The Principle of Granularity and Product Cost Management
After 25 years in the business of marketing manufacturing software, I still remember one of my early job interviews where I absolutely sealed the deal by referring to the Principle of Granularity.
I’m not even sure where I learned about this concept, but when I was speaking to this executive, he asked me “What was my strategy for attacking an extremely complex Request for Proposal project?” Without batting an eyelash, I launched into a description of how I would break down the project into its most elemental components, delegate the responsibility for answering each section of the RFP to the most appropriate resource in the company, then combine all the elements back together again to achieve the finished result. As soon as I finished, the gentleman I was speaking with looked me right in the eye and smiled. I knew I had the job right then and there – and I owed it all to the Principle of Granularity.
Fast forward to today. I have designed and implemented marketing programs around the world, many of them highly complex undertakings with hundreds of moving parts. And to this day, I still leverage that same basic principle when I attack these types of projects, and that will likely span a long duration of time – I break them down into their elemental components, then leverage the most talented people around me to drive towards a highly successful end result – it’s never failed me.
Applying the Principle of Granularity to PCM Strategy
Interestingly enough, the strategy for successfully achieving the total potential savings opportunity of a product cost management deployment should be viewed in the same way.
After consulting with key business executives across the product development organization (R&D, design, engineering, cost engineering, sourcing, manufacturing and key suppliers), and achieving a strong understanding of the company’s internal processes, current costing methodologies and goals and objectives for improvement, one can leverage the Principle of Granularity to build out a deployment plan that is broken down into its most elemental components, and is implemented like a phase/gate project.
The Role of Cost Culture Maturity
A key consideration when building out the deployment plan should be the level of Cost Culture Maturity. While some companies do have dedicated experts that have a strong understanding of costing and manufacturing practices, most manufacturers have outsourced a significant portion of this expertise to their supply chain.
In that case, as you break down a product cost management initiative, you want to start with a series of relatively small, manageable projects where you can build some experience, acquire manufacturing data from some of your strategic suppliers, gain an appreciation for the subtleties of product cost, and how cost evolves and represents itself differently depending on your needs, perspectives and the level of information available to you at a specific point in the product development lifecycle.
Once an initial project has been completed, and you have gained some valuable experience and established that there is a strong ROI to be achieved, you can move to the next level of cost maturity, and take on a project that may be somewhat more complex. Maybe it involves attacking the cost of a new manufacturing process, a new product line, or the project spans beyond your own organization into an adjacent function, requiring a new level of collaboration that did not previously exist.
Leverage Your Partner for Targeted PCM Solutions
An experienced Product Cost Management partner will be able to present you with an array of software and service solutions that are targeted specifically at addressing a narrow challenge you are facing, such as Spend Analysis, Quote Validation, Evaluation of Design Alternatives, costing of Engineering Change Orders and others.
Each of these solutions will require different levels of financial investment and different levels of personnel commitment. Typically you will find that there is a correlation between the complexities of the project, the Time to Value (TTV), and the long term ROI – the bigger the project, the longer the TTV, the bigger the ROI.
It’s best for companies that are at the foundational level of the cost maturity curve to start with projects that require minimal specialized manufacturing data, minimal product configuration, offer relatively short TTV and provide an initial level of ROI that starts to build credibility in the program, and allows you to graduate to the next level of maturity, and tackle a project with a little more experience under your belt.
In the end, it all goes back to that basic Principle of Granularity. The long term potential for a strategic Product Cost Management initiative is immense, but don’t bite off more than you can chew in the early days.
Listen to the advice of your PCM technology partner and break the project down into its elemental components. When you look back after a period of time, and roll-up all the savings you’ve realized, and you’ve personally played a big role in advancing the cost culture of your entire organization, you’ll come to realize that you too have sealed the deal, and helped your company become a much more competitive force in the marketplace.
Want to Learn More?
Download our whitepaper, Implementing an Effective Product Cost Management Program, for best practices and practical guidelines to help you get started on your product cost management journey.