Your Trusted Advisor | The Should-Cost Benchmark

Chris Catalini August 4, 2016

Need a Trusted AdvisorThe Need for a Trusted Advisor

As a new homeowner I do not have a lot of expertise when it comes to home repairs.

So, when I had to tackle the intimidating task of replacing my roof this summer, I struggled when it came to judging what was a reasonable price to pay a roofing contractor.

My biggest problem was that I didn’t understand the cost drivers to build up a reasonable price for the job! I am not in the roofing industry. I don’t understand their labor force, their accounting structure, their overhead costs, or how their market fluctuates. I didn’t understand how the shingle selection and the pitch of the roof affect the cost or even if the style of my house or geographic location weighs heavily into the price of the job. Or, maybe the time of year factors into the equation? I didn’t even know where to start.

Luckily I have a longtime friend who owns a roofing business in the area whom I trust and can approach for help when it came to estimating the cost of the job. He was a trusted third party who understands the cost structure of the roofing contractors and knows the detailed steps that go into a completed job. He knows where hidden costs are buried and points out complications that are only obvious to a trained eye. He is plugged into the local market, understands the cost drivers, and most importantly he has an objective viewpoint of what the job should cost.

Wouldn’t it be great to have a trusted, experienced, unbiased, and transparent friend who could help build up a benchmark estimate cost for your products?

How Should-Cost Benchmarks Change the Conversation

During a new product introduction program, cost reduction activities, or supplier negotiations a benchmark should-cost estimate can be your best friend.  The benchmark should-cost estimate is a valuable data point to consider alongside supplier quotes.

A should-cost estimate guides a conversation with your suppliers in new and interesting directions that may have not been obvious before:

  • Instead of discussing total process costs we can talk about cycle time, batch setup time, labor costs, and overhead rates
  • Instead of discussing total material costs we can talk about material utilization, part nesting, and cost per mass.

The deeper the knowledge and process data brought to a should-cost negotiation or into a cost reduction exercise the more likely it is the activity will yield a successful result.

Making Should-Cost Estimates Available for Everyone

Unless you had 30 years of manufacturing experience, building a bottoms-up should-cost estimate was nearly impossible. And, even with that kind of experience it was a time consuming process that limited your ability to cost optimize a high percentage of new parts being introduced by the design team.

This is one of the most eye-opening experiences for companies new to automated product cost management (PCM) technology. When they first realize that their own users – most of whom have little to no costing experience – can quickly build benchmark estimates that deliver detailed results fast, and their cost experts can do their work an order of magnitude faster, they are often overwhelmed by the potential for improvements to their product profitability.

Cost engineers have traditionally been the only source of this data, but the burden on this team is getting too heavy. By using product cost management software, designers and sourcing professionals can now have a self-service portal into should-cost knowledge for routine estimating.  This frees up the dedicated cost professional to focus their own efforts on identifying potential cost savings on higher value projects. Augmenting the cost knowledge of non-experts has huge savings potential in groups that have had limited access to this data before.

Cost Expert MemeNovice users of automated PCM technology don’t need to submit a request or wait for resources to free up – they can create the estimate themselves for most of their activities. And, the should-cost estimates aPriori provides are developed by leveraging the fundamental geometry of part designs, manufacturing process simulations, and economic data for the region where a product will be manufactured. It is also completely transparent and open, just like that trusted industry expert who knows every detail that factors into the cost of your products.

I am not an expert in all the projects I undertake. That’s simply not possible. But I do know who to ask when I need guidance and having trusted advisors is an invaluable asset to me.

Who do you go to for guidance when it comes to the cost of your products?


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