Enterprise Cost Management Software Platform

What is Enterprise Cost Management?

Enterprise Cost Management (ECM) is a major category of enterprise software, just like Enterprise Resource Planning (ERP), Product Lifecycle Management (PLM) or Supply Chain Management (SCM). Enterprise Cost Management includes techniques that companies use to assess, manage, control and reduce costs, with the goal of maximizing profit.

In laymen’s terms, Enterprise Cost Management is the Rosetta Stone that translates the ‘languages’ of Design Engineering, Sourcing and Manufacturing Planning into the language of business: Cost.

Enterprise Cost Management provides Cost Visibility™ to the organization. Enterprise Cost Management is NOT Accounting, Cost Estimating or Cost Analytics. Instead, Enterprise Cost Management is concerned solely with increasing profit by driving Cost of Goods Sold down through providing a predictive, real-time, precise cost assessment at every stage of the product life cycle.

How does Enterprise Cost Management fit into and support the enterprise software ecosystem?

In the world of discrete product and manufacturing companies, three primary enterprise software categories dominate operations: Enterprise Resource Planning (ERP), Product Lifecycle Management (PLM) and Supply Chain Management (SCM). All of these categories manage and control aspects of the product development and delivery cycle. In fact, each of these software categories manages one of the three primary drivers of product cost, which are the following:

1. Design Cost Drivers (geometry, tolerances, configurations, material) – These critical cost drivers are recorded and managed by PLM.
2. Manufacturing Cost Drivers (routing, machines, production volumes, batch sizes) – ERP (primarily through its subsumed predecessor MRP I & II) tracks and manages the factory floor operations, including these cost drivers once the product is actually in production.
3. Sourcing Cost Drivers (make vs. buy strategy, supplier selection) – SCM or Supplier Resource Management (SRM) records the supplier strategy and aids purchasing in making these selections from the standpoint of delivery and quality.

Click image to enlarge

However, even through all three of these enterprise software categories are intimately involved with generating and recording various product cost drivers, none of them actually focuses on assessing what the product will actually cost. ERP, PLM and SCM involve large databases and, of course, a database can store any number including a cost. Yes, PLM, SCM or ERP can all store a historical cost number, but a cost number calculated post production launch is not very useful to actually being able to impact and drive down product cost.

In other words, ERP, PLM and SCM can all store cost, but none of them can generate cost. There is a gap or a white space between these three enterprise software categories. This white space has been filled today with Enterprise Cost Management.

The Cost Record

There are many different “records” in the organization that need to be (a) generated and (b) managed. The figure below shows the various records that the organization must maintain. For the most part there is an enterprise software category that has grown up to service each one of the records except one: the cost record.

Click image to enlarge

Cost Record – The Cost Record is a continuously changing and converging series of costs for the product and every part and assembly in it.

By the time historical accounting is possible and invoked, the product has already been in production for a while. However, all of the decisions that determine what the final accounting cost will be were made much earlier in the product life cycle, during the design, sourcing and manufacturing planning phases, which occured before the product went to production. We need Cost Visibility™ from the BEGINNING of the new production introduction cycle – conceptual design. As shown on the diagram, there is a huge gap today from the beginning of design through product launch, where no one has a clear idea what cost is. This is the whole purpose of Enterprise Cost Management - to generate and manage a predictive, precise, real-time cost record throughout the whole new production introduction cycle.

Various techniques used for Enterprise Cost Management

Enterprise Cost Management divides logically into managing two very different buckets of cost. First, we have Indirect Cost (read SG&A, Period, or Indirect costs on the income statement). Second, and far more important to a discrete product and manufacturing company, is product cost (Cost of Goods Sold on the income statement).
Our roadmap shows the techniques that companies use to impact, manage and reduce cost. Please note that dashed lines show those Enterprise Cost Management techniques that are used primarily for the goal of reducing cost and which may affect product cost, but are primarily used for other reasons.

Click image to enlarge

All of these techniques hinge on the primary deliverable of Enterprise Cost Management - providing a predictive cost that is a number with high quality and confidence. If a real-time, predictive, precise cost is not available, these techniques are shooting in the dark or at least in a dimly illuminated room. Although, Enterprise Cost Management can drive both hard (COGS) and soft (SG&A) savings, most of Enterprise Cost Management's focus is on the hard savings, because COGS is typically ten times the size SG&A on the income statement.