Key Principles of Product Cost Management, Part 4 (the Finale!)

Implementing Product Cost Management in Your Organization

Think Big, Start Small — Cost management can have a significant and immediate impact across your organization – increasing profitability, accelerating time-to-market and growing revenues.  As such, it’s appropriate to think big and aggressively about how to use it with a vision for what is best for your organization. But it’s also best to start small and build your success from there.  Taking the right implementation approach is the key to effectively starting and building the foundation to expand your cost management initiative. 

Assembling a Core Implementation Team

You can’t drive an effective product cost management initiative alone.  It’s also difficult to implement from the bottom up, no matter how well-intentioned an individual contributor may be.  Assembling the proper team and building support for cost management within the organization are essential.  While it is not necessary to build out this entire team on day 1, as success builds, and the deployment expands, having these roles in place will ensure the program is properly supported.  Key roles in deploying a product cost management program include:

  • Executive Sponsor – Someone committed to implementing a cost management program and that recognizes the organizational factors to be considered to make your project goals a reality.  He or she can assist by:
    • Assessing his or her organization’s own cost culture and  how it naturally fits into their development environment
    • Fostering awareness of the problems cost management can solve
    • Mandating the change and communicating the high priority of the product cost management initiative so that teams appreciate the urgency to support and adopt the new system
    • Identifying champions in key business functions to spearhead focused initiatives in their own functional areas
    • Committing support to sustain implementation resources and activities
    • Funding the initiative properly so it has a strong opportunity to succeed
  • Champions – One or more executives and managers in key business functions whose teams will perform core cost management activities including:
    • NPI Engineering
    • Current Product Engineering / VAVE
    • Manufacturing Engineering
    • Cost Engineers to support Sourcing
    • Sourcing

Champions work with the Cost Management Manager to adjust/refine the cost management processes and activities so they work within their teams. They are also responsible for evangelizing and enforcing the use of cost management in their groups. These individuals are often incented on cost reduction or profitability goals tied to the cost management initiative, and in turn, will incent their teams.

  • Cost Management Manager – As the momentum from early pilot projects builds, assigning a dedicated program leader that has a clear understanding of cost management activities and how they apply to the organization overall will be critical.  This individual also works closely with the Executive Sponsor and Champions to rollout cost management tools and activities to the business teams and is ultimately responsible for guiding the teams in initial project selection and process implementation.  The Cost Management Manager should be supported by a technical team on the implementation of a cost management system.  And, as above, they are often incented on cost reduction or profitability goals tied to the cost management initiative.  Finally, the Cost Management Manager is responsible for documenting results of the deployment, and publicizing successes and lessons learned so awareness grows across the company, and the culture evolves to a higher level of cost management skill.

Cost Management Processes and Cost Control Points

It’s also important to identify your cost management processes and at which points costs can be effectively impacted. This might involve:

  • Assessing current cost management process and key cost control points (if they exist)
  • Mapping out your current product development process
  • Identifying new cost control points to introduce into the development process and establishing the cost estimate characteristics required to support each cost control point
  • Working with a cost management solution  provider to align to the above processes

Results Tracking and Monitoring Mechanisms

“If it can’t be measured, it can’t be managed” is especially true when it comes to effective product cost management. Key considerations include:  

  • Identifying metrics to collect at the key cost control points; e.g., percentage of parts in a BOM with cost estimates, the number of design alternatives explored, savings identified, etc.
  • Creating a process for measuring and recording results; e.g., at first functional design milestone, first prototype milestone, and final design milestone submitting costs to ERP or PLM system
  • Creating a process for monitoring and reviewing results; e.g., every design review includes presentation of anticipated product costs and data
  • Creating an incentive system for managers to reinforce these behaviors and activities; e.g.,  emphasizing that product cost is a priority equal to product launch schedule, quality and functionality

Getting Your Implementation Started

At the start, focus on one core activity and business group.  Assemble a small core implementation team, select a specific time-bound project (4-6 weeks), and build early successes.  This is the best way to show value (i.e. dollars or time saved) and make incremental adjustments, which will ease the rollout of the program to other groups.

You may choose to initially focus on either:

  • One product with multiple functional groups performing cost management activities over the product’s lifecycle
  • One functional group performing their function’s cost management activities over a number of products

Initial Implementation Recommendations

  1. Define clearly measurable goals for implementing cost management; e.g.; reduce cost of the chassis assembly by 2%, increase speed of generating a detailed cost estimate from by 3 days to 3 hours, etc.
  2. Identify the core cost management activities that will support your goals:
    • Identify initial projects, people, and timeframe.  Specific selection criteria depend on your organization’s short-term goals and cost management solution.
      • Executive Sponsor and Champions identify projects/groups that could generate results quickly. The Cost Management Manager will facilitate the selection.
      • Implementation team reaches out to the key manager(s) in the group(s) to get buy-in.
      • Timeframe for an initial evaluation will be dependent on the scope of the project selected, but can usually be completed in 1-2 weeks if you are well organized.  Longer term pilots typically produce “drift” where participants lose interest and return to their primary responsibilities.
  3. Identify relevant process changes for the initial groups:
    • Cost Management Manager outlines initial plan that defines the cost management activities and cost control points.
    • Cost Management Manager works with the Executive Sponsor and/or Champions to reinforce process adherence and refine the process details.
    • The implementation team discusses the plan with the business group selected, including an open discussion of concerns or competing priorities; e.g., allocating time to explore design alternatives for cost reduction
    • Establish the type and characteristics of the cost estimates required to support the projects and work with the cost management solution provider on how to configure the system to achieve these estimates.
    • Train the business group on the cost management processes and tools implemented to support the process
    • Complete the project, with weekly check-ins with the business group.
    • Review and publish results with the implementation team and discuss process refinements.

 Once the starter projects are complete, select another set of projects and manage them in a similar fashion to the first.  It is important to manage these first initial projects carefully in order to build momentum for continued expansion of your product cost management initiative.

Expanding Across the Organization

  1.  Continue to build and refine cost management infrastructure across the organization.
    • Use the series of starter projects to establish a support network of Executive Sponsors, Business Champions, and Business Participants across different functions and business units.
    • Roll out standard operating procedures for all cost management activities.
    • Centralize tracking and reporting of results.
  2. Create a funnel of cost reduction activities that will yield dividends across the short, medium, and long term:
    • Sourcing / re-quoting product cost management projects – realized cost savings in under 6 months
    • VAVE or Redesign product cost management projects – realized cost savings in 6-12 months
    • New product launches – cost avoidance / savings in quoting in 24+ months

Critical Success Factors

We’ve discussed many aspects of planning and implementing effective product cost management here.  The following are critical to the success of your initiative:

  • Find a dedicated Executive Sponsor who can mandate change and build urgency around cost management needs within your organization and consistently reinforce the need and importance of staying the course with the program over time. He/she should also be looking at the high level results on a regular basis.
  • Don’t take on the most complicated project on Day 1.  Start with something manageable where your likelihood of success is high, then move on to more complex projects.
  • Champions need to surround themselves with positive-minded risk takers.  Any time you try to change an established process, many people will try to return the system to the status quo by injecting negative feedback.
  •  Implement an incentive program for managers to drive desirable behaviors and push your implementation forward.
  • Define and insist on a formal system for capturing project metrics.  Publish these results far and wide across the enterprise.
  • Partner with an experienced technology solution provider that can provide you with practical advice based on a well established track record of producing positive results for its customers.

Good luck with your adventure in Product Cost Management!  We’ve layed out what we believe are some of the Key Principles and Best Practices for this type initiative over the past 4 weeks.  Please feel free to comment on this and the other articles with any practical experience you may have, or thoughts on our recommendations.