Manufacturing Cost Estimation Tools & Techniques: The Network Effect
In economics and business, the “Network Effect” is the impact that one user of a good or service has on the value of that product to other people. When the Network Effect is present, the value of a product or service is amplified as the number of other people using the product increases.
The “Network Effect” is a manufacturing cost estimation technique that should not be overlooked.
The overall level of success you achieve with your manufacturing cost estimation initiative is also a function of the Network Effect. If you have three people from the same department focused on product cost estimation management, you can drive sufficient value to justify your initial investment. However, if you deploy best practices across 30 people, not only in design, but in sourcing, cost engineering and manufacturing, your return on investment will be amplified dramatically as everyone on the product team shares a common view of product cost, and works to hit target cost goals collaboratively.
And, if you expand your thinking beyond the four walls of your company, to include your key suppliers into your concept of the product development team, you can fully harness the Network Effect potential, and yield the maximum value possible from your product cost management deployment.
Implementing the Network Effect
The first step towards tapping the Network Effect involves getting your internal house in order. The vast majority of companies we speak with still have an “over-the-wall” mentality when it comes to cost estimation techniques. Instead, engineering and product design teams must do a better job of collaborating with sourcing teams to understand the implications of early stage trade-off decisions, and how those decisions impact product cost. This is only truly facilitated when all members of the team are working with one shared view of product cost.
Furthermore, manufacturers waste vast amounts of time designing new products and waiting for cost quotes when one of the company’s strategic suppliers already has years of experience designing and manufacturing that exact type of product. The sourcing team would know that, and could initiate such a conversation early on with the design team if they only knew what was needed.
By expanding your product cost estimation deployment to all members of the product team that impact cost, each member contributes to the overall savings experience for the company, helping you to fully realize the benefits of the Network Effect. Below are some examples of benefits different teams can expect to receive when a company thinks strategically and cross-functionally about product cost, versus a limited, tactical deployment:
- Design Engineers who commonly have cost and weight targets for new product introductions (NPI) can design not only for form, fit and function, but also finance. Program managers and cost engineering teams can set cost targets, giving engineering and design teams the freedom to innovate, while quantifying design alternatives without worrying they will exceed target cost and profitability goals.
- Manufacturing Engineers can collaborate with design engineering to validate and refine the manufacturing approach, explore alternatives and determine the internal cost of making parts versus outsourcing to the supply base.
- Project Managers can have continual visibility into the cost status of a given product or project and understand where best to direct the team’s efforts. This requires the ability to roll up the cost of a complete Bill of Materials (BOM) with new design costs generated from your enterprise product cost management system or imported from other PLM or ERP systems (e.g., catalog parts, carry-over parts, components cost in another tool).
- Sourcing can have access to reliable should-cost data for finding outliers in current product spend and quotes, analyzing make vs. buy situations and negotiating more effectively with suppliers.
- Cost Engineering would have a tool that can help them scale, speeding the time it takes for them to analyze a complex part and determine piece part and tooling costs. As the experts, they play a critical role in deploying and maintaining the enterprise product cost management system and in developing a cost culture across the organization.
INTEGRATE ENTERPRISE COST ESTIMATION APPLICATIONS
On its own, your product cost management efforts can certainly deliver significant value to your organization. However, without synchronizing it with your other enterprise automation solutions, your product development team will not be able to leverage valuable data that already exists in other systems (such as BOM structures, catalog part pricing, material stock and pricing information, time standards and other manufacturing process data, logistics costs, etc.).
As new material costing information is entered into your ERP system, for example, it could ripple through to the product cost platform, and everyone on the product team would benefit from this real time update of relevant data. See image below.
Each of the outer systems above (PLM, ERP, MRP and SCM) contains individual components of cost. By not tying all of the individual parts together, the company is left with an incomplete view of costs for new product initiatives.
Manufacturers looking to gain an edge over their competition are taking a more holistic view of product cost and striving to implement a culture of cost consciousness across their entire product organization. See how our customer, GE, has incorporated a culture driven by product cost management in this case study video.
CREATE A COMPLETE VIEW OF PRODUCT COST
To achieve this goal, product development teams need to work with their counterparts in the IT organization to define and implement a technology infrastructure that provides one common view of product cost as a design evolves from concept, to detailed design, to sourcing and ultimately manufacturing or assembly. And, it needs to be integrated with other mission critical enterprise systems such as those indicated in the image above.
EXTEND COST MANAGEMENT TOOLS TO THE SUPPLY CHAIN
This leads us to the last, and possibly the most important and often overlooked element required to fully capitalize on the Network Effect. Tying together all internal organizations affecting product cost via a common manufacturing cost estimation tool is an excellent start.
But, if you only connect your internal organizations, you are missing one of the key links in your value chain – suppliers. Sending out RFQs to a supply base will likely get you at least three different quotes where you can pick the one in the middle, and still not pay what a product “should cost.”
Integrating with the supply chain is key to getting the most benefit from the Network Effect.
Today, companies are relying more than ever on the design, manufacturing and cost expertise of their strategic suppliers. Unfortunately, from a technology integration perspective, suppliers are off on their own, struggling against the incoming tide of RFQs.
But what if you were able to identify a handful of strategic suppliers and convince them to join your enterprise product cost management network? What if, instead of selecting a baseline product cost model to generate a cost estimate, you could select a cost model based on one of your strategic suppliers?
This would yield an accurate cost estimate that represented their material costs, labor costs, overhead costs, manufacturing capabilities, process routings, logistics costs, negotiated margin, etc.
Furthermore, instead of waiting weeks for the supplier to manually develop a quote and respond to your RFQ, what if it only took a few days or hours or just a few minutes to generate the quote? How would that impact your organization?
HOW TO INTEGRATE SUPPLIERS INTO YOUR MANUFACTURING COSTING STRATEGY
There are two effective approaches for integrating strategic suppliers into your manufacturing costing strategy.
- Build a supplier cost model in your own manufacturing cost estimation tool. With this approach, you leverage your buying power and pre-established relationship with a supplier to collect information about that supplier’s operations and general cost structure. Then, take that information, and build a Supplier Cost Model within your own tool environment that appears each and every time as a choice for end users of the system.
2. Get your supplier to implement a manufacturing cost estimation solution. As an alternative approach, you set up meetings between your costing solution partner and several of your key suppliers. Your costing solution partner can then work directly with those suppliers to implement a solution at the suppliers’ sites, building a baseline cost model that mimics the capabilities and cost structure at one or more of their manufacturing sites (virtual factory).
Now, when you need a cost estimate, you simply send a 3D solid CAD model to your supplier with the RFQ. Because the supplier no longer has to manually review endless sheets of drawings and other related information, and can simply open the CAD model in their own costing system, they rapidly generate a detailed cost quotation, and the supplier’s response back to the manufacturer can be cut dramatically. This has a direct and positive impact on the manufacturer’s product schedule and overall time to market.
BENEFITS OF THE NETWORK EFFECT TECHNIQUE TO MANUFACTURERS
Manufacturers that embrace the concept of The Network Effect and extend their manufacturing cost estimation tools and techniques beyond their internal organizations and to their supplier community will reap numerous and significant benefits, including:
- Faster Time to Market – get quotes on early designs in a fraction of the time it takes today
- A greater % of products and parts that are cost optimized
- Increased product profitability
- Less post-launch or late-state rework
- Enterprise cost collaboration – a common view of cost and a consistent repeatable costing process
- Increased corporate cost competency – by capturing and institutionalizing an understanding of design and manufacturing cost drivers
Some of you are already actively managing new product initiatives to target cost, engaging in more informed make vs. buy decisions, analyzing spend across entire commodities for outliers, and maximizing savings on re-design projects. You are ahead of most of your competition. But if you want to maximize the full potential of your product cost management efforts, and fully capitalize on the Network Effect:
- Connect all the constituents of your product development team, from the earliest stages of product design through sourcing, cost engineering and manufacturing on one manufacturing cost estimation platform.
- Integrate your enterprise cost estimation system to your other critical enterprise applications – ERP, MRP, SCM, PLM – to aggregate all information related to product cost under one core platform accessible by all members of your product development team.
- Extend your enterprise manufacturing cost estimation management system to your strategic suppliers so that your entire value chain works in the most time and cost-efficient manner possible.
Get The Guide! Our Manufacturing Cost Estimation Strategic Guide examines the business problems the right cost estimation approach can it help solve, and point to some real use-cases for today’s costing technologies.