aPriori — PCM / Spend Analytics Solution Profile

Jun 092020

Hello again cost management aficionados!

Spend Matters just published Eric Hillers’s next deep dive on cost management tools — this time on the article reviewing aPriori. They decided to break it into 2 articles. The first one went up on June 8

https://spendmatters.com/2020/06/08/apriori-product-cost-management-tool-spotlight-part-1-solution-overview/

It is behind their paywall, so you will only see a teaser of a few paragraphs, unless you have a subscription.

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.

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.

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

That can’t be right!? (Linearity and Discontinuity in Pricing and Costing)

Product Pricing, Project Cost Management, Uncategorized 19 Responses »

May 142014

Have you ever walked into a dining room with several pictures and seen that one picture that is not hanging parallel to the floor? If you’re a recovering engineer like me, you feel an overwhelming urge to correct the problem. You just can’t be comfortable until the frame is in alignment… unless you find your molding or floor/ceiling are not parallel. Then you have bigger problems!

Why does a slight misalignment (maybe just a couple degrees off bubble) set off instant and loud alarm bells in your brain? It’s because the human brain is very sensitive to two things:

Linearity/symmetry
Discontinuity (especially non-monotonic functions)

I was having a lively discussion the other day with a director of pricing at a Fortune 500 distributor. We were talking about how this affects product pricing. For example, when you have a catalogue with millions of products, it can be very challenging to keep pricing consistent. Consider the figure to the right. The orange dots could be product offerings for electric motors, graphed by the price vs. a performance attribute, such as horsepower. We expect price to increase with performance. But what happens when you find the blue or green dots? The brain says “that’s not right!”

Now, there may be legitimate reasons for the negative or positive arbitrage. Maybe there is a sale? Maybe there is an economy of scale on selling that particular model? However, that brings us to the next challenge, pricing functions that are not monotonically increasing (i.e. they have a negative slope for at least one product model). This is a problem, because this is difficult for even economies of scale to overcome. And, the customer does not like it, because it makes the vendor look as if their pricing is capricious, which causes distrust.

Discontinuity in Product Costing

This happens in costing too. For example, although “sunk cost” is an important concept in capital investment, it can wreak havoc on product costing. If a certain machine is fully depreciated and now has a greatly reduced overhead rate assigned by the accounting department, this will likely confuse the purchasing or engineering folks using a Product Cost Management software. It will either cause them to distrust the costing software or your manual analysis or it will drive them to cost all the parts they can using that

This is yet another curse of the difference between the data relevance needs in order to perform good cost or pricing analysis versus the data reliability needs, over which accountants typically obsess. From an accounting point of view the depreciated resource is “free” (or highly discounted). However, from a costing viewpoint, the abilities of that machine will have to be replaced sooner or later. Worse, the distortion in the overhead rate will lead to underestimations of cost, and often, unpleasant surprises late in product development and sourcing.

What to do about non-linearity, discontinuity, and non-monotonic pricing/costing functions:

You have a couple of choices on how to resolve the geometric costing/pricing problems in the minds of your customers or colleagues:

Remove them – the first solution is to correct the false arbitrage by fixing the pricing or costing data. For example, in the case of the machine that is fully depreciated, change the overhead rate back to reflect the cost at which a new machine with the same capability would depreciate.
Highlight them – if the pricing or costing curve has an unexpected kink in it for a legitimate reason, then you should make everyone aware of this and use it to your advantage. For example, in the catalogue motor example, advertise the sale and let people know this is not natural or permanent!

A lot of mistakes in pricing or costing are difficult to notice without close inspection, but remember anything that violates the brains desire for smooth regularity will stick out like a sore thumb… or a good deal.

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 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

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!

The Voice of Should-Cost (Voices Series, Part 3)

PCM Technique / Cost Models, Product Cost Culture, Purchasing / Sourcing, Uncategorized 4 Responses »

Jul 092012

It’s been a couple of weeks, since we discussed the Voices series, so if this post is interesting to you, you may want to go back and read the first two:

In these first two articles we introduced several of the voices that are always present in the Product Cost Management conversation, including:

The Voice of Hopefulness – the Pollyanna voice that assumes product cost will just work itself out in the end. It is a voice of justification to ignore Product Cost Management, because the team is just too busy at XYZ point in the development process to seriously consider product cost. Hope is NOT a strategy.
The Voice of Resignation – the nihilist voice that assumes that you have to accept high prices because the three suppliers that purchasing quoted gave you pricing far higher than what seems reasonable
The Voice of Bullying – the seemingly unreasonable scream of the customer telling you what your product should cost — not based on reality, but based on the customer’s own financial targets.

However, there is another voice in the conversation that can bring some reason to the cacophony. It is a voices of reason — the Voice of Should-cost.

Buck-up Cowboy. The Voice of Should-cost Can Help

Should-cost is just what it sounds like, using one or more techniques to provide an independent estimate of what the cost of a part or product “should” be. The question is, what does “should” really mean? For many, the definition depends on the type of cost being calculated, as well as personal should-cost calculation preferences. I will provide my own definition here, mostly targeted at providing a should-cost for a discretely manufactured part.

Should-Cost – The process of providing an independent estimate of cost for a part, assembly, component, etc. The should-cost is based on a specific design, that is made with a specific manufacturing process, and at a supplier with a specific financial structure. Or, the should-cost is calculated assuming a fictitious supplier in a given region of the world that uses the best manufacturing technology, efficiency operating at maximum sustainable capacity.

I realize that this is a broad definition, but as I said, it depends what you want to estimate. For instance, do you know the supplier’s exact manufacturing routing, overhead and labor rates, machine types, etc.? In this case, do you want to estimate what it “should” cost to manufacture the part under these conditions? OR… do you want to know what the cost “should” be for a new supplier who is well-suited to manufacture your design and has a healthy but not overheated order book? Although you could make many other assumptions, the point is: KNOW YOUR ASSUMPTIONS. You will note that I said nothing about margin. Some people call this a “Should-Price,” while others call it a “Should-Cost” referring to what they will pay vs. what the part costs the supplier to make. The only difference is that you will also make an assumption for a “reasonable” margin for a Should-Price.

The important point is that the team relying on the should-cost information must define the scenario for which they want a should-cost estimate. There is nothing wrong with wanting an answer for all these scenarios. In fact, it’s preferable. Run the calculation / estimate more than once.

Should-cost, Should Be a Choir, not a Solo Act

Manufacturing cost is a very tricky thing to calculate. I often say that the true cost of the economic resources to make a part or product is a number known but to God. Put statistically, you can’t know the true meaning or standard deviation of a population, you can only estimate it from the samples that you take. People take two common approaches to should-cost.

The Pop Star Solo Act

The popular solution that too many people pursue is the solution pictured at the right.

There’s no easy button to should-cost

They want the easy button — the single source of truth. They want the plasticized overproduced solo pop star version of should cost, i.e. the easy button tool. There’s nothing wrong with this and there are some really good should-cost solutions available, but none of them are infallible. In addition, it is not appropriate to put the same should-cost effort into each part or assembly in a problem. One should focus where the money is. However, too many people, especially cost management experts, become sycophants of one particular tool to the exclusion of others.

Single estimates in Product Cost Hiller Associates

The Lonely World of a Solo Should-cost Voice

Looking at the diagram to the left, you can see what the landscape looks like when you make your comparisons to one point in cost space. It is an uncertain, scary world when you only have one point of reference. In this case, all one can do is try to force a supplier to match the should-cost output of your favorite tool.

The Andrews Sisters, Competitive Trio Quoting

The other very popular approach comes from the purchasing department: three competitive quotes. If the auto-tuned single pop star should-cost is too uncertain, purchasing will listen to a trio instead. Why three quotes?

Supplier quotes in Product Cost Hiller Associates

The Trio of Should-cost Quoting

No one seems to know, but in EVERY purchasing department with which I have ever worked, three shall be the number of the quoting, and the number of the quoting shall be three. [If you are an engineer, you know my allusion. If not, watch the video to the left!] The trio of quotes in the diagram to the right do help clarify the picture a little better, but there is still too much uncertainty and what I call “commercial noise” to really believe that the quotes alone bound what the should-cost plus a reasonable margin is in reality.

An Ensemble of Should-Cost Estimates

Returning to our statistics example, one of the first things you learn in statistics is that it takes about 33 samples to characterize a bell curve distribution. At 33 samples, you can start to approximate the true mean and standard deviation of the actual population. I am not saying that one needs 33 estimates of should-cost to triangulate on the true cost, but you should get as many as you can within a reasonable time frame. Have a look at the diagram at the right to see this illustrated. Instead of the single pop star approach or the Andrews Sisters trio of quotes, hopefully what you get is a well-tuned small chorus of voices who start to drown out the Voices of Resignation, Hope, and Bullying. The chorus of should-cost estimates start to bound the “true” should-cost of the part or product and can give the team a lot more confidence.

Triangulating on Product Cost Hiller Associates

Chorus of Should Cost [CLICK TO ENLARGE!]

Sometimes the team does not have time to assemble all the voices of should-cost. Not all parts or products are worth assembling the full choir. More often than not, the organization is either unaware of the should-cost voices at its disposal, or are just too lazy to assemble them.

Don’t let your organization be lazy or sloppy with respect to should-cost, and remember that the best music is made when groups of instruments and voices work together, not when one person sings in isolation.

p.s. Bonus PCM points if you can guess what a cappella group is pictured in the thumb nail to the post

Costing Electric Components — A Free Tool the EE’s will Like!

Software Tools (for PCM, ERP, PLM, etc.) 2 Responses »

Apr 162012

Costing of electronic parts is a whole different ballgame from mechanical parts, most of the time. While there are certainly custom ASICS and other custom electronic components, for the most part, electronics are more and more dominated by standard components (off the shelf processors, resistors, memory, capacitors, LEDs, etc.). One person at Morey Corporation who I interviewed for my upcoming book project on Product Cost Management, referred to these components affectionately as “popcorn.” The ME (mechanical engineer) equivalent of this is the beloved category of “hardware” or “fasteners.”

The good news is that there is a commodity market for these EE (electrical engineer) components. The “market” drives the cost down for you with many (theoretically) interchangeable vendors of the same part. This is very different from most mechanical parts, which are unique and must be sourced to specific suppliers for custom quotes. That’s the good news.

The bad news is that in the fast paced EE world, you have to start worrying about things, such as:

Pricing Currency — How do I quickly find the lowest cost whenever I buy these components. Unlike the non-commodity world, the price will change often and quickly (and typically downward), until the component starts becoming obsolete.
Obsolescence — Have you ever been looking for a new USB drive or laptop memory for your old computer, only to realize that the 2 GB stick is MORE expensive than the 4 GB stick? Well, you have encountered the effect of obsolescence in pricing. So you might ask, how to I know when the price is starting to rise due to obsolescence, because maybe I’ll make a large purchase at that point?
Availability — where do I buy enough of what I need now?

Well, never fear, because the helpful folks over at Arena (a cloud based PLM provider) and Octopart (a search engine for electronic components) are here to help. Arena has a new (free) tool called PartsList that works like this:

Download the tool here
Put in your BOM (manufacturer and part number) to PartsList
PartsList will link to Octopart to keep you aware of all pricing and availability, identify alternative sources, etc. goodness

You can also directly search for parts in Octopart. PartsList is FREE for personal use and, as of 4/6/12, was $9/month for commercial use. You can read more about PartsList on the Arena blog here article about it.

(p.s. Do check out Morey Corporation, if you need hardened and rugged electronics. Not only are they great guys, but they are the real deal — an AMERICAN MANUFACTURER with design and manufacturing in one building in the good ‘ol Midwest. They make stuff from advanced telematics to engine computers you can drop off a tall ladder on a cement floor without failure, to power inverters the size of card tables that move big equipment.)

World Map of Product Cost Management

Product Cost Management 41 Responses »

Apr 102012

On the last blog post (Product Cost Management – What is it?), I talked the different ways that my colleagues and I have seen the meaning of Product Cost Management take shape over our careers and PCM’s development. I offered what I believe is a good operating definition of PCM:

Product Cost Management – An agreed, coherent, and publicized system of culture/goals, processes, people, and tools following the product lifecycle, that ensures the product meets its profit (or cost) target on the day that it launches to the customer.

This definition can certainly be fleshed out further. I was at a conference a few weeks ago and heard a great presentation on social media by Overdrive Interactive. Part of the presentation was showing their map of the social media sphere that has become viral on the internet and the de facto standard many people use to orient themselves to the social web. I really liked that idea, and I’m a big believer in 1-page maps that give the reader an overview of a complex subject, as well as a starting point to dig for deeper detail.

What does Product Cost Management look like from a graphical viewpoint? I believe that it looks like the attached map (click on the diagram to enlarge the map or DOWNLOAD IT IN .PDF FORMAT.

Like any other major discipline that product companies follow, PCM contains four main areas:

Culture, Goals, and Incentives
Processes (tied to the product life cycle)
Team Structure and Participants (tied to the product life cycle)
Tools/Software that can help
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Culture, Goals, Incentives – before attempting to put in place any process, people, or tools, the organization first has to ask the tough strategic questions. Where is our organization today in the PCM journey? To where does we hope to get and by when? And the big question: What is the priority of PCM and how much investment (honestly) will we make to close the gap from between today’s state to our goal? Once the company answers these questions, it can talk about the strategic structures that drive behavior (roles, incentives, and leadership support).

The next two continents on the PCM world map (PCM Processes, and PCM Tools/Software) follow the product lifecycle, and need to integrate with the company’s product development process. Different processes and different participants are appropriate at different points in the cycle.

Finally, we have the PCM Tools available to take on the journey. They fall into different buckets as follows: (a) homegrown tools (including Excel), (b) general platforms (e.g. PLM, ERP) that may be customized, and (c) specialty Best-In-Class (BIC) tools that focus on PCM processes. In the PCM World Map, many of the major BIC software systems are shown in a 2×2 diagram. We’ll discuss the 2×2 in more detail in a future post, but I don’t want readers to think there is a “magic [best] quadrant” in this 2×2. It is simply a descriptive conceptual diagram

One important thing for people who are navigating the map to realize is that Culture, Process, Team, and Tools are all interconnected and influence one another (see the top right in the header of the map). For example, if you are at the beginning of the PCM journey, it is likely that your company is not ready for all the processes shown. It also may only use one or two of the tools. The company may not have reached a capability level to benefit from some processes, people, or teams. Despite the inter-connectivity of the system, the best place to start when beginning the PCM journey is with the Culture (see blue arrows on the left of the map).

Like all high level maps, there are cities and even countries shown on it that have more detailed maps of their own. However, most companies would do well to focus on understanding the geography at the world level first, before hoping on a plane to a specific city. We can worry about street maps once we decide which cities we are going to visit!