Drive Profitability through Product Cost Management (PCM)
There are great engineered products and then there are commercially successful products. Many variables factor into the profitability of a product: innovation, satisfying customer needs and delivering a great customer experience with product performance help companies to drive sales, command price premiums, and boost their topline results. While product development engineers are focused on the form, fit, and function of their designs to drive innovation and a great customer experience, often the product cost impacts of their decisions to drive profitability from the expense perspective are overlooked.
Engineers seldom have visibility to the cost impact of their decisions; they can’t optimize their design parameters for cost in the context of other design parameters, as they don’t have the required information. The biggest challenge to optimizing cost is understanding different cost parameters, and that requires a detailed knowledge of manufacturing processes and cost drivers.
Product Cost Management (PCM) allows product development companies to design for cost by providing early visibility to the cost implications of design decisions. Using PCM processes and tools they can systematically simulate and evaluate different scenarios to develop an ideal “should cost” model that is based on a detail-oriented cost parameters of materials, manufacturing processes, supply chain , regulatory compliance, product support and service. This helps them to identify cost saving ideas like changing materials, simplifying designs, combining parts /functions, or changing production locations.
There are different PCM techniques. Feature-based techniques look at the characteristics of a design to eliminate unnecessary, high-cost design features. Bottoms-up approaches based on Bill of Process (BOP) calculate more accurate cost models based on the manufacturing processes including labor, equipment, tooling, setup, and other production information. It enables companies to perform a “what if” analysis by modeling multiple production scenarios.
The benefits of PCM are not only for manufacturing companies to design their products for optimal cost by receiving feedback on the cost impact of the design decisions – they also help companies that rely on their supply chain to source for optimal pricing. Even though Direct Material Sourcing processes introduce a price competition, they are seldom based on optimum cost. Using PCM, original equipment manufactures (OEMs) can simulate their suppliers’ production costs. Even if no supplier can match the ideal “should cost” price point, it allows supplier selection with the knowledge that they need OEM help to produce at the ideal cost. This again drives continuous investments towards cost improvement in the supply chain; that’s a win-win scenario for both OEMs and Suppliers.
In my next post, I will show you how PLM supports PCM.