NPI and Product Cost Targets
If you are working on a new product development initiative (NPI) for a discrete manufacturer, you’re likely under pressure to develop those products within specific cost, weight, market and quality targets under very tight timeframes. Developing and producing products that can meet all of these criteria, particularly cost, can be extremely challenging.
The cost implications of design decisions made during the development are often more significant than most manufacturers realize. Profit margins are reduced due to product cost overruns or time to market is delayed due to the need to firefight cost “surprises.” And there is often expensive post-production cost reduction rework required. At the core of all of these challenges is the inability to accurately identify, assess and manage detailed product costs early enough in a product’s lifecycle.
Incorporating Effective Cost Management into Your NPI Process
Best-in-class companies are applying effective cost management strategies into the earliest stages of their product design process and collaborating on cost analysis across functions. As a result, they are realizing huge repeatable benefits in both hard and soft cost savings including:
- Setting and managing cost targets and getting them right the first time, before products or parts go into production.
- Quickly evaluating the cost of new product design alternatives so that they can focus more time on product innovation and less on cost analysis.
- Identifying the real cost drivers behind a product design and minimizing engineering changes later in the release cycle where they cost more to address.
- Eliminating long waits for price quotes from internal cost experts, manufacturing experts or external suppliers.
- Creating should-cost estimates to be used to support vendor selection, quote validation and supplier negotiation.
Few would argue against any of these benefits, but it’s not uncommon for engineers or sourcing and manufacturing team members to worry about product cost management activities slowing them down. In fact, the opposite is true. Effective product cost management activities can actually drive significant time efficiencies for these teams. Implemented properly, most cost management activities fit naturally into existing engineering and sourcing activities and processes. The proper cost management tools also complement the tools already being used in most engineering and sourcing groups today. These teams often see time efficiency gains because they don’t wait as long for cost estimates to come from suppliers and they reduce expensive, late stage rework.
Meeting Target Costs - Core Requirements
There are some core requirements for effectively managing new product designs so that they consistently meet target cost goals:
- Early Cost Visibility - To effectively manage product costs, NPI teams must have early visibility into the cost impact of different design alternatives:
- Companies should evaluate tools that enable engineers to quickly and precisely determine cost by automatically pulling geometric and feature information from a CAD model. This enables team members that are not cost engineering or manufacturing experts to very quickly create an estimate and compare against established target costs.
- Costs should also be regularly re-assessed as features and design ideas are added or subtracted so tradeoff decisions can be evaluated and cost impacts can be addressed.
- Cost evaluation milestones should be established at stage gates in the NPI process to assess and discuss the specific cost implications of various design ideas and alternatives.
- Strategic Sourcing Managers and Manufacturing Engineers should also have early visibility to product designs and the most current cost estimates so they can provide input into alternative designs, sourcing options and manufacturability.
- Cross-Functional View of Product Cost - Providing cross-functional teams with a common view of product cost at each stage of the product development process is also important. This ensures that all parties impacting product cost are collaborating early, accessing the same information and working to prevent late stage cost surprises. The resulting benefits of this cross-functional view are significant:
- Strategic Sourcing Managers are able to consider Make vs. Buy decisions earlier in the process. This can improve profitability and better leverage the design and manufacturing expertise of supply chain partners.
- Manufacturing Engineers can regularly evaluate designs for manufacturability and suggest changes that can have a profound impact on cost and time-to market.
- Cost Engineers get access to a broader range of cost information than ever before, and are able to increase their overall economic impact on the company.
- Integration with Enterprise Systems – Since most new product initiatives typically build on a current platform (rather than a green sheet program), being able to load a BOM (bill of materials) and carryover part costs from PLM or ERP systems is very important to successful enterprise cost management initiatives. Furthermore, after an NPI team member calculates cost for a new product design, it is important that your product cost management solution is capable of storing that data back within the existing PLM or ERP systems to create a closed loop flow of information.
Without these core practices, processes and tools, product cost management remains a highly manual and decentralized function. As a result, cost-engineering teams may be limited in their ability to fully impact product costs. For example, they may only be able to focus on a portion of a product because they do not have the resources to cost all components. They are also forced to conduct their cost assessments when the product design is nearly finalized, severely limiting the windows of opportunity to identify and operationalize product cost savings. It also leads to inconsistent estimation methods with static information that is difficult to update, manage and share.
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 and not just for new product introductions. An effective product cost management program can increase profit margins, ensure faster time to market and improve product quality too.
Julie Driscoll is responsible for aPriori’s strategic product and marketing direction and has a keen eye for identifying new product cost savings opportunities for discrete manufacturers.