70-90% of Product Designs Are Not Cost Optimized
Product Cost Management (PCM) for many companies is still an emerging concept, predominantly practiced by a small team of highly specialized Cost Engineers that can be embedded within an Engineering or Sourcing organization. Typically, these Cost Engineers focus on a small percentage of the individual products or components within an overall product structure that are identified as the most complex and potentially the most expensive to manufacture.
These Cost Engineers are highly skilled in manufacturing practices and cost estimation techniques. However, they are almost always unable to keep up with the volume of work flowing through the company as new part and product designs are constantly being churned out every week of every month of every year.
In global manufacturing corporations that have R&D centers and supply chains that stretch around the world, this type of deployment often means that upwards of 70-90% of products designed by the company are not cost optimized. This has a significant impact on the company’s Cost of Goods Sold, and inevitably, their Annual Net Income.
PCM is both a Concept and a Technology Platform
From a concept perspective, companies that adopt advanced PCM strategies are highly concentrated on achieving the maximum leverage for every single dollar they invest in the design and manufacture of their products. This type of focus typically comes in the form of a top-down corporate initiative that permeates the entire organization.
It’s about improving product profitability. It’s about improving Earnings per Share and driving up the price of the stock. It’s about building a sustainable competitive advantage that allows companies to create better products faster than their competition, acquiring as much market share as possible on every New Product Introduction. Every individual in the organization, irrespective of whether they are at the very beginning of the product life cycle – such as an R&D engineer examining new advanced product concepts – or at the very end of the product life cycle – such as a manufacturing engineer cutting steel on the shop floor, or a strategic supplier designing and fabricating a mission critical components for their customer – they are all trained and goaled on understanding the cost implications of each and every decision they make.
However, for companies that aspire to this level of cost maturity, there has historically been very few technologies available to help non-experts understand the cost consequences of their day-to-day decisions. It’s been very difficult for them to attack cost at the point of origin, and often what happens is that they are forced to use departmental level, desktop solutions that are often homegrown MS Excel databases built up through tribal knowledge over time. Knowledge acquired from costing one product is not shared across the corporation, and if the individual managing that solution leaves the company, the software rapidly becomes obsolete.
From a technology perspective, aPriori’s Product Cost Management platform was designed to be implemented across the Enterprise, connecting people and enterprise applications into one seamless cost knowledge repository. Product cost information and trends can be accessed by Business Executives from a laptop, a tablet or even their phone 24 x 7 x 365 to monitor the status of the company’s latest big investment. Preliminary cost estimates can be generated by Product Designers so they can quickly understand which of their 3 design alternatives may meet all of the engineering specifications at the lowest possible cost. Sourcing Managers can quickly generate a highly detailed “should cost” that will enable them to negotiate more favorable pricing from their supply chain partners. Suppliers can generate quotations for RFQs faster and with more detail than ever possible using traditional manual estimation techniques, allowing the company to win more business.
Going Global with Product Cost Management, the Story of ThyssenKrupp Elevator
Many companies have great aspirations of achieving the vision of Enterprise Product Cost Management and have started to attack the problem by addressing a single aspect of costing across the product lifecycle. ThyssenKrupp Elevator (XETRA: TKA) is in the process of attacking product profitability across their entire Global R&D organization, spreading from Germany, to Spain, Italy, Korea, China, Brazil and the United States. They have worked closely with aPriori as their Strategic Business Partner throughout the entire planning and deployment process.
In the 7-minute video below, hear from Mattijn de Graaf, who is in charge of TKE’s global PCM initiative, about how they got started on their PCM journey, how they leveraged aPriori subject matter experts to accelerate the system configuration and deployment process, and how they have achieved a global network of 150+ product cost management practitioners that collaborate to drive down product costs and improve product profitability across their various product lines.
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.