Reduce Costs, Improve Time to Market and Increase Competitiveness with aPriori

In today’s global economy, discrete product and manufacturing companies are under siege. They are experiencing a demanding and difficult combination of factors making it increasingly difficult to maintain profit margins and remain competitive.  These factors include:

• Increased competition is reducing their available market share.
• Growing low cost international competition is driving their product prices down.
• Their internal costs (especially in the US and Europe) are rising from legacy costs due to aging populations, increasing labor costs, pension burden and medical costs.
• Their external costs are rising due to increasing commodity prices such as steel, copper, aluminum, oil, etc., and increasing regulatory compliance requirement costs.

Cost of Goods Sold (COGS) has become an increasingly important financial metric for these companies as it’s typically the largest expense item on the income statement. For these companies, COGS can range from about 55% of Revenue for industries like medical devices to about 95% of Revenue for automotive and aerospace companies. On average, for most discrete product and manufacturing companies COGS is about 80% of Revenue. Additionally, most of these companies have very slim Net Profit Margins, typically in the range of 3% to 8% of Revenue. For these companies, a small percentage reduction in COGS produces a significantly leveraged percentage increase in Net Profit Margin. This has led these companies to focus on reducing product costs with renewed vigor.

The aPriori Enterprise Cost Management software platform enables discrete product and manufacturing companies to precisely and predictively assess product costs. Knowing product cost early and continuously in the product development process is fundamental to managing and ultimately reducing COGS. With aPriori, even if customers are able reduce COGS by only a small amount, for example 1%, they can add 10% - 30% to their bottom line. In these companies, reduction in COGS is one of the most powerful drivers of Net Profit Margin.

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Why aPriori is needed for cost management?

Studying cost management practices in the discrete product and manufacturing industry for companies not using the aPriori Enterprise Cost Management software platform has revealed that the ‘state-of-the-art’ in cost management in many companies is a hodge-podge of spreadsheets, tribal knowledge and software applications usable only by a few cost experts in the company. Unfortunately, these methods have created the following challenges in their understanding and managing of product costs:

• Fragmented cost information – Critical pieces of cost information are spread across the organization in different functional groups, resulting in cost assessments that do not include all relevant information.
• Disconnected – Cost assessments are typically developed by specialist groups and involve long delays before estimates are available. This affects the person making the immediate cost relevant decision (e.g., the designer making a design decision, the manufacturing engineer making a process decision, or a sourcing analyst making a supplier decision) in that they are forced to make decisions without knowing what the cost impact will be. They may simply make their decisions in a “cost knowledge vacuum” to meet scheduling or other constraints.
• Inaccurate – Cost assessments (especially early ones) are often inaccurate and lack sufficient rigor and thoroughness to reliably be used in decision making.
• Inefficient / labor intensive – Most cost assessment activity is dependent on a small group of specialists spending hours manually producing each assessment. The demand for costing feedback by all of the functional groups whose decisions impact product costs cannot be met.
• Static – Once a cost assessment has been created, it typically doesn’t change or update as new information becomes available, or as the design changes or as other cost relevant decisions are being made during the product development and production delivery process.
• Uncontrolled – Multiple cost assessments exist that have been created from different sources. For example, design, cost management and purchasing may each maintain their individual spreadsheets of cost assessments. The users of this cost information may have no idea which assessment is valid and/or the most current.

As part of the effort of companies focusing on reducing product costs, product cost targets are now being defined earlier and with greater granularity than ever before. Meeting these detailed cost targets at product launch and avoiding expensive, lengthy post-production cost reduction phases requires knowing product costs before going to production. This can be difficult based on all of the challenges above.

The aPriori Enterprise Cost Management software platform brings together the critical pieces of relevant cost information to generate precise product cost assessments. These pieces typically exist with different functional groups, but are all necessary to generate precise cost assessments.

aPriori understands the product cost drivers that are based on a product’s design. Called Geometric Cost Drivers (GCDs), aPriori automatically captures these through its CAD integration.

aPriori also understands the product cost drivers that are based on how and where a product could be manufactured. Called Non-Geometric Cost Drivers (NGCDs), this information is captured and modeled in aPriori’s Virtual Production Environments (VPEs). A VPE is aPriori’s representation of the manufacturing capabilities and costing methodology of a particular factory or production facility. A VPE captures information about the manufacturing processes supported by that factory, the machines needed to support those processes, raw materials used in that factory, viable routings in that factory and the cost structure of the factory (i.e., labor rates, overhead rates, material costs, etc.).

aPriori reliably combines all of this information using its unique patented technology based on mechanistic process-based models to generate precise product cost assessments. The advantage of aPriori’s product cost assessments is that they are generated early in the product development process and continuously throughout this process, before a product goes to production. As changes are made to the design, to the manufacturing process, to sourcing activities, or by program or project management, the cost assessments generated by aPriori are updated in real-time to reflect those changes. This cost assessment information is made available to all functional groups in the organization whose everyday decisions contribute to product costs:

• Design Engineering
• Manufacturing Engineering
• Manufacturing Process Planning
• Cost Estimation, Value Analysis/Value Engineering
• Purchasing, Procurement, Sourcing
• Program and Project Management

With aPriori, everyone in the organization who impacts costs continuously has visibility to the latest cost information about the product. Product related changes or decisions that they make automatically update the product cost information for everyone else. aPriori puts the ability to generate cost assessments, which had traditionally been in the realm of a few specialists at a company, into the hands of all who impact product costs. Its ability to generate cost assessments dynamically, in real-time eliminates the traditionally disconnected static nature of product costing. With aPriori’s product cost assessments, users know product costs continuously and are able to successfully complete their cost reductions efforts in real-time and meet their cost targets.

Why aPriori is needed across the enterprise?

Enabling companies to reduce their COGS is the primary focus of the aPriori Enterprise Cost Management software platform. This is often referred to as “hard savings”.

In contrast, no other existing enterprise software category makes COGS its primary focus. Enterprise Resource Planning (ERP), Supply Chain Management (SCM), and Product Lifecycle Management (PLM) products mostly focus on the SG&A (Selling, General, and Administrative) line of the income statement. This is often referred to as “soft savings”. Additionally, none of these systems have any capability to generate real-time, predictive cost assessments to be used for cost informed decision making by all involved in the product development and production delivery process. They may track historical costs or be the repository for cost information, but none of these systems actually create real-time, predictive cost assessments of products before they go to production.

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For many companies, the ability to understand, manage and reduce product costs and ultimately reduce COGS is a broad enterprise-level problem that sits in the nexus of many organizational functions. Therefore, the challenge of product cost reduction must be met and solved with an enterprise-level solution used by all those involved. The aPriori Enterprise Cost Management software platform was created to meet this challenge.
aPriori product cost assessments make use of information from many different parts of the enterprise:

• Product design information
• Manufacturing process information
• Manufacturing process planning and routing information
• Factory and supplier manufacturing process capability information
• Financial and accounting information

This information is used by aPriori to produce precise, predictive, real-time cost assessments. Using aPriori, different functional groups across the enterprise can understand the product cost impact of their daily decisions. For example, while working in their CAD system, design engineers can see the cost impact of design changes using aPriori’s direct CAD integration. Similar functionality exists for users who do not have CAD access. Manufacturing engineers can see the cost effects of process or routing changes, sourcing analysts can see the cost effects of supplier changes, etc. This cost information provided by aPriori is consistently up to date and continuously available across the enterprise. With aPriori the information from many functional groups across the enterprise can be combined to enable companies to truly understand, manage and reduce product costs, and ultimately reduce their COGS.