Research Reveals Insights from 22 PCM Early Adopters
In a previous post, Strategic Product Cost Management: Challenges and Benefits, I shared the results of some recent online market research. In that post, I also referenced another effort completed in October 2014 by The Walsh Group, an independent consultant. That research involved in-depth interviews with 22 aPriori customers about how they approached product cost management (PCM), key business challenges, their use of the aPriori platform and the value realized from it.
The format of this effort enabled the interviewer to dig into great depth with the participants and produced some very valuable qualitative data. I’d like to share some of the key insights from those interviews and invite your comments on how this compares to your own experience.
The survey participants were generally reflective of aPriori’s existing customer set based on industry vertical, revenue size and geographical region. Interview subjects included CIOs, vice presidents, directors, mangers and team leads of multiple departments including Engineering, Manufacturing, Procurement, Sourcing and Cost/Value Engineering.
Why Market Leaders Invest In Product Cost Management Tech
aPriori customers tend to be early adopters of product cost management (PCM) technologies. They are investing in these solutions to address multiple business challenges, including:
- Cost Reduction – to reduce overall product costs and to meet target cost goals on new products
- Business Focus – to identify key cost drivers in their business and prioritize their plans and actions to address them
- Cost Culture – to increase awareness of product cost and a create a stronger cost management culture in their organizations
- Strategic Sourcing – to more effectively negotiate with their suppliers and enable more strategic sourcing decisions and activities
- Business Decision Making – to drive more informed decision making regarding make vs. buy, sourcing and manufacturing/material decisions
Contributing Factors to PCM Effectiveness
Those customers that saw the greatest improvement in their product cost management effectiveness after deploying aPriori cited several common themes:
- An overall increase in awareness and knowledge in their organizations about product cost. In the words of some participants, the information provided by aPriori is “raising the volume” on the conversation about product cost thereby creating more consistent action on it.
- A direct and measureable impact in sourcing, supplier negotiation and cost avoidance.
- Different groups have the ability to see cost earlier in the product development process – so they can do more to impact it.
- The product costing process moves faster and more efficiently.
- Anticipation of more opportunities for cost savings to come as they continue to use the aPriori platform and do more around product cost in general.
Effective PCM is Not a Quick Fix
While there are numerous short term benefits to be gained from aPriori, respondents agreed that the greatest impact comes from ongoing, longer term use of the platform that may also involve changes to business processes, metrics and culture.
The value from aPriori’s solution has been cumulative for most of the companies interviewed – increasing over time as the manufacturer gains more proficiency with the toolset, establishes confidence in the cost data produced and rolls it out to more users, locations and departments across in their organizations.
Where Production Expertise Has Been Lost, aPriori Can Fill in the Gaps
As manufacturers depend more and more on their supply chain for manufacturing and assembly, effective sourcing becomes very strategic. Over half of the companies interviewed outsource more than 50% of their manufacturing. Almost a third outsource more than 75%.
Companies that outsource large portions of their manufacturing report having lost production expertise, and along with it, knowledge of best methods of production and what products/ parts should cost. This makes effective sourcing more difficult.
Some manufacturers are filling this gap by using aPriori as a baseline and reference tool to:
- Validate supply base cost info, highlight cost outliers and identify potential material, utilization and manufacturing process alternatives
- Provide their Sourcing teams with target ”should cost” information
- Identify savings in materials, utilization, tooling
- Open up new lines of discussion internally and with suppliers about better ways to produce and source
- Focus their cost management efforts on the most valuable and highest impact opportunities for the company
- Forge more strategic and agile supplier relationships
These activities are creating large and measurable cost savings opportunities in the form of more efficient product materials and better material utilization; less costly tooling processes; and new supply sources that can support target cost goals.
Here are a few of the specific ROI examples cited by some of the survey participants:
- A US-based Industrial equipment manufacturer attributes $1 – $1.5M in material cost savings to aPriori as a result of product redesign and better supplier negotiation. It was part of an $8M improvement in total material productivity. Another project netted over $1 million in savings via better sourcing decisions as a direct result of “should cost” information.
- A US-based Industrial machinery manufacturer saved $1M+ via a 1x sourcing/should cost project.
- An automotive/transportation manufacturer in the US identified $600K in savings working with just two of its large suppliers.
- A European EHT manufacturer projects $200K savings in Year 1 based on a better sourcing decision on just one part. The company also avoided another $100K in cost by changing one part design from machining to casting.
Tell Us About Your Experience
How do these experiences compare with your own? Are you targeting the same core issues in your organization? What do you perceive to be the short and long term benefits of your own product cost management efforts? Is there a greater emphasis on strategic sourcing in your organization? Tell us about it in the comments.