2013 February » Hiller Associates Product Cost Management

It’s not the club… it’s YOU! (Lean = Vertical Integration = Better Product Cost Management Part 2)

Feb 212013

Last week we talked about the struggle in corporate strategy between Core Competency structures and Lean manufacturing. Whereas Core Competency thinking naturally leads to more outsourcing and extended supply chains, Lean manufacturing would advocate for a geographically tight supply chain, often with more vertical integration.

So, what does this have to do with Product Cost Management. The answer is “knowledge.”

The Lack of Manufacturing Knowledge In Design

One of the biggest complaints that I get from my clients is that their teams have lost or are rapidly losing product cost knowledge in the last 10 years. This is especially acute with design engineering teams, but also effects other parts of the organization, such as purchasing. Years ago, the engineering curriculum at universities became so overloaded that manufacturing began to be pushed to the side in the education of most engineers (excepting the specific “manufacturing” engineering major). In fact, at most top engineering schools today, there is only one high level survey course in manufacturing that is part of the required curriculum.

However, manufacturing and its evangelistic design missives (design-to-cost, design-for-manufacturability, design-for-assembly, etc.) were still learnable skills that the young engineers and others could pick up on the job, over time. This is because most product companies were not only in the business of final assembly, but also in the business of sub-assembly, as well as manufacturing components from raw materials. These companies employed large amounts of manufacturing engineers who were resources for the design and purchasing teams. Even for parts and subassemblies that were purchased, the suppliers were likely close by the design centers and had long standing relationships with the OEMs.

Designers and purchasing people could literally walk down to a manufacturing floor in an internal plant or drive a few minutes to a supplier. Conversely the manufacturing engineer would walk upstairs to question engineering about a design. This is nearly impossible when suppliers are often in different countries and the firm that designs does little manufacturing themselves

The Effect of Lack of Manufacturing Knowledge on PCM Tools

One of the ways that industry has tried to remedy this situation is with sophisticated Product Cost Management software. This software codifies a lot of the tribal knowledge that resided in the manufacturing engineers head. However, these tools assume that the tool users have (1) the will and (2) the skill set to properly use a PCM Software.

There is no doubt that the PCM and DFM/DFA tools today are far more advanced than they were, even ten years ago. However, the value one derives from a tool is not a function of the tool’s capability alone. There is a bottleneck problem of using a tool to its full potential. We could say that the value the PCM tool actually gives to the organization equals:

Value of PCM Tool = (Will to use tool) * (Ability to use tool) * (Potential of the tool)

People often forget about the ability component, but this is true with any tool. People buy expensive tools, e.g. golf clubs, hoping to improve their performance. However, 90% of the time, they cannot even use the set clubs they have to their full potential. Worse yet, often more expensive or sophisticated tools are more powerful and have the potential to give more value, but they are often less forgiving of errors. If you don’t know how to use them, they will HURT your performance.

In the past, with a Lean (vertically integrated and geographically close) supply chain, people used primitive PCM tools (often only spreadsheets). On a scale of 1 (worst) to 10 (best), on average what I hear from industry is that there capability to use the tool was higher, but the tool was limited and cumbersome. The users, including design engineers, knew what decisions to make in the tool, but the tool was cumbersome. Currently, we have more of the opposite problem. The PCM tools are better and much easier to use, but most design engineers are somewhat baffled on how to make what seems like the simplest of manufacturing input decisions in the tools. The “Will to use the Tool” is another problem altogether that is beyond our discussion today. However, my experience, in general, would be represented by the following table:

These results will vary company to company, and even, from design team to design team within the company. Regardless, I wonder if we are at a breakeven state from where we were in the past today in the value we get from PCM tools… or maybe, we have even lost ground. The sad thing is that the PCM tools today ARE more user friendly and requires less of an expert to use. However, is the loss of manufacturing knowledge in design engineering is so bad that it has overwhelmed the PCM tooling ease-of-use-improvements?

What Can You Do to Help the Situation in Your Company?

Obviously, nothing is as good as the osmosis of manufacturing learning that occurs from a tightly coupled, geographically close, and vertically integrated supply chain. However, the state of your firm’s supply chain is likely out of your control personally. There is some positive movement with the re-shoring and re-integration trends in industry, in general. However, there are steps you can take to improve the value your firm derives from PCM tools.

Send Engineers Back-to-School – do you offer (or better yet, mandate) classes in Product Cost Management, DFM/DFA, Target Costing, etc. for your design team? This should be part of the continuing education of the design engineer. I am not talking about training on the PCM tools themselves (although that is needed, too), but general classes on how different parts are made, the different buckets of cost, the design cost drivers for each manufacturing process, etc.
Design Cost Reviews – This is a very low tech way to create big wins. Design reviews in which design engineers review each other’s work and offer cost saving ideas should be a regular facet of your PCM process. Even better: include the engineer’s purchasing counterpart, company manufacturing experts, and a cost engineer to lead the review
Embed Experts – Does the design team have at least one advanced manufacturing engineer or cost engineering expert for no more than 20 design engineers? If not, you should consider funding such a resource. Their salary will easily be paid for by (a) the cost reductions they they help your team identify for products already in production, (b) the costs that help the team avoid in designs before production, and (c) the speed their efforts will add to time-to-market by helping the team avoid late changes and delays due to cost overruns.

In the past, vertical integrated, geographically close supply chains helped Product Cost Management in a passive way. The pendulum may be swinging back to that structure. However, even if it does, don’t rely on the “passive” Product Cost Management to help. Take the active measures described above and get more value out of your PCM Software investment.

New! IndustryWeek Article by Hiller Associates: Product Selection versus Product Development (What the product development team can learn from shopping on Amazon.com)

Product Management No Responses »

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

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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:

First Priority: Time-to-market
Constraint: minimum performance requirements met
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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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?”
Urgency – Do we need to make this decision today? How long do we have to consider the problem before the decision must be made?
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.

BFO: Lean = Vertical Integration = Better Product Cost Management (Part 1)

Uncategorized 10 Responses »

Feb 142013

I just read the following article and was smiling wryly while experiencing a BFO (blinding flash of the obvious).

The Death of Core Competence Thinking

This article talks about the slow… the FAR too slow… death of “Core Competence” thinking. This is the concept that organizations should only focus on the 1-2 things that they are best at, e.g. marketing, and everything else should be “outsourced.” This idea was pushed with a passion after the release of The Core Competence of the Corporation by C.K. Prahalad and Gary Hamel of Harvard Business School. I guess as an HBS graduate myself I have to now bear the sins of my forefathers? Actually, these concepts go back further to the work of the famous 18th century British economist, David Ricardo, who perfected the idea of “Comparative Advantage.”

Comparative Advantage Competence Hiller Associates

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Comparative Advantage says that there is a difference between absolute advantage in making something and relative advantage. For example, in the graph to the right, we see that Country A has an absolute advantage in BOTH manufacturing guns and wheat, but the gap (Comparative Advantage) between Country A and Country B is bigger in guns than wheat. Therefore, Ricardo would say that Country A should use ALL its resources to make guns until diminishing returns lowers its Comparative Advantage below Country B’s in producting wheat.

If the chart isn’t clear, here’s a great video teaching explanation of Comparative Advantage to a background soundtrack of AC/DC; I bet your micro economics class was never this fun.

You can see how closely Ricardo’s Comparative advantage is to Core Competence theory. In fact, Core Competence builds on Ricardo’s work as a foundation.

The opposite of core competence thinking is the “Conglomerate” (a company that makes many products in many different industries) and/or “Vertical Integration” (owning the whole supply chain for a given product). Core Competence theory rails against these strategies, and American business bought it hook, line, and sinker. Why? Because, Wall Street bought it hook, line, and sinker? Why?

When Conglomerates are split up into individual companies, they must report their financials individually, so Wall Street gets better information.
When Vertical Integration is stopped and companies begin outsourcing, they will often see and immediate (though often short term) improvements in Cost of Goods Sold. And, even if they don’t see this product cost improvement, Wall Street will give the company kudos by raising the company’s stock price, anyway.

Case closed, right?

Wrong.

Until the last ten years, companies have been terrible at calculating, realizing, and internalizing the Total Cost of Ownership of outsourcing. I.e. product cost is not only about the price paid for the part, but additionally, shipping, logistics, quality/inventory risk when you have 6 weeks of parts on the ocean, inventory costs, the friction of dealing with foreign cultures with different languages in vastly different time zones, etc. Even when firms began to calculate these costs, TCO started a cultural conflict with the proponents of outsourcing and core competence.

Enter the low key and industrious Japanese. Actually, the Japanese were a force on the scene since the 1980’s, but people did not really internalize the Japanese concept of “Lean” (click for video explanation) manufacturing until the mid-1990’s. Lean has many useful concepts, but two striking features of the Lean manufacturing are (1) to have one’s suppliers geographically as close as possible to the upstream plant and (2) to often own part or all of the suppliers.

In other words Lean ~= Vertical Integration.

But how does Vertical Integration = better Product Cost Management? Check back next week!

(or, you can subscribe by email, facebook, twitter, RSS, or linked-in to the right, and we’ll check back for you!)

Today’s Product Cost Killing Tip — Control the Evil Robot Overtolerancer!

Product Cost Killing Tip, Software Tools (for PCM, ERP, PLM, etc.) 2 Responses »

Feb 112013

There were a lot of comments last week to the article we posted with the title: Only 17% Percent of Companies Meet Product Cost Target

Many people complained about the dearth of knowledge of the design engineer in Design for Manufacturability. In the discussion, we also started to propose some solutions to overcome this problem. However, one comment that sparked my interest was a comment about WHY design engineers often overtolerance parts that went beyond “they don’t know any better.” The comment paraphrased was:

A big problem we have is that we are making parts directly from the CAD model. A lot of Catia based models have a general tolerance of +- .005 [in.] on the entire part .including fillet radii and edge breaks. …these features have to be penciled off with a ball end mill instead of using a standard tool with a radius on it can kill profit on a job when you miss it when quoting.

That is a fascinating observation. There is no doubt that the Product Lifecycle Management companies will be pleased as punch that people are finally taking their drum beating on “model is master” seriously. FYI – I agree that the model should be master and that drawings should be generated from the 3d master data. However, this improvement to PLM adherence highlights what happens when new technology (a tool) is foisted upon a problem without without understanding the current processes and outcomes that the incumbent tool is satisfying. In this case, the old tool is paper drawings. With the incumbent tool, there was a title standard block that for companies, and that title block would give helpful bounding constraints such as:

Unless otherwise specified:

All dimensions +/- o.o1 inches

All radius and fillets +/1 0.02 inches

Etc.

That helpful and protective title block may not be there with a 3d, model onl,y strategy. All the evangelism on “tolerance by exception” goes right out the window what the CAD system now has default values that are overtoleranced by definition. The CAD system itself becomes… The Evil Robot Overtolerancer.

The good news is that the Evil Robots can be controlled, and you don’t even need anyone named Yoshimi to help you do it. However, it will require some thought, before you change the default tolerances in your CAD system. Some considerations to think about are:

What were the default tolerances in the title block on your drawings when the drawing was master?
Can these tolerances be reduced?
How surgically will your CAD system allow you to set default tolerances?
Do you need different tolerence ‘templates’ depending on the primary manufacturing process. E.G. tolerance defaults may be very different for a casting that is machined than for a piece of sheet metal.
How will you make your design engineers aware of these new default tolerances?

Whatever decision you make, make sure all the right people are at the table to make it together, including design engineering, the drafting team (if separate from design), purchasing, and manufacturing (including suppliers, if parts are made externally). If done thoughtfully and correctly, the setting of default tolerance will bring the Evil Robot Overtolerancer under control. If these changes are made in a vacuum or carelessly, you may find that you have made the Evil Robot 10x more powerful as an agent of chaos and profit destruction.

You want to be dealing with the friendly Autobots, not the Decepticons, right?

That’s today’s Product Cost Killing Tip!

If you have Product Cost Killing tips that you would like to share, please send them to answerstoquestions@hillerassociates.com.

Only 17% Percent of Companies Meet Product Cost Target

Product Cost in Industry, Product Cost Management 32 Responses »

Feb 042013

People complain about the profitability of products, especially early in production, but how often do products actually miss their profitability at launch?

According to the latest research by Hiller Associates, most companies miss product cost targets. We asked almost forty people from a variety of corporate functions “How often do you meet or beat product cost targets at launch?” The results follow the familiar 80/20 rule of many business phenomena. On 17% of respondents said that their companies meet cost targets Often or Very Often.

Product Cost Results goals at launch Hiller Associates

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That is not an impressive showing. We would not accept 17% as a pass completion percentage from a NFL quarterback. That’s not even a good batting average in baseball. So why do we put up with this in our companies? It’s also interesting that almost the same percentage of respondents (15%) don’t know enough about product profitability to even guess how well their companies are doing.

Companies are understandably careful with releasing actual product profit numbers. Still, it would be great to have a more in-depth academic study done, in which actual financials were analyzed to answer the same question.

How often does your company meet its product cost targets? Does anyone know in your company know? These are questions you cannot afford not to ask. Is your firm the 17%… or the 83%. If you are in the 83%, consider starting or improving your efforts in Product Cost Management.