Total Cost Modeling for Superior Product Development Outcomes

Alphecca Management Resources

Total Cost ModelingBest Practices in Project Management

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You just got an email from your boss with a lot of capitalized

words, exclamation points and some phrases normally not

used in polite company.

The cost of the new product being developed by your team

is now projected to be 35% over target.

What happened?



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Total Cost Modeling for Superior Product Development Outcomes• Concepts & Definitions• Examples• Comprehensive Work Breakdown Structures • Improved Risk

Management• Better Reporting and

Control



Lets go back to the beginning . . .

Your project’s goal is to develop a communications module for a piece of industrial equipment.

During the project’s kick-off meeting the projected cost for the new hardware was flashed on the big screen.

Everyone at the table nodded and said “Don’t worry, we’ve got this.”

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Six months later the hardware’s estimated cost is 35% over the original projection.

There are lots of excuses for missing a product cost target – none good.

What our hypothetical project manager likely did not do was use a Total Cost

Model, or TCM, to guide project planning, risk management and tracking.

Now he’s toast . . .

VagueSpecificati

on

PoorCommunicati

ons

Inadequate

Manpower

Wrong Staff Mix

Conflicting

Priorities

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Contractor

ProblemsInadequat

eFunding

Poor Risk Managem

ent



MaterialsCertainty of

Internal P/N Description Qty Cost Extended Cost Estimate422-654-627 Housing - Series C 200 mm 1 $1.25 $1.25 100%322-652-108 Socket Head Cap Screw - SS - No. 3 6 $0.10 $0.60 100%

125-350-600K USB Port Assembly Kit 1 $1.09 $1.09 100%TBD CE Certified 3V Power Supply 1 $4.75 $4.75 80%TBD Power Supply Adapter 1 $2.00 $2.00 80%

125-200-127K Board Mounting Kit 1 $2.14 $2.14 100%TBD Cellular/WiFi Communications Board 1 $85.00 $85.00 70%TBD Shipping Box and Packaging Kit 1 $2.00 $2.00 90%

Materials $98.83 73%

DL (Direct Labor)Certainty of

Labor Grade Activity Hours Rate Extended Cost EstimateAssembler 2 Assemble Unit 0.5 $19.50 $9.75 75%

Test Technican 1 Test and Document 0.5 $24.00 $12.00 60%Shipping Clerk 2 Package & Label 0.2 $18.00 $3.60 90%

DL (Direct Labor) 1.2 $25.35 70%

Overhead AllocationCertainty of

Description Hours Rate Extended Cost EstimateFactory Direct Labor Allocation 1.2 $135.00 $162.00 70%

Target Cost of Goods Sold $286.18 71%

What’s a Total Cost Model?A TCM is a spreadsheet consisting of:

A projected, detailed bill of materials

for the hardware.

Estimated direct labor to make the product.

Estimated indirect costs (overhead) that will be allocated to

the product.The TCM exactly replicates how the product's

total cost of goods sold will be calculated and used in the

organization's enterprise system.

NG3 Communications Module

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Here’s a TCM example.It shows the target cost for an

industrial equipment communications module made in

low volume Line items with part numbers are

existing parts and assemblies. Those marked TBD must be developed.

Direct labor estimates cover assembly, test, and packaging.

Factory overhead is allocated to the final product as a function of direct labor hours.

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What is “Certainty of Estimate”?

CoE (certainty of estimate) measures the accuracy of the projected cost.

100% CoE: the cost is known with certainty.

75% CoE: the value could vary +/- 25%.

CoE values are estimated by subject matter experts during project pre-

planning.

Weighted averages are used to calculate CoE for cost categories and the entire

assembly. 7



Business Case

Feasibility

Overall Design

Detailed Design

Prototype & Test

Production Validation & Launch

Project Planning

ProjectActivity

A Typical Stage-Gate Process

When should a TCM be prepared?

A Total Cost Model should be prepared before major resources are committed

to the product development project.

In organizations that use stage gate processes, the TCM should be part of

the Feasibility study that develops the Business Case for the project.

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It illustrates critical, top-level tasks that must be completed.

It identifies the areas of greatest cost risk.

It generates tasks early in the project plan to mitigate these risks

or pursue parallel development paths.

How does a TCM impact the WBS (Work Breakdown Structure) and

project risk management?

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Total Cost ModelingBest Practices in Project Management10














Example: How a TCM Identifies Tasks and

RisksIt identifies tasks – for example, the project plan must include steps to specify, procure and test this

power supply.

It highlights important cost risks – with a CoE of only 70%, the new Communications Board could

be as much as $ 25.50 over target cost.

More important, with an only 70%average CoE on labor, there could be as much as .36 hours of

added Direct Labor. In turn, that adds $ 48.60 in overhead allocations!

This increases overall cost by 20%.



It identifies tasks – for example, the project plan must include steps to

specify, procure and test this power supply.

It highlights important cost risks – with a CoE of only 70%, the new

Communications Board could be as much as $ 25.50 over target cost.

More important, with an only 70% average CoE on labor, there could be as

much as .36 hours of added Direct Labor. In turn, that adds $ 48.60 in

overhead allocations! This increases overall cost by 20%!

Adds specific tasks to the project plan – assures that every individual item on the bill of material is properly specified, procured and tested.

Highlights Communications Board Risk – project plan modified to pull forward board procurement activities; early engineering tasks added to look at alternate, lower cost approaches to achieve the design objectives.

Highlights Direct Labor Risk – project plan changed to undertake early evaluation and validation of direct labor estimates.

Example: How a TCM Changes the Work Breakdown

Structure



How TCM Improves Project Reporting and Control

Update the TCM weekly, using inputs from those assigned ownership of each task.

Have project contributors brief the entire team on important updates and changes.

Summarize the TCM in periodic updates to management, stakeholders and sponsors.

If one set of costs start to drift above target, work

with the team to see if other costs can be reduced.

Project teams using a TCM find themselves focusing on total cost.

In turn, team members take ownership of both their individual

tasks and the entire project.



Total Cost Models Deliver Bottom LineProject Management Success

Create realistic, validated product cost estimates before project work begins.

Identify critical project tasks.

Identify hidden cost risks and create effective risk management plans.

Identify, respond & correct cost overruns.

Keep management informed – built team focus and cohesion.



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Leadership & Management

Total Cost Modeling for Superior Product Development Outcomes