Key Principles of Effective Product Cost Management, Part 2
In Part 1 of the "Key Principles of Effective Product Cost Management" post, we introduced the Challenges and Opportunities in Managing Product Costs, and some of the Core Cost Management Activities that help positively address the issues we identified.
In Part 2 of the Key Principles of PCM blog series, we expand on this discussion, and discuss best practices around Core Cost Management Processes and Tools.
Cost Management Processes
The core activities described in Part 1 naturally fit into various functions and processes over a product’s life cycle and include numerous potential Cost Control Points during the overall product development process. These are measurable, managed checkpoints that dictate where and when people should perform the core cost management activities outlined above. The output and results of these activities continue to build on each other throughout the product development lifecycle. For example, during the introduction of a new product, there are typically design review meetings at regular intervals to ensure that the new product is meeting form, fit, and functional requirements. This is a perfect opportunity to have a discussion about the financial implications of different design alternatives that are being evaluated. An effective product cost management system would include mandatory cost evaluation as part of each design review milestone
Another example of a Cost Control Point would be as a design reaches the release to manufacturing (RTM) milestone. At this point in the process, there is often a decision to make or buy that product, or key components within that product. The company that has implemented a cost control point at that RTM milestone, would be able to quickly calculate the financial impact of both options, and make an economically-wise decision in a fraction of the time that it would take to create and manage an RFP response from the supply base.
There are numerous opportunities for a company to implement cost control points in their product design, sourcing and manufacturing processes. In the early phases of implementing your product cost management program, rather than labor over identifying every possible cost control point, just pick a few logical opportunities to get started, and then enforce them rigorously. The process of getting started with Cost Control Points is made infinitely easier if the right Cost Management Tool is selected to support the process of generating accurate cost assessments. A tool that is quick and easy to use by everyone minimizes the possibility that team members can complain that generating a cost assessment is slowing them down from their primary responsibilities. More details on critical capabilities in a Cost Management Tool are provided below.
Cost Management Tools
Effective product cost management is also enabled by putting the proper tools in the hands of anyone that impacts product cost. These tools help identify and assess true product costs at a detailed level at any stage and enable people to act on the appropriate opportunities to reduce costs. Some of these tools might include:
- Product cost estimation systems that can quickly and consistently generate and manage accurate cost estimates without requiring specialized manufacturing or cost knowledge
- Reporting systems for documenting and tracking cost management results and KPI’s over time
- Analytics systems to search large volumes of data and identify cost outliers and trends
- BOM cost tracking systems to roll-up costs at any point in a product’s life cycle
Without the Core Activities (described in Part 1), processes and tools, product cost management remains a highly manual and decentralized function – of value only to manufacturing or cost engineering experts. It can only be performed one or two times per NPI cycle, severely limiting the windows of opportunity to identify and operationalize product cost savings. It also leads to inconsistent estimation methods with static information that is difficult to update, manage and share.
To truly impact product costs so it drives down the Cost of Goods Sold (COGS) by entire percentage points, manufacturers must look to deploy product cost management further upstream in the development process and across all departments and levels – not just inside manufacturing or cost engineering. Each group must identify its key cost control points and define the activities and processes needed to reduce costs. These groups must also be enabled with the right tools to analyze the cost of trade-off decisions quickly and easily each time they make a decision. The recipes for successfully implementing an effective product cost management system will vary for each group, but the time invested to meet their specific requirements will provide a very high return on investment.