finance and accounting often shy away from participating in PCM efforts. My own experience is that the finance and accounting people are uncomfortable with the very physical world that includes the Bill of Material (BOM) and purchasing commodities. Moreover, the PCM team often needs to recalculate overhead and other financial rates to be RELEVANT for cost management analyses. This recalculation is is very different from the RELIABILITY focused, acceptable financial accounting viewpoint with which the accounting team is comfortable. That is just a general guess from my experience over the years, but maybe a reader can provide more insight. Regardless, I would urge more finance and accounting folks to step out of their comfort zone in the financial world to participate in the physical world with engineering, purchasing, and manufacturing.

Translating from the Physical World to the Financial

At the end of the day, isn’t translating the physical into the financial what Product Cost Management is about? I actually wrote one of my first blog posts in 2007 about this concept for Jason Busch at SpendMatters. The article is called What’s The Language of Your Business? It’s very helpful to ensuring a good translation when experts in all languages are present during the translation work. Ergo, both the people that speak physical (features, functions, BOM, machines, and supplier) and people who speak financial (dollars, overhead rates, internal rate of return, net present value) need to be around the table to make sure nothing is lost in translation.

See you again soon with part 2.