Discrete-part manufacturing companies are experiencing a demanding and difficult combination of price pressure from customers, rising costs (both internally and from vendors), international competition, and income growth pressure from investors.
Cost of Goods Sold (COGS) has become an increasingly important metric as the largest expense item on the income statement; typically 70% to 90% of revenue. Manufacturers are forced to focus on product cost and profit margins with renewed vigor.
Cost targets, an important component of design-to-cost strategies, are now being defined early and with greater granularity, even down to the individual component level. Meeting these detailed cost targets at product launch (avoiding expensive, lengthy post-production cost reduction phases) is a new challenge and manufacturers are struggling to find effective systems or tools to assist in this effort. A Cost Management (CM) platform, such as that developed by aPriori, can help manufacturers address the challenges in New Product Introduction (NPI) programs.
New Product Introduction refers to the complete business process within an organization for introducing new products or product models to market. Today’s NPI process is a cross-functional business process, including both internal functions and external suppliers or partners. Most manufacturers are still struggling to break the historical functional divisions or silos, notably between Marketing, Engineering, Manufacturing, and Procurement. This struggle continues to exist because important product, process, and customer information is still trapped in these functions emerging only at serial release stages or gates.
Product costs (material, direct labor, direct overhead, and tooling) and target costs (the costs that must be met to meet key business objectives) are key components and information central to the product development team’s daily decisions. It is important that the NPI process includes mechanisms for providing information in a continuously refined and updated manner as the project moves from conception through product launch to delivery.
Cost-estimating systems typically utilize traditional cost-estimating methodologies characterized by incremental and off-line operation as follows:
• Intuitive – based on the experience of the estimator
• Analogical – based on similar sets or systems
• Parametric – based on parameters characterizing the product, without describing it completely
• Analytical – based on a decomposition of the work required into elementary tasks.
Some methods are better than others depending on the context and stage in the product development process. There is a trade-off that exists between the level of cost detail and the time spent obtaining the cost information. Detailed analytical costing systems require knowledge of a wide array of manufacturing parameters, and are only suited for use in a cost estimating department. Such systems will not suit the needs of a designer, engineer, or procurement professional since they rarely have the time or knowledge base to perform cost estimation at this detailed level.
A practical costing tool in the product design phase must be accurate, flexible, simple, timely, and economical. Such a tool must also present a clear relationship between the designer’s decision and costs.
The importance of cost estimating during design and the resulting benefits are well known, with over 70% of the final product costs being determined by early design decisions. However, despite the effort to understand and address this challenge, until the development of Cost Management Platforms, such as aPriori's, there was no practical cost estimating tool or methodology accepted by engineering. Some off-the-shelf cost estimating software solutions were used by cost specialists to support NPI programs, however, due to the off-line nature of these solutions, lead times for cost feedback were lengthy.
Currently, most manufacturers have the information needed to provide adequate and effective cost collaboration scattered across the organization. It is very difficult to cascade timely information across departments. The knowledge to synthesize the many pieces of the cost puzzle often resides with a few cost experts in the organization, who do not have enough time to meet the needs of their many constituents.
According to aPriori’s CEO Frank Azzolino, “Discrete-part manufacturing companies are looking for ways to streamline their NPI processes through improved product cost management and control. A solution is required to provide seamless cost analysis from early concept design through development, manufacturing planning, procurement sourcing, pilot production, and on to full production and delivery after product launch. After completion of the NPI process, the NPI team must support sales and service, and engineering change in response to field problems. “
The Cost Management solution must therefore support all stages and functions of the organization throughout the entire life cycle of a company’s product.