aPriori eBook | Cost Management

Implementing an Effective Product Cost Management Program

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The benefits of a systematic product cost management program are significant, yet many manufacturers struggle to implement these initiatives effectively. This ebook

discusses some of the obstacles involved and outlines key considerations and best practices for initiating an effective product cost management program. It also provides

practical guidelines and examples of how to execute them for maximum impact.

EXECUTIVE SUMMARY

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THE CHALLENGES AND OPPORTUNITIES IN MANAGING PRODUCT COSTS

Engineering ManagersYour Engineering Managers are

given target product cost guidelines, but no tools to understand the

true cost impact of their product design decisions. As a result,

new product designs are released to manufacturing over original target costs and with potential

manufacturability issues that have yet to be discovered.

Value EngineersYour Value Engineers are tasked with reducing the cost of products

after they are in production. Yet, they have no tools to understand how

their ideas truly impact product cost. To validate their ideas, they send

their best engineering concepts to their manufacturing team or out to a supplier for a quotation — adding days or weeks to their own process.

Sourcing Professionals Your Sourcing Professionals are tasked with managing outsourced product costs. However, they have

very little insight into what their product should cost before they

send new designs out to bid. They are faced with asking for arbitrary

discounts which do not take in consideration the should cost of the

part and the supplier margin.

Cost Engineering When your Cost Engineering team

is asked to develop a quote for new customer business, it is often a painstaking process to build up the quote that requires significant manual inputs and manufacturing

expertise.This results in delays responding to the customer that can

often mean losing the business.

These situations are very common in most discrete manufacturing organizations today. At the core of all of them, is the inability to accurately identify, assess and manage detailed product costs early enough in a product’s lifecycle. There are several reasons for this:

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Fragmented Information Critical pieces of a cost estimate are spread across the organization in different functions, resulting in inaccurate, incomplete estimates.

Inefficient / Labor-Intensive Processes Most cost estimating activity depends on a small group of people with highly specialized skills spending hours manually producing each estimate. This creates a significant bottleneck.

Siloed Decision Making Most cost estimates are developed independent of the person making the immediate product design decision. Cost estimating tools that are available are really only feasible for Cost Experts with strong manufacturing knowledge.

Static Information Once a cost estimate is recorded, it does not change or update as new information becomes available or the design changes.

Uncontrolled Systems Multiple cost estimates from different sources exist with many users of cost information having no idea which estimate is the most current and/or valid.

Minimal Re-use of Previous Estimating Work As a product matures, different methods are used to re-cost parts and processes that often don’t leverage previous estimate work.

Best-in-class companies are overcoming these challenges by applying effective cost management strategies across their organizations and realizing huge repeatable benefits in both hard and soft cost savings.

Product Cost Management (PCM) is a set of tools, processes, methods, and culture used to ensure that a product meets its profit (or cost) target.

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PCM Benefits by Organizational Role

PCM in Product Design/EngineeringPotential Benefits:• Avoid cost during new product design.• Reduce time to market by avoiding last-

minute cost surprises.• Increase engineering knowledge of cost

tradeoffs.• Ensure manufacturability through design to

cost feasibility checks.

PCM in SourcingPotential Benefits:• Reduce quoted part and tooling costs.• Ensure lowest pricing via fact-based

negotiation. • Identify cost outliers for renegotiation

through batch cost analysis.

PCM in Value EngineeringPotential Benefits• Evaluate a higher quantity of redesign alternatives in a shorter period of time.• Identify and quantify high-value savings

during Value Engineering or redesign.• Select redesign opportunities by

highest ROI.

PCM in Cost EngineeringPotential Benefits:• Generate accurate, detailed quotes for new

business in a fraction of the time required with manual approaches.

• Achieve a higher degree of consistency across your cost estimating team.

• Increase throughput of the costing team by batch costing hundreds of parts at once.

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PRINCIPLE #1Align Your Product Cost Management Strategy with Corporate Objectives.

KEY PRINCIPLES OF EFFECTIVE PRODUCT COST MANAGEMENT

In order to succeed with your product cost management (PCM) initiative, the first thing to consider is how this project will help with the attainment of annual goals set by the executive management team. Perhaps the goal is to reduce the amount of time it takes to launch new products to market. Or, maybe a goal has been set to reduce the cost of goods purchased through the supply chain by 2%.

Aligning the goals of your PCM initiative will ensure that the program has the full support of the executive management team. This will be critical for securing resources (to staff the project team for and any technology purchases that are required) and overcoming any obstacles encountered as the program evolves across the organization.

Cost

Cost

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Assembling a Core Implementation TeamYou can’t drive an effective product cost management initiative alone. Assembling the proper team and building support for cost management within the organization are essential. Having these roles in place will ensure the program achieves its objectives.

PRINCIPLE #2Product Cost Management is a Team Sport

representing the 3 key stakeholders: Executive Sponsor, Champions and Cost Management Manager. [maybe 3 workers sitting around a table looking at a pile of papers/reports?]

see attached document for some copy to attach to these 3 graphic images.

Executive Sponsor – Someone committed to implementing a cost management program and that recognizes the organizational factors to be considered to make your project goals a reality. They can assist by:

• Assessing their organization’s own cost culture and how it naturally fits into their development environment

• Fostering awareness of the problems cost management can solve

• Mandating the change and communicating the high priority of the product cost management initiative so that teams appreciate the urgency to support and adopt the new system

Champions – Champions work with the Cost Management Project Lead to refine the cost management processes and activities so they work within their teams.

• NPI Engineering

• Value Engineering

• Cost Engineering

• Sourcing

• Manufacturing Engineering

Cost Management Project Lead – As the momentum from early pilot projects builds, assigning a Project leader that has a clear understanding of cost management activities and how they apply to the organization overall will be critical. This individual also works closely with the Executive Sponsor and Champions to rollout cost management tools and activities to the business teams and is ultimately responsible for guiding the teams in initial project selection and process implementation.

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Think Big, Start SmallCost management can have a significant and immediate impact across your organization — increasing profitability, accelerating time-to-market and growing revenues. As such, it’s appropriate to think big and aggressively about how to use it with a vision for what is best for your organization.

But it’s also best to start small and build your success in stages, with specific Value Milestones that provide quantitative ROI metrics. See below for an example of how a first year deployment can provide immediate payback.

PRINCIPLE #3Don’t Try to Boil the Ocean

Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 12

Value Milestone 1 Value Milestone 2 Value Milestone 3

Value Tracking Value Tracking Value Tracking

Define

Configure & Calibrate

Define Expansion Plans for Years 2 and 3

See the infographic on the next page for examples of high value cost control points across the product development lifecycle.

Evaluating multiple design alternatives for lowest cost during NPI

Evaluating the cost of proposed solutions to an engineering change order

Evaluating multiple manufacturing and tooling alternatives for lowest cost, including make vs. buy analysis

Generating a detailed “should cost” to enable fact-based negotiation and ensure lowest pricing

Batch analyzing entire commodity groups to find cost outliers

Evaluating multiple cost down ideas on current products in real-time to identify the highest potential reduction in the shortest amount of time

Core Cost Management Activities

The Core Cost Management Activities outlined below are performed by multiple functions in an organization and result in Cost Control Points in the product development process. These are measurable, managed checkpoints that dictate where and when people should perform the core cost management activities outlined below.

The output and results of these activities continue to build on each other throughout the product development lifecycle. For example, during the introduction of a new product, there are typically design review meetings at regular intervals to ensure that the new product is meeting form, fit, and functional requirements. This is a perfect opportunity to have a discussion about the financial implications of different design alternatives that are being evaluated. An effective product cost management system would include mandatory cost evaluation as part of each design review milestone.

Cost Control PointsPRINCIPLE #4Overlay Specific Cost Control Points on your Existing Product Lifecycle

There are numerous ways

to Improve Profitability and Accelerate Time

to Market

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Organizations that are leading the way in product cost management treat cost as they would any other requirement within their product development process.

Cost management is performed at multiple Cost Control Points by R&D and Engineering during both New Product Introductions and current product re-design cycles including early concept evaluation and detailed design — where 70% of costs are determined.

In later phases of the product development lifeycle, Cost Engineering, Sourcing and Manufacturing perform their own cost management activities beginning with their initial cost estimates and refining it based on knowledge of strategic suppliers or the status of internal manufacturing facilities. These refined cost estimates serve to benchmark and control actual costs during manufacturing planning and quote validation. In all cases, cost information is dynamic and easily shared in a usable format with everyone that impacts product cost.

R&D

Assessing Concept Cost

Developing Cost Targets & Program Plan

Designing-to-Cost & Meeting Targets

Developing Should Cost Analyses

Examining Make vs. Buy

Negotiating with Suppliers

Developing Time Standards

Indentifying Outliers and Analyzing Components for Cost Reductions and Supplier Trends

Shortening OverallNPI Lifecycle

Tracking Product & Program Costs

NPI

Reducing CurrentProduct Costs

Cost EngineeringChange Orders

ValueEngineeringSourcing Manufacturing

Estimating Costs for NPI Projects

Capital AssetJustification

CostEngineering

Figure 2. Product Cost Management Across the Enterprise

Cost Control Points Across the Enterprise

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Key considerations for measuring the progress and success of your PCM initiative include:

• Identifying metrics to collect at the key cost control points; e.g., number of active users, cost avoided in design, cost saved in negotiation, cost reduction opportunity identified.

• Creating a process for measuring and recording results; e.g., at first functional design milestone, first prototype milestone, and final design milestone submitting costs to ERP or PLM system

• Creating a process for monitoring and reviewing results; e.g., every design review includes presentation of anticipated product costs and data

• Creating an incentive system for managers and individual contributors to reinforce these behaviors and activities; e.g., emphasizing that product cost is a priority equal to product launch schedule, quality and functionality

To measure progress and promote cost consciousness across your entire organization, consider working with your PCM Technology Partner to implement a Cost Maturity Index as part of your long-term growth plan.

Results Tracking and Monitoring Mechanisms

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PRINCIPLE #5If It Can’t Be Measured, It Can’t Be Managed.

Chart Strategic Progress Using a Cost Maturity Index

Results tracking for specific Cost Down or Cost Avoidance projects during the early days of your PCM initiative is an absolute imperative. It helps validate your investments in process change and technology purchases that support the PCM program and identifies areas for improvement. However, it is also important to chart your progress at a higher enterprise level to understand how your overall cost management culture is progressing over time.

aPriori recommends charting your progress using a Cost Maturity Index (CMI). The CMI is a customized version of a capability maturity model that charts your overall progress towards improving product profitability against four key focal areas.

In a CMI engagement, members of the product team are asked a series of questions aligned to each of the above categories that help identify the level of cost maturity across the organization.

The response to each question is given a grade ranging from 1 (low level of effectiveness) to 5 (high level of effectiveness). The scores in each category are added and averaged to produce a single value. The objective is to identify areas for improvements and adjust your on-going PCM Strategy to drive your score in each category to 5.

An annual CMI audit is essential to understanding if progress in each of these areas is staying aligned with the initial goals and objectives of the deployment, and the overall cost management culture of the organization is progressing towards a more advanced level of maturity.

Companies that utilize this type of long-range planning mechanism consistently yield higher cost savings, improved product profitability and also find that eliminating process inefficiencies gets them to market faster.

Charter Process TechnologyPeople

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Effective product cost management is enabled by putting the proper tools in the hands of anyone that impacts product cost. These tools help identify and assess true product costs at a detailed level at any stage and enable people to act on the appropriate opportunities to reduce costs. Key considerations when evaluating a PCM technology should include:

PRINCIPLE #6Arm Your Product Team with a Modern, Automated PCM Technology

FEATURES/CAPABILITIES BENEFITS/OUTCOMESAutomated Costing: System should provide automated cost estimate creation from a few basic inputs to simulate manufacturing operations and generate detailed manufacturing data and cost.

• Get products to market faster (don’t have to wait for quotes from purchasing or suppliers)• Allows cost novices to quickly and easily produce cost estimates early in the design process.• Eliminates costly mistakes that have to be fixed downstream by value engineering.

Flexible Costing: System should be able to take inputs in a variety of ways, including 3D CAD models, manual input, tables of data and batch analysis of large volumes of components.

• Eliminates the need for multiple specialized costing solutions.• Accommodates collaboration with customers and supply chain partners that use different

systems and costing approaches.

Starter Cost Models: Software should have pre-built starter cost models representing a wide variety of manufacturing processes.

• Accelerates Time to Value• Helps end users understand cost drivers for a wide variety of manufacturing processes

(sheetmetal stamping, injection molded plastics, casting, machining, forging, etc.).

Regional Data Libraries: Software should have cost data for a wide variety of machines as well as labor and overhead costs from countries across the globe.

• Quickly study tradeoff decisions for different supply chain/manufacturing scenarios for regions around the world.

Cost Rollups (costing of BOMs): Software should be able to easily import BOMs from an ERP or PLM solution and attach that BOM to geometric models of costed components.

• Quickly generate detailed cost for functional assembly groups made up of hundreds of parts.• Understand current status vs target cost for New Product initiatives during the early stages

of product development.

Single Database Architecture: Create a single system of record that represents the current cost of parts, subassemblies and complete products.

Creates consistency of costing practices across your globally distributed product development organization.

Platform is Configurable and Scalable: System should provide capabilities for configuring cost models and data and must fully accommodate a global enterprise deployment.

Accommodates the unique requirements of your specific business, no matter where you operate.

Reporting & Analytics: System must enable management to easily monitor the status of current projects.

Improve decision making by providing management team with detailed cost and manufacturing data.

Cost Estimation Detailed ReportsManufacturability Guidance

Cost Management Tools

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SPEED OF COSTING

Faster costing feedback available to all business functions greatly expands the potential impact of product cost management and

reduces time to market.

INCREASE THROUGHPUT

A modern PCM platform provides easy to use, automated costing features that enable designers,

engineers and sourcing professionals to significantly increase the

percentage of cost optimized parts.

CONSISTENCY OF COST

A centralized product cost management platform ensures

everyone on the product development team is working with

the most up-to-date information, and leveraging previous findings.

Technology is a key enabler for effective product cost management. Leading manufacturing organizations are taking advantage of the latest systems and tools to speed and standardize cost estimation and centralize cost information across the enterprise.

Cost Management Tool Benefits

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Align your Product Cost Management Strategy with Corporate Objectives. This is critical to garnering executive support throughout the definition and evolution of the program.

Find a dedicated Executive Sponsor who can mandate change and build urgency around cost management needs within your organization and consistently reinforce the need and importance of staying the course with the program over time. They should also be looking at the high level results on a regular basis.

Product Cost Management is a Team Sport. From the very beginning, involve leadership from across the product team to identify and enforce Cost Control Points at key stages & gates of the life cycle.

Champions need to surround themselves with positive-minded risk takers. Any time you try to change an established process, many people will try to return the system to the status quo by injecting negative feedback.

Don’t take on the most complicated project on Day 1. Start with something manageable where your likelihood of success is high, then move on to more complex projects as you move past value tracking milestones.

Implement an incentive program for managers and individual contributors to drive desirable behaviors and push your implementation forward.

Define and insist on a formal system for capturing project metrics. Publish these results far and wide across the enterprise. You should also chart your progress against a Cost Maturity Index (CMI) to reinforce a culture of continuous improvement. Partner with an experienced technology solution provider that can provide you with practical advice based on a well established track record of producing positive results for its customers.

CRITICAL SUCCESS FACTORS

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Best-in-class manufacturers are addressing these challenges and distancing themselves from their competition with a systematic approach to cost management that extends across their enterprise to every function and department that impacts product cost. These companies have made product cost management a normal course of responsibility and decision making inside their organizations. They deploy a core set of cost management activities, processes and tools into their everyday business to identify key cost control points and they equip employees to remove cost at every opportunity.

Effective product cost management is critical to the success of discrete manufacturers but challenges abound and their impact can have a domino effect that goes far beyond cost of goods. This includes delays in time to market, compromised product quality, less competitive differentiation, poor customer satisfaction and reduced product revenues.

Part Interior Cost Details

Reference ID GA Reflength

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16 250 cm bk

16 250 cm wh

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SUMMARY

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For more information on how to implement your strategic PCM initiative, please contact aPriori at info@apriori.com.

300 Baker Ave Concord, MA 01742 | aPriori.com | 978.371.2006 | ProductCost@apriori.com

@aPriori_Inc aPriori Technologies www.apriori.com/articles

Cost Driver report