What’s the Price (WTP) — PCM / Spend Analytics Solution Profile

Mar 092020

Hello again cost management aficionados!

I would like to announce the first in my series of deep dive profiles on specific product cost management software solutions. You all may remember that I did a two-part series on the history and landscape of PCM and Spend Analytics solutions with our good friends over at SpendMatters.com in December. You can find those jumping off point analysis here and here.

As of late last week, we posted the first of our deep dives on one of the solutions, What’s the Price (WTP). Please check it out over at Spend Matters. One caveat: I have been the victim of my own success in that Spend Matters thinks the article such good content that you will see a teaser article and then need to pass through their paywall to see the full analysis.

WTP is really intriguing as a software solution, so I hope you enjoy the analysis!

Here’s a teaser of some of the insight that you’ll get:

Click here to read more!

Eric A. Hiller

SEER Composites Brings Cost Estimating to CATIA

Product Cost Management, Product Lifecycle Management, Software Tools (for PCM, ERP, PLM, etc.), Uncategorized 1 Response »

Mar 202014

Hiller Associates posted the following article at ENGINEERING.COM yesterday. You can read it there at this link, or just keep reading below!

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Another solid piton in the cliff of making product cost mainstream in CAD / PLM Products?

CATIA users can now get a faster and more effective way to design and source composites products with the highest profit by bringing the estimation ability closer to the designer’s native environment. Galorath Incorporated debuted its newest integration of SEER® for Manufacturing with the Dassault Systems 3DEXPERIENCE® Platform in CATIA at the JEC Composites conference in Paris. The new product is called the SEER Ply Cost Estimator.

Who is involved?

Galorath Incorporated grew out of a consulting practice focused on product cost estimation, control, and reduction that began in the late 1970

s. Over the last 30 years, Galorath built their costing knowledge into the SEER suite of software products. SEER is one of the independent product cost estimating software companies.

Dassualt Systems is one of the “big 3” Product Lifecycle Management (PLM) companies in the world.

Hiller Associates spoke with Galorath CEO Dan Galorath, Vice President of Sales & Marketing Brian Glauser, and SEER for Manufacturing product lead Dr. Chris Rush and got a full product demo.

What does this integration do?

The integration allows users of CATIA to use SEER’s costing software for composite materials within the CATIA environment. In CATIA, the engineer designs a lay-up for a composite part, generating a Ply Table (a critical design artifact for composite parts that specifies material, geometry, and some manufacturing info). That activates the integrated SEER Ply Cost Estimator so that the designer (or the cost engineer or purchasing person aiding him) can set up more part-specific costing choices and preferences within the CATIA environment.

When ready, the user pushes the cost analysis button. The information is processed by SEER Ply Cost Estimator which sends the ply table data and other information to the interfacing SEER-MFG software to compute cost. The cost data is returned and presented to the user, once again within a native CATIA screen.

How broad is the capability?

Click to ENLARGE!

Currently, the integration of SEER is applicable for parts made of composite materials. It’s a strong starting point for the integration partnership because SEER has a long experience in the field of costing composites, working with companies in the defense and aerospace verticals. Composites are also becoming more mainstream in other industries, such as automotive and consumer products. Galorath has been a major player in the US Government’s Composites Affordability Initiative (CAI), a 50/50 government/industry funded consortium including Boeing, Lockheed and Northrop Grumman that was formed to drive down the costs of composites. Galorath has also worked with Airbus in the area of composites parts costing.

Galorath’s Brian Glauser says that the SEER Ply Cost Estimator has hundreds of man-years invested, much from previous work with CAI and with aerospace companies that resulted in several of the modules already in the SEER-MFG standalone product.

The first version of the SEER Ply Cost Estimator handles many composites manufacturing processes, materials, concepts of complexity, and both variable and tooling costs. However, it does not yet directly cost the assembly of one part to another.

The initial integration will be to CATIA v5, but SEER and CATIA have signed a v6 agreement as well. That integration will follow later.

Galorath (and likely Dassault) are hoping that the SEER Ply Cost Estimator will be well received by customers and help drive many product cost benefits. If this happens, there may be demand from Dassualt’s end customers not only to improve the SEER Ply Cost Estimator, but to expand the SEER/CATIA integration to other manufacturing processes covered in SEER’s stand-alone software products such as machining, plastics, sheet metal and assembly processes.

What does it mean for Functional Level Groups?

Philippe Laufer, the CEO of CATIA was quoted saying :

“Using Galorath’s SEER for Manufacturing in CATIA…will help companies perform early trade-off analysis on the use of various materials and composites processes before manufacturing even takes place.”

Well, that has been one of the goals in Product Cost Management for a long time. If your company uses composites, the tool has the following possibilities:

Engineering – identify which design choices are driving cost and by how much
Purchasing/Manufacturing – get an early warning of what to expect from suppliers before asking for quotes or estimates (should-cost)
Cost Engineering –focal point for the cross-functional discussion about cost to drive participation, especially from engineering

It’s important to realize that this integration will have its limitations, as with any costing product. First, the current integration applies only to composites. While expensive, composites are only one type of part on the Bill of Material (BOM). You will have to go beyond the current integration of SEER/CATIA to cost the full BOM, perhaps to SEER’s standalone costing product or to those of its competitors.

Second, remember that cost is far harder to “accurately” estimate than many physical performance characteristics. While meeting an absolute cost target is important, even more important are the following:

Continuous Design Cost Improvement – If your company consistently designs lower cost products because you have superior cost estimation information, you WILL beat your competitors.
Correct Cost and Margin Negotiation – If your company is better at negotiating quotes because it can give suppliers a better understanding of what it will cost them to make your part and you can negotiate a margin that is not too high, but adequate to keep your suppliers healthy, you WILL beat your competitors¹.

What does it mean for the C-Level?

Philippe Laufer of CATIA also says:

“This [the SEER Composites integration] leads to finding out the most efficient way of manufacturing a product while meeting cost, performance, functionality, and appearance requirements.”

The C-suite doesn’t really care about composites or ply tables in and of themselves, but it does care about revenue and profit. Of course every well-marketed product will claim to improve these metrics. Regarding product cost, the good news is that Galorath and Dassault are aiming at a big target. Companies that use a lot of composites can have very high costs. For example, Boeing and Airbus have Cost of Goods Sold of 84.6% and 85.5% and Earnings before Tax of 7.2 and 3.6%, respectively². Those COGS figures are big targets on top of a highly leveraged COGS/Profit ratio.

What does it mean for Product Cost Management becoming mainstream in the enterprise software stack?

We asked Dan Galorath how long it would be before Product Cost Management was as much of the PLM ecosystem as finite element, manufacturing simulation, or environmental compliance. He replied:

“Cost estimation software will never be on every designer’s workstation, but I don’t believe that is what it means for Product Cost Management to be considered ‘mainstream.’ It’s not fully mainstream yet, but a greater need is being driven by outsourcing and the tight business environment. The procurement folks can’t only rely on internal manufacturing knowledge like they used to. They need tools like SEER to fill the gap and move the cost knowledge base forward.”

We agree with Mr. Galorath. This is another step, another piton to secure Product Cost Management onto the PLM cliff, as PCM continues to climb this steep hill.

This is the first integration point between independent Product Cost Management software companies and the PLM/ERP world since September 2012, when Siemens PLM purchased Tsetinis Perfect Costing³. PTC has built some level of cost tracking ability into Windchill, and Solidworks (owned by Dassault) has developed the first couple versions of a costing calculation module for their product.

There is still a lot of ground to cover. There are quite a few independent product cost management software tools that have costing intellectual property that can accelerate the process, especially if the big PLM companies acquire them or partner with them. When that will happen is anybody’s guess, but for now it looks like CATIA users, at least, have a viable solution for composites costing… and maybe more in the future.

1 For more information, see the Hiller Associates Industry Week Article: Your Should-cost Number is Wrong, But It Doesn’t Matter

2 Per www.morningstar.com, trailing 12 months COGS, 3/13/2014

3 Siemens buys Perfect Costing Solutions (Tsetinis), Hiller Associates, September 2012

2012 Product Cost Management Revenue Assumptions

Product Cost Management, Software Tools (for PCM, ERP, PLM, etc.) No Responses »

Apr 172013

Hello Internet and Product Cost Management industry! We’ve had strong interest in our latest article on the 2012 revenues of the Product Cost Management market. There have been several good questions that have made us want to clarify some of the assumptions in the analysis, so that people are clear on what is and is NOT included in the estimate.

Most importantly, this is an estimate of the REVENUE of the group of included vendors today in 2012. This does NOT represent the Total Addressable Market for Product Cost Management software.

The total addressable market is many times larger than the revenue of the included vendors that are estimated in 2012. In fact, we plan to write follow-up articles that discuss the total addressable market, as well as the growth rate of the current vendors in reaching that total addressable market Here’s some of the assumptions we made in the analysis:

Only the Vendors noted are estimated – The uncertainties do not explicitly take into account other vendors. They reflect the fact that most of these are private companies whose numbers are not public and that vary from year to year. Obviously, it matters where one draws the line in the analysis.
Focused on the estimation of manufactured products, not construction – there are many products in the market that focus on construction estimation, for example estimates for building an office building, an oil platform, a refinery, etc. We consider this a wholly different market. In our own experience we have rarely if ever see the companies that specialize in construction estimation also compete for the same customers for which the companies listed in this Monday’s article compete.
Not focused on job shops – there is also a separate market for software used by small “job shops.” These are small, mostly family owned businesses, that typically manufacture one type of part, for example sheet metal, machined castings, etc. Some of the included vendors may sell to a few job shops, but there software is capable of being used by bigger enterprises.
Generally Available Software – We only included vendors whose primary business involves selling a legitimate “generally available” software product (not a consulting business with internal tools)

Given these constraints, we believe this group represents over 90% of the revenue in the market today. If you know of other competitors who meet the criteria above and make over $2 million USD a year in revenue, let us know.

Keep the questions coming! We are glad there’s so much interest.

2012 Revenues in the Product Cost Management Software Market

Product Cost Management, Software Tools (for PCM, ERP, PLM, etc.) 8 Responses »

Apr 152013

Hiller Associates received a question this week from a business school asking us what the revenue of the product cost management market is. That was a very interesting question, and one that we have thought about before. However, we’ve never actually sat down to think about the question formally. So rather than answer the person privately, we thought it might be helpful to everyone to discuss this in a public forum.

Product Cost Management Software Companies Hiller Associates

Companies included in the Revenue Aggregate

There’s good news and there is bad news with respect to the estimation of the size of the Product Cost Management market. The good news is that the market is fairly self contained, i.e. there are only a certain limited number of players in that software market. However, that’s where the good news ends. There are several challenges to estimating the market size:

Private companies -80% of the players in the product cost management software market are privately held companies, either venture funded, or privately held by a small group of founding owners and managers. Therefore, their revenue numbers are closely guarded information that is not publicly available. This includes the PCM company that our managing partner, Eric Hiller, founded and at which he was the CEO and then the Chief Product Officer for many years (aPriori).
Bundling – the second challenge comes with the fact that some of the larger players bundle product cost functionality into the price of another larger product. For example, Solidworks Cost is a bundled-free option that is included whenever someone buys their professional or premium level Solidworks CAD product.

There is is one other good piece of news, which is that Hiller Associates knows most of the players in the market and speaks with them regularly. For some of them, we do know the revenue, and for others, we have a good idea. Obviously, we cannot share revenue numbers of an individual company, but this inside information will help us move the estimate from a wild guess to an educated guess.

Taking a look at the figure on the left, you will see the companies that we have included in the estimate. These are all the main players that we know of in the market. If there are others that we’ve missed, we’re very happy to learn about them and consider if we should add them to the market sizing.

2012 Revenues in the Product Cost Management Software Market

Those of you who follow this blog or have worked with Hiller Associates know that our philosophy is that point estimates are very dangerous and, often, not even that useful. Knowing the uncertainty around a cost number is just as important as having a point estimate of what that number is. We feel this holds true with any financial quantity. Therefore, we will provide a range of the size of this market. Please see the figure on the right, which shows are estimate of the total revenue of the company’s above for 2012. When given the uncertainty factors that we have discussed above, we feel the total market has a large range. Total revenue could be as low as $60 million or as high as, perhaps, $115 million.

Current market revenue of Product Cost Management Hiller Associates

Click to Enlarge!

Other questions that people should ask are how much of this revenue comes from services and how much of this revenue comes from actual licensing of product. Some of the companies included are primarily product companies, and most of the services that they offer are tightly bound around the product. Such services would include training on the software, implementation, and customization. However, there are others in the group that also maintain general consulting businesses. For example, several of these companies offer classes about product cost or subsets of product cost management, such as design for manufacturing & assembly (DFM/DFA). These are general classes which only relate peripherally to their products.

Estimate Methodology

To do our estimate, our methodology was to estimate the revenue of each of the included companies individually. We also did an estimate of the service percentage of their revenue on an individual company basis. Then we added up the aggregate numbers. You will notice from the estimate figure to the right that when all the numbers for service and product revenue or aggregated, there is approximately a 60/40% split between product and service respectively. This ratio of product vs. service revenue seems approximately correct, per our experience in the market.

It’s important to understand, that this estimate is four the actual revenue of these companies in 2012. It does not reflect the total addressable market for product cost management software, which we believe is woefully on realize that this moment. This is the first our discussions about revenue in the product cost management software market.

NEXT TIME: Growth Rate in the Product Cost Management Software Market

You want to be within 10% of the cost? (Internal Variance in Product Costing)

Product Cost Management, Purchasing / Sourcing 2 Responses »

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)

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:

What is your EXPECTATION of how “accurate” your PCM Tool’s cost forecast is to the quote forecast?
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.

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.
Don’t focus exclusively on the end cost, but on the physical and immutable concepts that cost is supposed to quantify: mass, time, tooling.
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.

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

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

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 Article by HA in Tech Clarity: PRODUCT COST MANAGEMENT AS A LINK BETWEEN ENTERPRISE SYSTEMS

PCM Technique / Cost Models, Product Cost Management, Software Tools (for PCM, ERP, PLM, etc.) No Responses »

Nov 052012

Last week, Hiller Associates published an article in Tech-Clarity with the title:

PRODUCT COST MANAGEMENT AS A LINK BETWEEN ENTERPRISE SYSTEMS

Here’s an outline of the article:

Siemens PLM recently bought Perfect Costing Solutions from Tsetinis & Partner. What does this mean?
To answer this, let’s first ask, what IS Product Cost Management and what does PCM software really “do”?
Now that we know what PCM software really does, who would value this in the Enterprise Software world?
There are look’s of possible categories of enterprise software that could value PCM software, but the most likely are PLM and ERP.
Product Cost Management software is really a bridge linking the engineering language of physical things to the rest of the organization (purchasing, supply chain, finance, manufacturing, etc.) who primary speak the financial language of dollars.
If independent PCM software companies are not bought by a large PLM or ERP player, what are the other possible options for their future?

Here’s a teaser diagram from the article, just because who doesn’t like maps?

Product Cost Management Bridge from PLM to ERP Hiller Associates

Click to Enlarge! The position of PCM Software in the Enterprise World

My thanks to Jim Brown and Tech-Clarity for the publishing platform to discuss this subject – Eric Arno Hiller

Siemens buys Perfect Costing Solutions (Tsetinis)

Product Cost Management, Software Tools (for PCM, ERP, PLM, etc.) 6 Responses »

Sep 112012

Today is a day of solemn remembrance for Americans and many around the world who remember the 9-11 attack on the the United States of America. However, there is at least one person who likely quite happy today for a very different reason: Andreas Tsetinis. Andreas is the Founder and CEO of Perfect Costing Solutions who makes Tsetinis Perfect Pro-Calc and Perfect Calcard. In the biggest Product Cost Management (PCM) news of the day, Siemens PLM (specifically the Industry Automation Division) has announced the acquisition of Perfect Costing Solutions.

What is Tsetinis and What are Its Products?

For those of you who are not familiar with Tsetinis & Partner (parent of Perfect Costing Solutions), it is an integrated product cost company of software tools and consulting services. Many people consider the software tool side of the Tsetinis business, Perfect Costing Solutions, the recognized market leader in Europe for the PCM. In the last couple of years, the product Perfect Pro-Calc has also been making inroads in the US. Perfect Costing Solutions makes two software products:

Perfect Pro-Calc – This is a cost estimation tool used primarily by costing experts. It is fed by manual input that allows predictions of cost for mechanical and some electrical parts. Perfect Pro-Calc also includes that ability to roll up costs in a hierarchical BOM structure that the user defines.
Perfect CalCard – This is a software focused on capital tooling (injection molding, casting, and stamping) cost estimation by tooling experts. It has the capability of accepting 3d solid CAD models as input to the costing process, although, I am personally not aware how advanced this ability is.

Per the Perfect Costing Solutions website, “today over 240 companies in the automotive sector and other industries successfully use our products.” Perfect Costing Solutions has 50 employees according to the Siemens press release.

What does this mean for Product Cost Management?

The last year, starting from September of 2011, has been a very eventful year in Product Cost Management. First, Solidworks unveiled its first foray into the PCM world: Solidworks Cost — the first tool, besides aPriori, that can cost parts directly from geometry. Then PTC announced Windchill Cost. Windchill is not a cost generation tool, but is a cost management / roll-up tool that builds off of Windchill. It allows customers roll-up costs generated by other softwares or methods and track and analyze these costs. Now we have the very first Product Cost Management acquisition (Perfect Costing Systems, Gmbh) by a major Product Lifecycle Management player (Siemens). This begs many questions, among them:

Will the PLM companies begin to dominate the PCM space and crowd out the pure plays?
Will Siemens attempt to build CAD Feature Based Costing abilities into Perfect Pro-Calc?
What does this mean to PCM software companies; will other players acquire specialized PCM software companies?

I am going to see if I can get an answer to these questions. In an eerie coincidence, just this week, Jim Brown of Tech Clarity and I were just discussing me writing an article about where Product Cost Management might settle out in the enterprise software landscape. It sounds like it’s time for me to write that article…

What does the rest of the PCM world think about the Siemens acquisition of Perfect Costing Systems. Please let us all know by commenting!

Do you hear the voices? (Voices Series, Part 1)

Product Cost Culture, Product Cost in Industry, Product Cost Management 4 Responses »

May 142012

Lately, it’s become popular to talk about “voices” in business, e.g. the “Voice of the Customer.” With all the voices, it is difficult not to wonder if one is listening in on a business meeting, or a group of choral composers arguing over the score’s balance, psychologists trying to diagnose a patient, or a kitschy show with karaoke singers trying to go pro. I believe that the “voice” nomenclature is the new new way to say “stakeholders,” a term that was the new way to describe the groups of people and forces of the universe that prioritize your product decisions and limit its possibilities.

All frivolity aside, the Voices framework is not a bad one. Instead of arguing over what we call the rose, I’d like to focus on WHO and WHAT those voices are with respect to Product Cost Management. Click on the diagram to the right. In this graphic, I show three categories across the product development cycle:

Voices in Product Cost Management Hiller Associates

Click to Enlarge! Voices in Product Cost Management

What are the ‘Voices’ in the discussion of product cost and profit
What are the target costs or cost statuses that the voices dictate or influence
What are the ways that people can estimate the cost target or cost

The First Voices in the Discussion Had Better Be Balanced

The first two voices are the Voice of the Customer and the Voice of the Business. The Voice of the Customer is supposed to tell you what consumers will pay for a certain bucket of product features and attributes based on perceived customer value. Understanding the weird customer dialects isn’t so easy because customers won’t give you an exact number for the price they expect, such as $44.85. If customers do give you an exact number, the number should still be considered fuzzy because customers have a hard time conceiving the value of your intended offer. It is traditionally marketing’s job to read these tea leaves in order to decipher the Voice of the Customer.

The second voice, the Voice of the Business, gives us the Product Target Price and Product (System) Level Cost Target. To illustrate, the CEO or Group VP comes in and says, “We need X total revenue and Y market share,” and the VP of Finance comes in and says “We need to have Z profit margin on the product.” Great! Right? Well, yes, but this is a TOP-DOWN cost target, or as the EE‘s in the room would say, an “open loop” control. Normal people refer to this as an “estimate” or a “guess” (a.k.a. a hope).

Trade-offs in Product Cost Management Hiller Associates

Click to Enlarge! Product Fiscal Planning Triangle

The hopeful nature of the top-down product cost target is why the next voice in the discussion is so important: the Voice of Reason. What modern businesses don’t like to think about (or have been taught not to by consultants) is that there is a fairly rigid triangle (see the figure to the left) linking the price you must charge (or the customer will pay), the feature set (value) you will deliver in the product, and the product’s cost (margin). If you set two of the corners of the triangle, the third will move to compensate. I am not saying that people cannot do better on their product cost, but there are limits.

The key is to ALSO estimate what is theoretically possible for product cost in a BOTTOMS UP way — given REASONABLE assumptions.

The bottoms-up estimate moves you from an open loop control to a closed loop control (with feedback for adjustment), as the EE’s would say. If the top-down and the bottoms-up costs are too far apart, somebody needs to throw a flag. The first figure above shows the methods one can use to get an early bottoms-up product cost estimate. Another voice that is often not heard is the Voice of Intent. People often just assume a design alternative and immediately launch into full scale engineering. But the old DARPA study told us that 80% of cost is decided in the first 20% of decision making. So, the solution is pretty obvious.

Spend significant effort and time in the concept design stage seriously generating, considering, and costing a series of alternatives with your cross-functional team of design, manufacturing, purchasing, etc.

Spend the money needed on comparative teardowns of carryover systems you plan to cost reduce and systems with new features you plan to design versus similar systems of your competitors’ products. Spend time together in a workshop evaluating your design alternatives and estimating your costs (raw material, manufacturing, shipping, etc.). You do not need triple point precision — you only need a good enough estimate to allow you to compare one alternative to another. Then you should give a REVISED Product Cost Target to management and marketing. Very little cost has been spent up to this point, so if a program needs to be stopped or modified, now is the time!

Keep the Conversation Going

The next voice that should be in the product cost discussion is the Voice of Engineering. Often, the discussion on product cost just stops for months or years until suppliers send in the first quotes at the end of the detailed design phase. However, the conversation should continue. Where is the engineering team in their cost roll-ups? Have they discovered problems and barriers that will force costly changes, or have they found clever ways to beat the cost target?

Shrink the Triangle with Should-Cost and Spend Analytics

The Voice of Partners and the Market refers to the price your suppliers (or your internal plant) will charge you to produce your design. If you want to get the best prices, it is important to understand another triangle: the Purchased Cost Triangle (to the right). The corners of this triangle are the price the supplier or plant quotes, the final cost you negotiate with the supplier/plant, and your should-cost calculations. Here’s the secret: this triangle is much more flexible and stretchy than the product fiscal planning triangle above. Powered by the number and quality of your should-cost and spend analytics estimates, you want to drive all three vertexes together and converge. Product cost is a difficult and fuzzy world; it’s even fuzzier when you have no facts (or even well-reasoned estimates) to rely upon.

Triangulating in Product Cost Management Hiller Associates

Click to Enlarge! Purchased Cost Triangle

If you want your Negotiated Costs to reflect the actual costs of manufacturing plus a reasonable supplier margin, invest heavily in good Should Cost and Spend Analytics.

If that’s too hard or too expensive… well, it’s only your product’s profit anyway, right?

Time to Pay the Piper

For the most part, the final voices settle things. The Voice of Realization happens when you actually start to make the product and do the formal accounting to see what the product actually costs. Sadly, this is where most companies spend the lion share of their product cost management effort. This is not to say that there are not opportunities to reduce costs after launch. However, this is not where companies should be spending a lot of Product Cost Management effort. Cost is pretty much set at this point, and companies should be working on the NEXT product.

The last voice is the Voice of Regulation / Responsibility. In general, the Voice of Regulation should be known up front, in regards to disposal fees or other government penalties and taxes for which the company is responsible. On the other hand, the Voice of Responsibility is trickier. The company should take its warranty predictions very seriously. Most products, though, tend to have surprises, and they are typically not positive surprises. Sometimes, the Voice of Responsibility speaks with legal authority (e.g. contractual warranty), but it should also speak to the corporate conscience to do the right thing for the customer, even when the company is not legally bound.

Next week….

This week we talked about how things SHOULD work. However, the framework and solutions presented are not how many companies DO work. Next week, we’ll talk the ad hoc and emergent system by which most companies operate, and what problems this causes.

PLM, ERP, and the Effect on Product Cost Management

Product Cost Culture, Software Tools (for PCM, ERP, PLM, etc.) 3 Responses »

Apr 302012

Michelle Boucher from Aberdeen Research just put out another nice piece of research on Product Cost Management. (Actually, it’s not about PCM specifically.) It’s called Product Development Single Source of Truth: Integrating PLM and ERP. The report delves into perennial topic of Enterprise Resource Planning (ERP) and (or versus) Product Lifecycle Management (PLM).

I have worked closely around these enterprise categories for the last 10 years, but I admit I may not be an expert of Michelle’s level. However, from my seat in the ballpark, it feels like the open warfare between PLM and ERP has now morphed into a cold war or maybe cautious Glasnost and the realization of each other’s right to exist. Michelle’s report doesn’t focus on the war between the software categories but on the end customers. The end customers know that both ERP and PLM must exist in a corporation, but they have the problem of figuring out how ERP and PLM should best work together.

The general interoperability of ERP and PLM is beyond my interest in this post. What is interesting is that there is research in the report on Product Cost Management, even if the report does not call it out specifically. Here’s a few pieces of data that I have surgically excised from much larger tables from a much larger report.

How important is Product Cost Versus Other Pressures?

Top Pressures Driving Improvements to How Products Are Developed Hiller Associates

CLICK to Enlarge: Top Pressures Driving Improvements to How Products Are Developed

Readers of Jim Brown’s blog on PLM may remember that I did a post on this very topic a few months ago. You can read it here. Take a look at the figure to the right. It appears that my intuition was right, at least with the preeminence of time-to-market as the number one priority to product development. However, I was surprised to see that Product Cost Management came in number two in importance, albeit 25% less important than time-to-market (using time-to-market as a base). Regardless, that is encouraging. So, one wonders again why more companies don’t have stronger PCM efforts?

Does PLM and/or ERP Help with Product Cost Management?

One of the tables in Michelle’s report shows the effect of a company having PLM and the effect of PLM’s level of integration with ERP on many different performance metrics. One of those metrics is whether a company meets its product cost targets or not. Take a look at the chart to the right. This is very interesting for two reasons.

CLICK to Enlarge: Performance Benefits of Integrating PLM and ERP

First, we see a range of meeting product cost targets of 65%-72%. Really? In my own research on about 40 operational companies in many different industries, the mean percent of time that companies meet product cost targets at launch is 20-30% — HALF of what Aberdeen is seeing. I wonder what the disconnect is in my data versus theirs?

Second, the report shows mean (average) of the respondents that fell in each category on the chart (having ERP but no PLM system, having PLM and ERP but unintegrated, and having both in some level of integration). As expected, the companies with some level of integration do better, but is this statistically relevant? What is the standard deviation on this data? I ask this because the range of answers I get when I ask companies how often they meet product cost targets is from 0-100% of the time.

Is PLM or ERP is Storing Product Cost Data?

CLICK to Enlarge: Data sent from ERP to PLM

Looking at the graph to the right, notice that none of the couple hundred Aberdeen respondents were pushing any cost data from PLM to ERP. They were pushing some data from ERP to PLM. I have shown the pieces that they are storing in ERP and pushing to PLM. One could argue that the “Sourcing Data” that they pushing to PLM may be quite relevant in Product Cost

Management. However, I wonder how relevant the “Costs / Actual Costs” are to PCM, given that ‘actual’ costs imply old carryover costs, which are fairly irrelevant to new designs or re-designs.

According to Aberdeen, 77% of companies do store “Item Costs” in ERP. This left me wondering, where are the other 23% of companies storing cost information? An excel spreadsheet? (have mercy!)

There’s a lot more in Michelle’s report than this narrow slice of data on PCM. So, if you don’t subscribe to Aberdeen’s research, you can sign up or just buy the report. Great data, though, Michelle. Thanks.

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