Cost of Goods Sold (COGS) impacts every important business measure for a manufacturer -- revenues, profits, time-to-market, competitive differentiation and more. But managing product cost is not easy.
Challenges exist at multiple levels and across the entire product lifecycle. Engineering makes design decisions without understanding their true cost impact. Cost engineering decisions come either too late in the development process or even after product launch and take months or more to get into production and create cost benefits. Sourcing professionals typically don't have accurate enough information to negotiate preferred pricing with suppliers.
The negative impacts of these challenges -- reduced profits, delayed time to market, limited product innovation -- are well understood, but the solutions to them are not.
Best-in-class manufacturers take a disciplined approach to product cost management that attacks cost pre-through-post product development. They also follow some fundamental guidelines to maximize their success:
Think Big, Start Small
Cost 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, focus on a specific project and build the foundation to expand your cost management initiative from there.
Assemble a Core Implementation Team
You can't drive an effective product cost management initiative alone. It's also difficult to implement from the bottom up, no matter how well intentioned an individual contributor may be. Assembling the proper team and building support for cost management within the organization are essential.
This team might include an executive sponsor, manager champions and a point person responsible for the overall cost management initiative.
Establish Cost-Management Processes and Cost-Control Points
It's also important to identify your cost management processes and at which point's costs can be effectively impacted. This might involve:
- Assessing current cost management process and key cost control points (if they exist)
- Mapping out your current product development process
- Identifying new cost control points to introduce into the development process and establishing the cost estimate characteristics required to support each cost control point
- Working with a cost management solution provider to align to the above processes
Monitor and Track Results
"If it can't be measured, it can't be managed" is especially true when it comes to effective product cost management. Key considerations include:
- Identifying metrics to collect at the key cost control points; e.g., percentage of parts in a BOM with cost estimates, the number of design alternatives explored, savings identified, etc.
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 to reinforce these behaviors and activities; e.g., emphasizing that product cost is a priority equal to product launch schedule, quality and functionality
At the outset, focus on one core activity and business group. Assemble a small core implementation team, select a specific time-bound project (4-6 weeks), and build early successes. his is the best way to show value (i.e. dollars or time saved) and make incremental adjustments, which will ease the rollout of the program to other groups.
You may choose to initially focus on either:
- One product with multiple functional groups performing cost management activities over the product's lifecycle
- One functional group performing their function's cost management activities over a number of products
Once the starter projects are complete, select another set of projects and manage them in a similar fashion to the first. It is important to manage these first initial projects carefully in order to build momentum for continued expansion of your product cost-management initiative.
Additional Success Factors
The following are also critical to the success of your initiative:
- 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. He/she should also be looking at the high level results on a regular basis.
- Start with a manageable project where your likelihood of success is high, then move on to more complex projects.
- 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.
- Define and insist on a formal system for capturing project metrics. Publish these results far and wide across the enterprise.
- 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.
Reducing cost of goods is just the tip of the iceberg. An effective product cost management program has a number of other important benefits too including increased profit margins, new product innovation, faster time to market and improved product quality.
Best-in-class manufacturers are distancing themselves from their competition with a systematic approach that makes product cost management a normal course of responsibility and decision making inside their organizations. They deploy a core set of activities, processes and tools into their everyday business to identify key cost control points and they equip employees to remove cost at every opportunity.
Jessica Milan is a Client Engagement manager at aPriori, a provider of product cost management software solutions for discrete manufacturers.