Case Study: Implementing a Culture of Cost Awareness
How a High Tech Electronics Company Saved Millions by Attacking their Mechanical Spend
The aPriori Customer profiled in this Case Study is in the High Tech Electronics (HTE) industry vertical, and focuses on the design and manufacture of networking equipment, servers and switches. They outsource 100% of their product manufacturing to some of the world’s largest contract manufacturers such as Foxconn, Flextronics & Celestica, and a supporting tier of the world’s leading commodity manufacturers for sheet metal, plastics, die casting and heat/surface treatments. They have been an aPriori customer since 2013.
Industry & Business Challenges
HTE is one of the most competitive markets today. Whether you are a major global OEM headquartered in North America or a small injection molded plastics supplier in Malaysia, the pressure to adapt and evolve with constantly changing market dynamics is intense. The three primary challenges companies in this marketplace include:
- Fierce Global Competition
- Hyper Innovation Curve/Short Product Lifecycles
- Complex Global Supply Chain
Cost Estimation/Management Challenges
In a world where innovation is constant and unrelenting, manufacturing volumes are extremely high, supply chains stretch around the globe, and getting your products to market quickly is mission critical. Product development teams face a number of challenges in securing acceptable product margins, including:
- no visibility to cost during product design
- time to manually generate a cost estimate is unacceptable
- credibility of spread sheet based solutions is suspect
- no details available in should-cost estimates for fact-based negotiation
Creating a Culture of Cost Awareness
This customer is under significant pressure to closely manage product profitability, given the considerable pressures they face every day in their operating environment. In the following case study, we will reveal how they took a multi-dimensional, strategic approach to managing cost:
- …during the design cycle for their most important new product introductions,
- …to provide their buyers with considerably more detailed should cost data than ever before,
- …and, by working as a collaborative team to attack cost at the point of origin
The results of this strategic initiative to implement a cross-functional culture of cost awareness are starting to pay significant dividends in bottom line cost savings and improved product profitability.
Dedicated Costing Resources
Major product lines are organized into individual business units. Some of the larger business units created positions within their product operations teams that were dedicated to cost modeling and estimating services. However, the company also recognized that a centralized “technology & quality” team was needed to provide expert support to the business units during times of peak demand, and also provide cost modeling and estimating services for the smaller business units that did not have the resources to fund their own dedicated cost team.
The new technology & quality team was located at Corporate HQ, and was responsible for selecting, configuring and maintaining the cost management platform leveraged by all members of the product design, costing & sourcing teams. They were also made responsible for developing an integration strategy and tools that facilitate the process of managing cost estimate requests from the product design teams, tracking cost savings and working with the buyers to help ensure they were maximizing their leverage of should cost data.
In addition to the central costing team at Corporate HQ, a dedicated cost engineering service team was set up in India to help support day-to-day cost modeling tasks and cost estimation requests.
The mechanical design and engineering teams are constantly working on new product initiatives. Target cost for these new products are set by the product marketing team. The target cost for a product is in most cases broken down to the functional level. When the product design team has achieved a sufficient percentage of design definition, a request is sent to the cost engineering HQ team. The request is analyzed by the Senior Manager of Engineering Operations at HQ, and routed to the proper resource in the cost engineering service team for detailed analysis.
The cost engineering service team handles 3-5 projects per week, with most projects consisting of assemblies that have upwards of 20 or more individual components to be analyzed. Using aPriori, a detailed cost estimate is generated very quickly for each part, including all of the primary manufacturing operations and any secondary operations that may be required, such as plating, heat treatments, etc. The cost of all components is rolled up into a total bill of material cost for the product assembly that includes any mechanical assembly operations.
Calling upon decades of practical experience, aPriori guided the customer through the development of an initial strategic program plan. The goal was to improve efficiency in the costing process and enhance trade off decisions along multiple points in the product definition, sourcing and manufacturing process. aPriori then worked closely with this customer to deliver the technology platform configured to meet their unique operating requirements.
- single database, enterprise class architecture
- automated costing solutions for 2D, 3D and table driven applications
- extensive portfolio of manufacturing cost models and regional data libraries
- batch costing for hundreds of commodity parts to quickly identify outliers where the customer is paying their supplier too much
aPriori was designed from inception to be used by novices and advanced cost experts alike. Designers who may not have all the production details can accept system defaults when costing their own parts and assemblies and quickly answer the question, “What does my design cost?” Cost engineering or buyers on the sourcing team can then override defaults and specify values based on experience or conversations with suppliers. This model is fundamentally designed to help companies attack cost at the point of origin, no matter where you are in the product lifecycle.
Costing individual components, and being able to easily roll those up into a fully cost bill of materials is a critical feature of a modern PCM system. Furthermore, being able to easily examine alternative product designs, sourcing or manufacturing scenarios is a must have. aPriori enabled this customer to drive significant product cost savings through its ability to quickly create and analyze different scenarios
Synchronization of Quoting Formats
A common problem that many sourcing teams face is the lack of data correlation between their request for quote and the bid proposals returned from suppliers, each of whom has their own different format. With aPriori, reports can be configured and output into XML format, and then used as the input to a standardized bid evaluation sheet.
This customer was able to convince their suppliers to provide quote details in their standard bid sheet evaluation format because the suppliers knew it improved their chances of being selected for the business. Once a critical mass of suppliers had joined the synchronization program, the rest agreed to conform.
More Efficient & Productive Supplier Negotiations
In the graphic below, our customer illustrates how a conversation with a supplier would go before using aPriori cost estimates and then after. This conversation is enabled by the rich manufacturing data that is calculated either on-the-fly or via batch costing/outlier analysis and presented to the user on screen, in a convenient part cost report that can be brought to a supplier meeting or via an aPriori Cost Insight Report dashboard.
Cost of Tooling
Historically, a cross-functional finance team was responsible for approving tooling costs. However, they had no insight around the mechanical components of the tooling they were buying. They commented, “I’m really just approving that I have enough money to buy this tool, but have no idea if I’m paying an appropriate cost for what I’m buying”.
To overcome this challenge, the team decided to create a tooling board that had a more technical dimension. The team decided to include representation from the corporate cost engineering team, and leverage the detailed tooling bill of material and cost estimate generated by aPriori as a natural part of the piece part evaluation. The aPriori Tooling BOM is generated simultaneously, and has an incredibly detailed breakdown itemizing each and every component of the tool, and the cost associated with that component.
The program has been so successful in providing detailed visibility into tooling costs at this customer that it is now mandatory for all tooling funding requests to include an aPriori cost estimate.
Results to Date
Shown below is a small sampling of the types of findings from this customer that were quickly discovered because their team was using aPriori to quickly evaluate cost at the point of origin:
Whether you manufacture Audio & Video Equipment, Computers or Peripherals, Networking Equipment or Communications Equipment, you are faced with an increasingly difficult balancing act, managing external industry challenges with internal challenges impacting product profitability.
aPriori has worked with numerous HTE companies to guide them through the process of defining a strategic enterprise product cost management plan that will help them achieve:
- fast time to market and time to volume
- Bring products to market before competition and achieve volume production quickly to capture market share
- product lifecycle cost reduction
- 70% of product costs are locked down in the design phase of the product lifecycle; costs can be reduced and supply risks minimized by making design changes and/or sourcing decisions early in the lifecycle.
- profitable management of outsourced design and manufacturing
- Outsourced design and manufacturing has clear benefits but companies have not realized the benefits because of adhoc business processes and infrastructure around product cost negotiation; aPriori helps Buyers understand what is a reasonable should cost for a new product design, and what the key cost drivers are for a new product.
- For contract manufacturers, the quoting process for new product designs and manufacturing services has significant delays built into the system; acceleration of this process has the potential to yield big gains in overall time to market and revenue realization.
*Quotations within the body of this Case Study come from the company’s Senior Manager of Engineering Operations.
He is responsible for defining and driving the company’s enterprise product cost management initiative, and personally leads the Cost Engineering team in their day-to-day operations. In this case study, he shares many observations that have been gleaned from the past 18 months of experience working closely with aPriori as their strategic partner in this endeavor.