Key Principles of Product Cost Management, Part 3
Product Cost Management Across the Enterprise
Organizations that are leading the way in product cost management have made the process a normal course of responsibility and decision making across their enterprise (see Figure 2 below). Cost management is performed at multiple milestones by R&D and Engineering during both New Product Introductions and current product re-design cycles including early concept evaluation and detailed design – where 70% of costs are determined. In later phases of the product development lifeycle, Cost Engineering, Sourcing and Manufacturing perform their own cost management activities beginning with their initial cost estimates and refining it based on knowledge of strategic suppliers or the status of internal manufacturing facilities. These refined cost estimates serve to benchmark and control actual costs during manufacturing planning and quote validation. In all cases, cost information is dynamic and easily shared in a usable format with everyone that impacts product cost.
It’s not uncommon for engineering teams to worry about product cost management activities slowing them down. In fact, effective product cost management activities can drive time efficiencies for these teams. Implemented properly, most cost management activities fit naturally into existing engineering and sourcing activities/processes. The proper cost management tools also complement the tools being used in most engineering and sourcing groups today. These teams often see time efficiency gains because they don’t wait as long for cost estimates to come from suppliers or from over-burdened cost engineers. Sourcing teams also become much more efficient because of their ability to negotiate more effectively through fact-based discussions with suppliers.
Core Capabilities for Success
As mentioned in previous blog posts, technology is a key enabler for effective product cost management. Leading manufacturing organizations are taking advantage of the latest systems and tools to speed and standardize cost estimation and centralize cost information across the enterprise. The benefits of these solutions include:
- Speed of Costing — Faster costing feedback available to all business functions greatly expands the potential impact of product cost management and reduces time to market.
- Consistency of Cost — A centralized product cost management platform ensures everyone on the product development team is working with the most up-to-date information, and leveraging previous findings.
- Cost Awareness — The ability to integrate cost awareness as a core competency for all key decision makers uncovers new opportunities to identify potential cost savings that were previously invisible.
There are a number of important considerations when planning for and deploying product cost management technologies in your organization:
- Ease of Use – the system should be easily used by all business function impacting cost, regardless of their cost estimating or manufacturing expertise. Training on your new system should take no more than a couple of days, and users should be able to leverage the tool to inform decisions almost immediately.
- Real-Time Results – any system deployed should be able to generate a cost estimate, and corresponding manufacturing process details, within seconds or minutes. If the system does not respond with an answer quickly, users will become frustrated, and avoid using the tool.
- Cost Estimation Capabilities– it should incorporate all the latest cost estimation trends and technology features; for example:
- Ability to take advantage of 3D CAD models and automate a feature-based costing approach
- Require minimal manual inputs to generate initial cost
- Manufacturing process simulations that model manufacturing floor activities and practices
- Ability to generate detailed cost breakdowns (in addition to a total cost)
- Configurable to produce different types of cost estimates – early estimates, should-costs, etc.
- Centralized costing information repository to foster consistency and reuse of previous work
- Change inputs/outputs on the fly for ease of use in supplier negotiation
- Estimate all costs that may be useful in comparisons; e.g., logistics, exchange rates, etc.
- Clearly show product cost drivers to help educate users on what drives cost and how to lower it
- Multiple output and reporting formats (Excel, PDF, Custom reports)
- Easy to update and maintain to handle changing business conditions
- Ability to integrate with existing IT infrastructure and systems of record
- Cost Analytics– it should include detailed capabilities to analyze product costs and help focus design, manufacturing, or sourcing-related activities on the areas which can drive the biggest cost savings. For example, these analytical capabilities would include:
- By different types of design-related cost drivers
- By different types of manufacturing process-related cost drivers
- By supplier-related cost drivers
- Ability to determine and find cost outlier parts and determine cost trends
- Reporting Mechanism – it should include capabilities for reporting of cost results and KPI’s, and disseminating that cost information via reports and cost dashboards.
- Cost Management– it should include the ability to track and manage costs throughout the product lifecycle. Those capabilities would include the ability to:
- Roll-up BOM costs at any point in a product’s life cycle
- Support costing process workflow needs
- Track different BOM cost revision
In the 4th and final part of this series, we’ll focus on best practices around Implementing Product Cost Management in Management.