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Rick Burke

Key Principles of Effective Cost Management, Part 1

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Many people and departments within an organization impact product cost.  For example:

  • An engineering team decides on a specific design, but there are multiple design alternatives that meet the same form, fit, and functional requirements.  Each alternative dictates a different cost.
  • A sourcing team pays to produce a specific design, but there are multiple potential costs for manufacturing the design.  Manufacturing costs are often negotiable and depend on plant cost structure, capabilities, and process control. 
  • A manufacturing team selects one way to produce a specific design and estimates a ballpark cost, but there may be multiple ways to manufacture the same design that are potentially more cost effective.

Traditionally, product cost management has been performed by cost engineering experts, or by Value Analysis/Value Engineering (VAVE) team members who specialize in cost reduction and/or support core business functions. These resources typically have strong manufacturing backgrounds and may have worked as a supplier quote estimator.  Their expertise is unique and their domain knowledge builds over time, but it is extremely difficult to duplicate and scale across all products developed by a large organization. Effective product cost management requires a set of systematic activities, processes, and tools for use throughout the enterprise to guide the above decisions to the lowest costs or prices available.  This enables manufacturing organizations to attack cost at the point of origin and yield the greatest impact on product cost reduction. In Part 1 of this article, we will start by providing an overview of key cost management Activities.  In the Part 2 of this article, we will expand upon the most effective Processes and Tools that can be used to drive a successful Product Cost Management implementation. Core Cost Management Activities There are a number of core activities involved in effective product cost management.  Some of the most highly recommended activities include:

  • Studying the cost tradeoffs of different concept designs in the R&D stage
  • Evaluating multiple  design alternatives for lowest cost during NPI
  • Evaluating the cost of proposed solutions to an engineering change order
  • Evaluating multiple manufacturing and tooling alternatives for lowest cost, including  make vs. buy analysis
  • Generating a detailed “should cost” to validate supplier quotes and ensure lowest pricing
  • Batch analyzing current prices of entire commodity groups to find over-cost outliers
  • Evaluating multiple cost down ideas on current products in real-time to identify the highest potential reduction in the shortest amount of time

Companies that are most successfull with their product cost management initiatives attack cost at the point of origin, and and at multiple points in the evolution of a product as it goes from concept to reality. In Part 2 of this article, we will continue this conversation and describe key processes and tools that can be used as part of the Activities noted above.

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