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Rick Burke

The Network Effect and its Impact on Product Cost & Cycle Time – Part 3

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As we’ve described in our first two installments of this series, in economics and business, the Network Effect is the impact that one user of a good or service has on the value of that product to other people. When the Network Effect is present, the value of a product or service is amplified as the number of other people using the product increases.

In the first article, we discussed the importance of creating alignment of goals and methods across your internal product development teams.

In the second article, we discussed the significant value that can be achieved when you integrate all of your mission critical enterprise applications (such as ERP & PLM) with your Product Cost Management platform to create a single system of record for cost data.

Extend Cost Management to the Supply Chain

This leads us to the last, and possibly the most important and often overlooked element required to fully capitalize on the Network Effect. Tying together all internal organizations affecting product cost via a common product cost management platform is an excellent start.

But, if you only connect your internal organizations, you are missing one of the key links in your value chain – suppliers. Sending out RFQs to a supply base will likely get you at least three different quotes where you can pick the one in the middle, and still not pay what a product “should cost.”

 

integrating with the supply chain

Integrating with the supply chain is key to getting the most benefit from the Network Effect.

 

Today, companies are relying more than ever on the design, manufacturing and cost expertise of their strategic suppliers. Unfortunately, from a technology integration perspective, suppliers are off on their own, struggling against the incoming tide of RFQs.

But what if you were able to identify a handful of strategic suppliers and convince them to join your enterprise product cost management network? What if, instead of selecting a baseline product cost model to generate a cost estimate, you could select a cost model based on one of your strategic suppliers?

This would yield an accurate cost estimate that represented their material costs, labor costs, overhead costs, manufacturing capabilities, process routings, logistics costs, negotiated margin, etc.

Furthermore, instead of waiting weeks for the supplier to manually develop a quote and respond to your RFQ, what if it only took a few days or hours or just a few minutes to generate the quote?  How would that impact your organization?

How to Integrate Suppliers into Your EPCM Platform

There are two effective approaches for integrating strategic suppliers into your enterprise product cost management (EPCM) network.

  1. Build a Supplier Cost Model in Your own EPCM Platform – With this approach, you leverage your buying power and pre-established relationship with a supplier to collect information about that supplier’s operations and general cost structure. Then, take that information, and build a Supplier Cost Model within your own EPCM environment that appears each and every time as a choice for end users of the system.
  2. Get Your Supplier to Implement an EPCM Solution – As an alternative approach, you set up meetings between your EPCM solution partner and several of your key suppliers. Your EPCM solution partner can then work directly with those suppliers to implement an EPCM solution at the suppliers’ sites, building a baseline cost model that mimics the capabilities and cost structure at one or more of their manufacturing sites.

Now, when you need a cost estimate, you simply send a 3D solid CAD model to your supplier with the RFQ. Because the supplier no longer has to manually review endless sheets of drawings and other related information, and can simply open the CAD model in their own product cost management system, they rapidly generate a detailed cost quotation, and the supplier’s response back to the manufacturer can be cut dramatically. This has a direct and positive impact on the manufacturer’s product schedule and overall time to market.

Benefits of the Network Effect

Manufacturers that embrace the concept of The Network Effect, and extend their enterprise cost management platform beyond their entire internal product organizations, to their strategic supplier community, will reap numerous and significant benefits, including:

  • Faster Time to Market – get quotes on early designs in a fraction of the time it takes today
  • A greater % of products and parts that are cost optimized
  • Increased product profitability
  • Less post-launch or late-state rework
  • Enterprise cost collaboration – a common view of cost and a consistent repeatable costing process
  • Increased corporate cost competency – by capturing and institutionalizing an understanding of design and manufacturing cost drivers

Summary

Some of you are already actively managing new product initiatives to target cost, engaging in more informed make vs. buy decisions, analyzing spend across entire commodities for outliers, and maximizing savings on re-design projects. You are ahead of most of your competition. But if you want to maximize the full potential of your product cost management efforts, and fully capitalize on the Network Effect:

  1. Connect all the constituents of your product development team, from the earliest stages of product design through sourcing, cost engineering and manufacturing on one enterprise product cost management platform.
  2. Integrate your enterprise product cost management system to your other critical enterprise applications – ERP, MRP, SCM, PLM – to aggregate all information related to product cost under one core platform accessible by all members of your product development team.
  3. Extend your enterprise product cost management system to your Strategic Suppliers so that your entire value chain works in the most time and cost efficient manner possible.

To learn more, download our whitepaper, The Network Effect.

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