What is the Network Effect?
In economics and business, the Network Effect is the impact that one user of a good or service has on the value of that product to other people. When the Network Effect is present, the value of a product or service is amplified as the number of other people using the product increases.
The same is true when it comes to product cost.
The overall level of success you achieve with your enterprise product cost management initiative is also a function of the Network Effect. If you have three people from the same department focused on product cost management, you can drive sufficient value to justify your initial investment. However, if you deploy best practices across 30 people, not only in design, but in sourcing, cost engineering and manufacturing, your return on investment will be amplified dramatically as everyone on the product team shares a common view of product cost, and works to hit target cost goals collaboratively.
And, if you expand your thinking beyond the four walls of your company, to include your key suppliers into your concept of the product development team, you can fully harness the Network Effect potential, and yield the maximum value possible from your product cost management deployment.
Implementing the Network Effect
Step 1 – Get Your Internal House in Order
The first step towards tapping the Network Effect involves getting your internal house in order. The vast majority of companies we speak with still have an “over-the-wall” mentality when it comes to product costing. Instead, engineering and product design teams must do a better job of collaborating with sourcing teams to understand the implications of early stage trade-off decisions, and how those decisions impact product cost. This is only truly facilitated when all members of the team are working with one shared view of product cost.
Furthermore, manufacturers waste vast amounts of time designing new products and waiting for cost quotes when one of the company’s strategic suppliers already has years of experience designing and manufacturing that exact type of product. The sourcing team would know that, and could initiate such a conversation early on with the design team if they only knew what was needed.
By expanding your product cost deployment to all members of the product team that impact cost, each member contributes to the overall savings experience for the company, helping you to fully realize the benefits of the Network Effect. Below are some examples of benefits different teams can expect to receive when a company thinks strategically and cross-functionally about product cost, versus a limited, tactical deployment:
- Design Engineers who commonly have cost and weight targets for new product introductions (NPI) can design not only for form, fit and function, but also finance. Program managers and cost engineering teams can set cost targets, giving engineering and design teams the freedom to innovate, while quantifying design alternatives without worrying they will exceed target cost and profitability goals.
- Manufacturing Engineers can collaborate with design engineering to validate and refine the manufacturing approach, explore alternatives and determine the internal cost of making parts versus outsourcing to the supply base.
- Project Managers can have continual visibility into the cost status of a given product or project and understand where best to direct the team’s efforts. This requires the ability to roll up the cost of a complete Bill of Materials (BOM) with new design costs generated from your enterprise product cost management system or imported from other PLM or ERP systems (e.g., catalog parts, carry-over parts, components cost in another tool).
- Sourcing can have access to reliable should-cost data for finding outliers in current product spend and quotes, analyzing make vs. buy situations and negotiating more effectively with suppliers.
- Cost Engineering would have a tool that can help them scale, speeding the time it takes for them to analyze a complex part and determine piece part and tooling costs. As the experts, they play a critical role in deploying and maintaining the enterprise product cost management system and in developing a cost culture across the organization.
For more information on how you can achieve the maximum value of the Network Effect on product cost and profitability, check out Part 2 – Integrating Enterprise Applications to create a single view of Product Cost across your Enterprise.
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