Product Cost in Industry » Hiller Associates Product Cost Management

The biggest mistakes executives make in design-to-value and product cost management

Design-to-Value, Product Cost Culture, Product Cost in Industry, Product Cost Management No Responses »

Aug 272020

Eric Hiller is moonlighting on us again! This time he’s back on one of his favorite subjects, or at least two of them:

Product cost management
Design-to-value.

Although there are 1001 ways to fail at the tactical level of the project in either of these methodologies, it turns out that a lot of times these efforts fail because of executive failures in the project. Eric covers the 10 most common ways that you can sink a DtV or PCM project… and more importantly, how to avoid them!

Check out the article here:

Eric A. Hiller Reviews Top Mistakes Made by Executive Champions in Product Cost Management and DtV

Eric Hiller published the first comprehensive product review of Galorath’s SEER Suite

Product Cost in Industry, Product Cost Management, Software Tools (for PCM, ERP, PLM, etc.), Spend Analytics, Total Cost of Aquisition, Total Cost of Ownership No Responses »

Aug 072020

Good morning again, product and service cost management aficionados,

You’ve been waiting for it for awhile I’m sure ! Who doesn’t wait with bated breath for the next installment of knowledge in the product cost management world? Our founder, Eric Hiller, has been very busy with a lot of things lately, but he just completed the herculean task of doing a deep dive review on the SEER by Galorath (published at Spend Matters, where he been filling out a whole series on PCM tools, started with two articles in December 2019 (here and here)

Those of you in the product cost management world, especially if you are in the aerospace and defense industries, know a lot about the SEER suite. It’s been around for over 30 years now, growth in products, depth, and breadth. Much like Eric’s review on aPriori, which was so deep we had to explode it into two parts, the Gallery app suite is so broad that’s been matters needed to split the article into two. Apparently, it’s also so valuable it’s behind their firewall.

Here they are!:

So, you may want to check it out. And if you can’t get there and still need some advice, give us a call and maybe we can help you.

5 Questions for Better Cost Management Discussions (Industry Week Series Part 1)

Education, PCM Technique / Cost Models, Product Cost in Industry, Project Cost Management, Uncategorized No Responses »

Jul 022020

Hello Cost Management aficionados!

We have an exciting new series that our managing partner, Eric Hiller, is writing for Industry Week, who has eagerly accepted all the content. The series is all about how an executive (and other people who are not cost experts) can understand what the cost management team is communicating. The first in the series was just published yesterday. Here is a short snippet as a teaser:

A big part of the communication problem is that there is not just one type of cost model. Cost management is a broad field with a variety of methodologies to address the almost infinite world of situations for which one wants to know the cost of manufacture or service delivery. Even if an executive has some understanding of one particular cost-modeling technique, it can often be confusing when the analytics team uses different technique.

This can lead to uncomfortable meeting, where executives and colleagues outside of the cost management team are confused how to understand the results and/or have low confidence in the results. Conversely, the cost management team may feel frustrated that executives are not listening to them or do not trust their conclusions.

What is the solution? The short answer is that the product cost management team needs to better educate their audiences, not only on their results, but how they got to those results. In addition, it is incumbent upon their colleagues to be willing to learn, and invest the time to become conversant in the terminology of cost management just like they would in other function areas, e.g. product development, purchasing, finance, etc.

Please click this link to read the article: 5 Questions for Better Cost Management Discussions

We look forward to your engagement, comments , and sharing.

Thanks!

Hiller Associates

Mission critical cost management during Corona: your local pub

Operational improvement, Product Cost in Industry, Product Cost Management No Responses »

Apr 302020

Much of the time here at Hiller Associates, we focus on the “Product” in cost management. But, cost management is just a pertinent to services as well.

Our managing partner, Eric Hiller just published an article on the effect that Corona virus has had bars in a cities and the people associated with them.

Check out the published article at Market Watch.

Eric Hiller of Hiller Associates to give 1-hour Design-to-Value seminar Tuesday 3/24!

Design-to-Value, Product Cost in Industry, Project Cost Management No Responses »

Mar 202020

Want to learn about how Design-to-Value (DtV) can deliver millions in savings and growth to your company?

Running out of Netflix B-rated shows, as you self-quarantine from Corona?

Well, you’re in luck!

Eric Hiller, Managing Partner, of Hiller Associates and one of the top practitioners of DtV in the world is giving a 1-hour seminar and Q&A through GLG Research on Design-to_Value. (we’ll also talk a bit about should-cost, as well).

Please go here to sign-up and pass this link and info onto all of your friends that care about Product Cost Management, as well!

CLICK HERE to register for the free webinar and Q&A

What should it cost? (Eric publishes on the McKinsey & Company Ops Extranet)

PCM Technique / Cost Models, Product Cost in Industry, Product Cost Management, Uncategorized No Responses »

Nov 212017

Hello all!

As some of you may know, I joined McKinsey & Company a little over two years ago as an expert in their Product Development Design-to-Value practice. (Don’t tell anyone, but I do a lot of work for clients in the purchasing space, too!).

It’s been a whirlwind of a couple years, but I finally got some time to publish some new thought leadership. I just did this on McKinsey Ops Extranet, sadly not here. But, the good news is, you can join for FREE, so don’t be worried when you see you need to register.

Here’s the first. Enjoy! Oh, and may sure to 5-star my post if you read it and like it. Thanks.

What should it cost?

(Welcome to the standard costing party! What’s this all about?)

Comparing Quote Apples with Estimate Oranges

Product Cost in Industry, Purchasing / Sourcing 5 Responses »

Jul 122013

Today we are reposting the article we wrote this week for ENGINEERING.com. The original article is here and our announcement of our partnership with ENGINEERING.com is here. Enjoy!

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One of the most frustrating things for many engineers is understanding the quotes they receive from their suppliers. They want to know how these quotes compare to their own internal estimates. Unfortunately, most engineers are not skilled at getting the right answer.

Strangely, engineers are typically very good at this in their personal lives. Let’s say you’re going to buy a new stereo receiver. In a matter of minutes you have the following options laid out:

Option 1 – Amazon ($300) + Shipping ($0) + Squarespace extended Warranty ($50)
Option 2 – Amazon vendor ($270) + Shipping ($15) + Squarespace extended Warranty ($50)
Option 3 – Stereo Shop ($320) + No Shipping ($0) + Included Extended Warranty ($0)

In your personal life, you not only outline how much costs are, but where they are. That is, in which cost bucket does each dollar reside? So why is this so hard when dealing with a part quote at work? The answer is: it shouldn’t be!

Don’t ask what, ask where

The first step to unraveling quotes is to put the numbers aside – what matters first is to decide into which cost buckets each dollar should go. To illustrate this, let’s consider buying a lightly machined casting.

First ask, what resources go into delivering this casting to your shipping dock? Take a look at the figure below. On the top line in orange blocks, we show the various cost buckets for the casting. These include the raw material that is melted, the various processes that are applied, the machining, any painting, and then margin and logistics.

Hiller Associates Matching Estimates and Quotes

CLICK TO ENLARGE

Start with your estimate

We suggest that your starting point should be your own internal cost estimate from your cost expert, your spreadsheet, or from a third party Product Cost Management calculation tool.

It’s likely that the level of detail in your calculation method will be deeper than what you receive from suppliers. Even so, your tool or spreadsheet may not provide a number for each bucket of cost. In our casting example, our initial estimating method did not provide margin and logistics. Becaues these are real costs we will list them, noting that we don’t know what numbers to use for those costs at this point.

Lay out what you know from the Supplier Quotes

Now, it is time to match up your supplier quotes. We show three different quotes in the casting example. Your purchasing department may give you more quotes or less quotes. However, in our experience, three shall be the number of the quoting, and the number of the quoting shall be three. (If you don’t get that reference, please see the attached video).

The quotes you receive probably won’t line up exactly with your estimates. Suppliers, as in example Quote 3, rarely provide a detailed breakdown. Regardless, it’s important to know which costs are included in the $23.00. Are any costs included missing?

But what if I am missing a cost bucket?

It’s common to not have an estimate for every cost bucket from one single tool or spreadsheet. Thankfully, there are several methods to triangulate to a better estimate.

Look at past part quotes for similar parts.
Ask an expert. For example, your shipping department may know what it would cost to ship similar casting parts.
Use a different estimation tool that does include the missing cost bucket.
You can also surgically lift and triangulate cost buckets from the quotes themselves. For example, you could average the cost for logistics between Quote 1 and Quote 2, so your internal estimate of logistics cost becomes $1.50.

The benefits to you and your company

You may think that this exercise is just about whether you should be paying $23.00 for this casting or $20.00. That is an important question, but there are other big benefits to this method.

Missing Buckets – One of the biggest advantages to accounting for cost buckets is to identify any misunderstandings between your company and the supplier. It is better to find out now that the supplier has not included the shipping costs than to find out later.
Your time to shine in front of management – regardless of the final cost that you negotiate, if there is a question later from your management about why you paid what you paid for a part, you have a ready-made, easy-to-understand management slide prepared.
Negotiation power – deep understanding of costs is very useful when talking to the supplier with whom you decide to negotiate. Of course, you cannot show them the numbers from other suppliers’ quotes, but there is nothing wrong with showing your internal should-cost estimates.
Learning by doing – after you go through this exercise several times, you will start to develop an intuitive feel for what drives cost in a commodity class. In our example, you will start to understand the relative magnitude of machining vs. casting cost vs. raw material for lightly machined castings.

They say that “It’s not about the destination; it’s about the journey.” The good news is that with part quote evaluation, both the journey has value (as shown by the four points above) and the so does the destination (e.g. paying $20, rather than $23 for a casting). Enjoy both!

Hiller Associates becomes an author on Engineering.com

Product Cost in Industry, Purchasing / Sourcing, Uncategorized 20 Responses »

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.

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.

The Lake Wobegon effect: there are no laggards in Product Cost Management

Product Cost Culture, Product Cost in Industry 1 Response »

Jun 272013

Anyone who has ever heard the famous NPR show the Prairie Home Companion will smile warmly, remembering warm and disarming voice of legendary storyteller Garrison Keilor talking about the fictitious Minnesotan town, Lake Wobegon. Garrison’s sign-off to the show has entered pop culture: “And that’s the news from Lake Wobegon, where all the women are strong, all the men are good looking, and all the children are above average.”

We know of another place called Lake Costbegone. It’s a magical land of companies tightly clustered around a lake of profit. Lake Costbegone is the vacation spot of Product Cost Management. Lake Costbegone (and maybe many other corporate disciplines besides Product Cost Management) are similar to Lake Wobegon.

That’s right. At Lake Costbegone ALL the companies are, at least, average.

The post that we put up a couple days ago (Is the View Worth the Climb in PCM?), showed the effect on a company’s product cost, based on whether a company is best in class, industry average, or a laggard at Product Cost Management. The splitting of the companies into these three categories is almost universal in Aberdeen research reports, and other analyst firms use a similar framework, too. However, we don’t think we had ever met a client or potential client to that thinks that they are in the laggard category.

Sure, there are people that are more realistic and honest within each firm, who will tell you “off the record” that their organization is doing very badly at Product Cost Management, or whatever corporate initiative we are talking about at the time. However, no one wants to proclaim in the sight of others that their organization is a “laggard.” Apparently, admitting that your organization is not, at least, average is the corporate equivalent of a stock analyst giving a sell signal. It’s just not done. Stock analysts typically give only three signals: Strong buy, Buy, and Hold. No one really knows what “Hold” means, but we are all pretty sure it means, “You might wanna think about dumping that stock.”

Being “industry average” might mean exactly that, the organization is industry average in whatever technique on which the firm is evaluating themselves. However, they could also be a laggard in need of great improvement, but just don’t want to admit it.

Hiller Associates effect of Product Cost Management

CLICK TO ENLARGE!

The funny thing about the post from a couple days ago is that the gap or potential between industry average and best-in-class companies is actually *bigger* than the gap between the laggards and the industry average (see figure to the left). Therefore, if you are in the industry average, you should be quite excited about getting to best-in-class, because there is a big carrot to do that.

Our opinion is that companies are better off when they mistakenly consider themselves laggards when they are really industry average than when they consider themselves industry average when they are really a laggard. The industry average designation is much more of an invitation to apathy in Product Cost Management. No one wants to be the laggard, and that’s a good thing! What’s the worst thing that can happen, after all? If you misclassify yourself as a laggard and you actually are the industry average, your effort to get out of laggard state will probably move into being best-in-class.

And that doesn’t seem like such a bad thing.

Is the View Worth the Climb in Product Cost Management?

Product Cost in Industry, Product Cost Management, Uncategorized No Responses »

Jun 242013

I worked with a colleague once that used the expression: “Is the view worth the climb?” That’s an interesting expression and a very visceral way of expressing the fear that we all have when undertaking a new project in our companies. New projects always require not only capital in the form of money, but also to human capital in the form of resources, emotion, and hard work. Careers can be made by a successful project… or destroyed by a major project gone awry. Is the view really worth the climb? Will the rewards be worth the effort?

For example, it’s easy to say that people should work on increasing their profit by reducing their product cost. We all understand that this intuitively seems like a good thing to do. Mathematically, who can argue? If you reduce your product cost, you create profit that drops the bottom line. The question is: how much profit will drop to the bottom line? Is the view worth the climb?

CLICK TO ENLARGE!

To answer this question, let’s take a look at a graph we made of data from a 2010 Aberdeen study on product cost. The graph shows the average effect on product cost over two year period for companies. The companies were broken into the standard three Aberdeen categories (Best-in-Class, Industry Average, and Laggards) based on other criteria of how they manage their Product Cost Management efforts.

The results were pretty impressive. In two years, best-in-class practitioners of Product Cost Management reduced the cost of their products on average by 7%, whereas companies that were average practitioners of Product Cost Management were only able to reduce cost by an average of 1% .

Let’s put this in perspective. The table below shows an example company with $10 billion in revenue, 80% product cost (as a percent of sales), and a 5% net margin. On an annualized basis, the difference between best-in-class and the industry average is the difference between $560 million and $80 million, respectively, of extra profit. Note also that the laggard’s product costs increased 3% per year equating to a $240 million profit loss.

Hiller_Associates_profit_from_Product_Cost_Management

CLICK TO ENLARGE!

These numbers represent the view (the results), but what about the climb (the investment)? The Aberdeen study does not investigate this. However, one should ask: how much money *should* the company be willing to invest to capture an incremental $480 million per year of profit? 100 million? 50 million? $25 million? What about $10 million? Would your company even invest $10 million?

It’s something to think about.

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