Managing product costs effectively

Dec. 8, 2011
There are significant benefits associated with managing product costs, yet many manufacturers struggle to implement effective PCM programs. And though many people and departments within an organization can influence product cost

There are significant benefits associated with managing product costs, yet many manufacturers struggle to implement effective PCM programs. And though many people and departments within an organization can influence product cost, traditionally, PCM gets done by cost-engineering or value-analysis experts with strong manufacturing or cost-estimator backgrounds. Their expertise is invaluable, but it is difficult to be knowledgeable about all products and their cost drivers in a large organization. A better approach to PCM requires systematic, company-wide processes and tools to guide decisions. This lets OEMs attack costs at the source and yield the greatest impact.

Effective PCM activities include:

• Studying the cost trade-offs of different design concepts. Several alternatives might meet the same form, fit, and functional requirements — each with a different cost.
• Evaluating the effects of engineering change orders.
• Comparing manufacturing and tooling alternatives, including make-versus-buy analysis.
• Validating supplier quotes to ensure lowest pricing. A vendor’s costs are often negotiable and depend on plant cost structure, capabilities, and process control. The more detailed cost information available, the easier it is to work with a supplier to ensure the lowest possible cost.
• Evaluating multiple cost-reduction ideas on current products in real time to quickly identify the greatest potential savings.

These activities apply throughout a product’s life and include key cost-control points during the development process. These are measurable, managed checkpoints that dictate where and when people should perform specific PCM activities. For example, there are typically design-review meetings at regular intervals to ensure a new product meets form, fit, and functional requirements. However, rarely is there a conversation about the financial implications of the alternatives being evaluated. Effective PCM should include mandatory cost evaluation as part of key design-review milestones.

Likewise, when a design gets released, manufacturing often must decide to make or buy the product or key components. A company with a cost-control point at that milestone would quickly calculate the financial impact of both options, and make an economically wise decision in a fraction of the time it takes to request quotes and manage responses from suppliers.

Effective PCM also puts proper tools in the hands of anyone who influences product cost. These tools help assess and track detailed product costs at any stage, without requiring special manufacturing or cost expertise. It empowers employees to act on opportunities to reduce costs.

Without these processes and tools, PCM remains highly manual and decentralized, of value only to manufacturing or cost-engineering experts. Estimation methods are inconsistent, using static information that is difficult to update and share. And the process can only take place once or twice per new-product cycle, severely limiting the window to identify savings.

To significantly drive down costs, manufacturers must employ PCM early in the development process and, ultimately, across all departments that impact cost. Each group must identify its key cost control points and define how to reduce costs. Given the right tools, these groups can quickly analyze cost trade-offs each time they make a decision. The specifics will vary for each group, but the overall PCM effort will provide a sizable return on investment.

aPriori Inc. develops and markets product cost-management software for leading OEMs.

Edited by Kenneth J. Korane

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