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Managing Product Costs in the Face of Complexity and Globalization

Managing Product Costs in the Face of Complexity and Globalization

Manufacturing organizations have faced a growing challenge of delivering products on time and to cost over the past decade, as product lifecycles and value chains have become increasingly complex. Even in the face of constant pressure to drive down costs, globalization and competition have led the design and manufacture of any given product or assembly to become distributed geographically as well as across organizational boundaries in the extended supply chain.

For example, in recent years, NACCO Materials Handling Group (NMHG), a Cleveland-based manufacturer of forklifts, has seen growing competition in global markets. At the same time, the company's manufacturing and product-development activities have spread out across the globe as well. Quality and product cost were key concerns for the company, but its costing processes were highly manual and time consuming.

NMHG "was setting product cost targets in design but frequently finding itself over those targets when the product was handed off to production," according to a paper from aPriori, a developer of product cost management (PCM) solutions based in Concord, Mass. "Cost information was not always available, and it was difficult to share that information across different departments or physical locations." This also seriously delayed product development and time to market.

Such challenges have become typical in today's globalized economy. "Traditionally, when you were designing something, you would figure out what it was going to cost you to make it, then you would add in your margin and come up with the price," said John Parkinson, CEO of Entertainment Experience LLC, a supplier of color processing technologies used by consumer electronics OEMs, and former CTO of several large firms.

In an interview with Design News, Parkinson said that with globalization, things got flipped around. "You had to determine what you could sell the product for, then figure out how to make it for less than that," he said. "In other words, you went from cost-based pricing to price-based costing. This means you have to think very hard about how sourcing works for the parts that go into the things you want to sell."

Adding to the complexity of cost management is the increasing burden of regulation in many industries such as automotive, according to Julie Driscoll, vice president in charge of product and marketing strategy at aPriori. "Often industry regulations drive product changes," Driscoll told us. This is the case in the American market, for example, where design engineers must frequently alter designs to meet changing emissions and fuel-consumption standards.

This dynamic context surrounding any given product has made it difficult for design engineers to keep track of the constantly changing streams of information governing the cost of product designs. A product could easily go over-budget without any decision-maker being the wiser.

This problem has given rise to the PCM discipline and a set of practices and solutions for implementing it in the manufacturing enterprise and across their supply chain partners. Parkinson said that PCM often integrates with a company's product lifecycle management (PLM) and enterprise resource planning (ERP) solutions, and becomes important particularly in the early design phases of a product. Besides aPriori, PCM solutions are available from some of the business tech giants, such as SAP, Oracle, and Siemens.

"You set up a set of rules the engineers have to adhere to during the design phase," said Parkinson of PCM, "so when you go into manufacturing, you have a feedback loop that continually informs the engineers about how well manufacturing is able to build to the cost constraints."

Driscoll of aPriori said the company is seeing an increased effort by organizations to bring sourcing and manufacturabilty earlier into the design process to provide guidance and to use that information to drive decisions. "You can't control what you can't measure," she said. "So visibility to cost is really important."

The PCM solution from aPriori includes several hundred models that can help to analyze manufacturing processes and seek out less costly ways to get things done. A case study from the company provides several examples showing how PCM can help engineers "drill down" into a design to make cost improvements at the level of the part or assembly:

  • By redesigning a brake pedal as a sand casting rather than a weldment, engineers at NMHG reduced the cost of the part from $13 to $7. At an annual volume of 20,000 units, that adds up to $120,000 in savings every year.

  • A construction equipment manufacturer had been making a bracket as a three-part weldment. Re-design found that a one-piece formed bracket would be just as good and would cost $9.89 to make, as opposed to $31.96 for the weldment.

  • A truck manufacturer spent two days reviewing 128 parts for possible re-quoting with suppliers. It identified 25 parts for potential cost savings, including an aluminum DPF step and a tracking rod reinforcement. At an average of $29,000 annually per part, total savings came to $718,000.

Product cost management capabilities can even kick in during the post-sale warranty phase, when similar feedback loops can help design teams understand which parts or components are causing failures and the associated costs. "You're constantly trying to use the experience to tweak the design so you produce a more reliable product and so it's easier to make," Parkinson stressed. "The most sophisticated implementations constantly revisit the cost structure of the product."

In the case of lift-truck manufacturer NMHG, company leaders decided to adopt a PCM solution across its global operations and its four product-development centers. PCM gave the design function a way to anticipate product costs up-front and to monitor costs across the lifecycle. Sophisticated costing models allow designers to compare alternatives and understand the cost impact of alternative design and manufacturing strategies. Design changes and new specs can be rolled up dynamically into the cost models.

Al Bredenberg is a writer, analyst, consultant, and communicator. He writes about technology, design, innovation, management, and sustainable business, and specializes in investigating and explaining complex topics. He holds a master's degree in organization and management from Antioch University New England. He has served as an editor for print and online content and currently serves as senior analyst at the Institute for Innovation in Large Organizations.

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