Product Cost Management is a Team Sport
Over the past few months, aPriori has had the privilege of working with Stan Przybylinski, Vice President of Research at CIMdata, to document the current state of the product cost management software market. As we discussed our observations of the market, emanating from literally hundreds of on-site meetings with some of the world’s premier product manufacturers, we shared with Stan how we are always stunned at how many companies are behind the curve when it comes to managing their profitability (i.e., they’re still managing costs with spreadsheets or custom cost databases). It’s like looking at the CAD market in the early 1980s, when people were still struggling with the concept of replacing drafting boards with wireframe modeling.
So many aspects of the product design, sourcing & manufacturing process have been automated through the use of software technology, but in most cases, not product cost management and profitability. Some will argue that their ERP system helps them manage cost. Okay. That’s great for products where the product is actively being manufactured and shipped to market, but what about identifying and eliminating cost drivers during the development process, before a product goes to market? Why let your employees inadvertently design cost into a product with no associated value for the end consumer? It’s a mystery.
Key Research Takeaways
After our briefings with Stan, he did a bunch of research on the state of the market and talked to several of our customers to get their perspective. His key takeaways from the research were as follows:
- In most companies, product cost and manufacturing knowledge and requirements are spread across different functions and information systems
- Competitive pressures to win business are forcing companies to make decisions earlier in the lifecycle, making it more difficult to get disconnected functions to bid to win and to make money
- The most successful companies take a team approach to product costing, fostering collaboration among design engineers, cost engineers, manufacturing, and supply chain management
- aPriori designed their solutions to support the deep subject matter expertise needed to simulate manufacturing processes cost effectively within a collaboration environment that helps teams meet their market requirements and costing objectives
I think the 3rd bullet is the most critical observation and it’s completely technology neutral. Product Cost Management, in the most modern form of the discipline, is indeed a team sport. It’s such a great analogy. Being a Boston Red Sox fan, I loved watching the Yankees go out and spend an obscene amount of money to buy the best players on the market, only to see the Chicago Cubs (#14 in team salaries) win the world series this year. As individuals, their players are the best at their respective positions. However, if they don’t have a cohesive system or process for working together towards achieving the goal of winning, they’ll never achieve that goal.
Achieving the maximum level of product profitability is truly very similar. Many companies we’ve met do indeed have dedicated cost engineering teams, and these folks are always incredibly smart, insightful individuals, passionate about driving costs out of the innovative new products their companies bring to market. Unfortunately, the company equips these dedicated players with outdated technology and only gives them a handful of people to try and understand the costs of designs developed by the product engineering team which outnumber them 10 to 1. It’s a system that is designed to underperform every time.
Cost is the Responsibility of Everyone
Every design decision that is made – from the features of a design to the material to the assembly process – all have an impact on cost. Every single decision. Yet time and time again, we observe that the design teams have absolutely no insight into the cost impact of these decisions. Why not?
Sourcing managers are still relying on the tried and true method of sending out RFQs to a large array of qualified suppliers, then negotiating based on price quotes. Very few companies we work with have evolved to an “open book” strategy with their key suppliers. How do they know that the price quote from any one of these suppliers is accurate? Typically the range between the high and low can be extreme. How do they know which price is the right price to pay?
Cost Engineers certainly have the skill to assess cost for a design, given their knowledge of manufacturing processes and their experience in costing thousands of parts over time. Unfortunately, they get a look at the design long after critical decisions have been made that in some cases would require extreme amounts of re-work to “undo”, setting the time to market back by an unacceptable margin. This inevitably results in the infamous, “let’s ship it, and squeeze cost out as we ramp to volume” strategy.
Everyone on the team is responsible for cost. It’s time that the leaders of these companies start accelerating their deployment of new technologies and best practices around product cost & profitability management, just like they did with CAD design back in the ’80s and with simulation tools like FEA/CFD in the 90s.
For complete details on the research completed by Stan Przybylinski on the current state of the Product Cost Management market, we recommend you take advantage of these additional resources:
- Optimal Lifecycle Costing is a Team Sport (Written Article)
- Optimal Lifecycle Costing is a Team Sport (video, 40 min)