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3 Steps for Effective Manufacturing Cost Analysis

 | May 4, 2023

Key Takeaways:

  • Current inflationary pressures continue to increase critical component costs.
  • Effective cost analysis includes outlier identification, opportunity evaluation, and action.
  • Manufacturing cost analysis software informs product redesign and renegotiation strategies.

The Full Article:

The manufacturing cost analysis process enables organizations to identify, evaluate, and capitalize on savings opportunities across the supply chain. Effective manufacturing cost analysis gives companies insight into how lingering supply chain issues or inflation are impacting costs.

Manufacturers such as General Electric (GE) use cost analysis to validate price increases independently or use their insights to negotiate price changes with suppliers in new market conditions. “We now have an opportunity to go back into the supply base and claw back some of the lost productivity suppliers had because of social distancing,” said Rob Lidster, former Chief Procurement Officer for GE Appliances. “We can say to our suppliers, ‘Look, you’re no longer social distancing. Are you getting 30 pieces per hour? Are you back up to what you originally quoted at 45 or 50 pieces per hour?’”

Delving Deeper: What is Manufacturing Cost Analysis?

Manufacturing cost analysis is a methodology to forecast the expected total cost of a finished product. The analysis aims to inform cost-reduction negotiations and drive better sourcing and manufacturing decisions for an entire product development team.

Manufacturing cost estimation must account for every aspect of a product’s cost structure to be effective. This includes associated raw materials, labor costs, manufacturing facility expenses, machine depreciation, and more.

Innovative companies are replacing their manual Excel spreadsheets with automation-driven manufacturing cost estimation software to increase the accuracy and speed of their projections. With greater insight and real-time visibility into their product’s total manufacturing costs, organizations can successfully identify:

  • Cost drivers in the early design stage (and then make design improvements).
  • Components or parts that are cost outliers and provide an opportunity to renegotiate with suppliers.
  • The most efficient manufacturing processes and routings.

Three Key Steps in the Manufacturing Cost Analysis Process

Manufacturing companies must follow a critical three-step process to ensure the efficiency of their product cost management and evaluation activities. A detailed overview of each step follows.

Step 1. Identify Product Cost Outliers

First, manufacturing businesses must identify outliers in parts where significant cost reduction is possible. This enables product teams to focus on analyzing components with seemingly high costs.

Organizations need to identify the scope of the components they would like to analyze. They can do so by segmenting parts into different manufacturing process groups, such as sheet metal or casting components. Manufacturers can then segment the components even further based on material type.

Next, teams access their enterprise resource planning (ERP) or other sourcing data systems to acquire information on parts’ current prices and expected annual purchase volumes. The two figures can be multiplied to yield the total spend per part. The intent is to bring into the scope the components with the largest spend by segment.

Once the scope is defined, the product team must gather all the critical data associated with each specified part. To improve the accuracy of their projections, internal cost engineering teams must incorporate the following into their calculations:

  • Component material types
  • Each part’s estimated batch size
  • Actual or estimated annual production volumes
  • Secondary processes required by the design (e.g., heat treatment, anodizing, etc.)
  • Current quoted costs and supplier location details
  • Production processes used to manufacture a part today (if known)

Specialized product cost engineering teams can begin their component spend analysis after successful data collection. This analysis can be performed using labor-intensive spreadsheets or accelerated using manufacturing cost modeling software with precise, consistent estimates and real-world insights.

Once generated, the estimates can be used for comprehensive should cost analysis. This exercise allows teams to compare their projections with supplier prices and identify the parts where significant savings opportunities lie.

Step 2. Analyze the Identified Cost Outliers

It is now time for the product development team to carefully examine the outliers from step one and optimize their procurement estimates. In the outlier analysis stage, manufacturing businesses are responsible for the following:

  1. Reviewing initial outliers. Teams re-review their estimates from procurement to ensure that product forecasts are accurate and that no contractual or relationship impediments exist.
  2. Evaluating potential savings and the percent difference between the current price and the estimate. It is crucial that there are significant savings (your current spend − the potential spend if your estimate was the price), and concurrently, there is a considerable net % difference between the estimate and your current price to account for the erosion of savings during the negotiation.
  3. Building action plans. Teams must obtain a basic cost breakdown of their quote to plan for a successful discussion with suppliers. This will include the cost of raw materials, secondary production processes, basic routings, assemblies, and non-recurring engineering (NRE). Teams must compare these details with their estimates to identify gaps and formulate a discussion plan to determine their root cause.
  4. Identifying re-design opportunities. These can be identified by plotting your cost estimate—using a uniform batch size for all parts—against the finished weight of the component. A best-fit line should then be drawn. Parts with more than one standard deviation above the best-fit line should be examined for design inefficiencies or other factors causing higher costs.

Step 3. Act on Cost-Reduction Opportunities

In this final stage, manufacturers must execute their cost-reduction plans and act on their product redesign or renegotiation goals. Regarding the redesign approach, cost specialists and design engineers must collaborate to make successful, cost-effective product iterations. Alternatively, manufacturers can ask their suppliers whether a part can be redesigned to fit a manufacturing process more efficiently.

To capitalize on renegotiation opportunities, sourcing professionals can approach suppliers with their fact-based should cost estimates. These findings can help sourcing teams negotiate with suppliers and discover the underlying cause of the difference between an estimate and a quote. Savings will be achieved in the resolution of the root cause.

Enhance Manufacturing Cost Analysis With aPriori

Global manufacturing companies can revolutionize their cost analysis and management operations with aPriori’s powerful Manufacturing Insights Platform. Here is how the aPriori platform enables teams to achieve cost-saving victories:

  • Automated digital twin technology. aPriori integrates seamlessly with an organization’s existing product life cycle management (PLM) tools to analyze its 3D CAD files automatically. aPriori will thread three digital twins together—product, process, and factory twins—to unlock granular, precise cost insights based on real-world conditions. The platform even delivers insight into a product’s carbon footprint and manufacturability.
  • Fast, actionable “what-if?” insights. aPriori supports many physics-based manufacturing process models and routings, such as plastic molding, machining, die casting, and more. aPriori also provides real-world economic data, including direct labor and manufacturing overhead costs, for 87 regions across the globe. Teams can configure this data to explore various “what-if” scenarios and identify cost-effective suppliers, raw materials, or production alternatives in real time.
  • Centralized reporting dashboard. With aPriori, engineering, manufacturing, and purchasing professionals only need to access one platform to manage their critical product cost data. They can use aPriori’s detailed reports and visualizations to collaborate seamlessly and quickly to make informed, data-driven cost decisions. Further, this level of speed and efficiency enables manufacturers to improve their product time to market (TTM).

Manufacturers continue to deal with lingering supply chain issues and inflationary pressures that increase component costs. However, by following the three steps in this article, manufacturing companies can better identify, assess, and capitalize on valuable cost-saving opportunities.

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