By Brett Holland
Imagine you have just ordered a new car, having negotiated a final price and signed the papers. A few days later, the dealer calls. He's very sorry, but the parts used to make the car were more expensive than estimated, so they need to increase the purchase price by 7 percent. Would you pay? Not likely.
Manufacturers of complex new products often face a similar challenge. After undergoing an exhaustive process to bring a new product to market, executive management often discovers that critical parts or assemblies cost more than originally estimated. Their choice at that point is to postpone the launch or proceed as planned and watch profit margins erode. Obviously, it would have been much better if the manufacturer had been able to nail down the product costs early in the process to establish a realistic pricing structure.
Cost Analysis: Don't "Reinvent the Wheel"
Recalculating cost structures late in the new product introduction (NPI) process is like "reinventing the wheel" since it typically requires extra time and resources during production or post-production phases to make adjustments that should have been made earlier in the concept and design phase.
If a company can discern the true cost structure of a product during the design and planning phase, it will be far easier to keep costs in line and eliminate costly rework later on. This NPI "true costing" philosophy should be an integral part of any company's product lifecycle management (PLM) strategy. But to achieve this, many companies must change their approach to developing new products and bringing them to market.
Traditional NPI processes call for design engineers to create the product concept and design with little if any data input from manufacturing engineers or the supply management specialists and suppliers who cost out the components. Only later, when a design is finalized, do these other supply chain professionals become involved, offering their expertise regarding design for quality, manufacturability and cost. This late involvement can lead to significant delays in product launches. With complex product lines, a company may need to procure thousands of materials and parts, making true cost estimating of new products even more time consuming and uncertain.
There is a better way. Getting the product-cost balance right the first time requires product managers to bring together people from engineering, supply management, manufacturing and other areas early in the NPI process to establish the real business opportunity and true ship costs.
Getting to True Product Costing
One proven method to effectively manage product costs earlier in the NPI process is to employ feature-based cost analytics (FBCA). FBCA represents an innovative, intelligent approach to cost management of manufactured products. The concept was developed by top experts in product development, data mining and statistical analysis, with practical input provided by manufacturing and supply chain best practices leaders. Unlike traditional project-based cost management approaches, the FBCA approach provides a dynamic mechanism to continuously evaluate the cost impact of design features at any time in the product lifecycle. Using this automated approach, an analysis that previously took product development and supply management experts months to complete, can instead be done in real-time.
FBCA software also facilitates valuable interaction and collaboration across engineering, supply management and financial functions. The objective of FBCA is to transform these interactions to make them faster and more strategic, with the end goal of attaining complete cost alignment of products throughout the product lifecycle. FBCA can make a difference between a product that meets cost targets the first time out, and one that requires arduous reworking to get costs back into alignment.
The principle technology underlying the FBCA process is feature-based cost analytics software. These solutions allow the NPI team to mine and analyze information from separate design, costing and supplier databases and develop accurate baseline cost targets by determining the cost impact from the individual features of new products. FBCA software solutions use a top-down approach to cost management of individual parts. They use sophisticated data mining algorithms to generate predictive cost models that enable users to analyze part features, construct "baseline target cost" curves across part families, and determine the key drivers that affect part costs.
With effective FBCA software solutions, companies can quickly evaluate multiple NPI alternatives before a product design is finalized. In this way, they can optimize the product design by analyzing and evaluating the impact of the inevitable tradeoffs between performance, reliability and cost. Ultimately, FBCA will help them select the design that best balances customer performance and price requirements with corporate quality standards and profit margin objectives. FBCA will also allow the product development team to pre-plan supply management and bundling of contracts with existing and new parts suppliers.
FBCA in Action
Consider, for example, a manufacturer developing a product that uses an assortment of cast aluminum parts. If the development team has accurate cost and design information at the beginning of the process, they can strive to reduce design complexities and develop more commonalities among families of similar castings, based on individual part features. They can also monitor how their cast component designs stack up against target costs at any stage of the design process and how they affect the costs of the subsystems and platforms to which they belong.
Supply management specialists can then tie the cost and design information to a selection of appropriate foundries and finish shops with the right capability set and be empowered to work with these suppliers on a feature-based cost basis to achieve a lower cost by modifying the design, materials and/or production process. Manufacturing engineers can then plan specific production requirements around the forging and finishing of the parts correctly the first time, eliminating costly changes and rework downstream. And, with a realistic cost structure firmly in place, financial specialists and other internal supply chain partners can work together to determine anticipated sales volumes for the platforms in which the parts belong, and a real-world pricing structure that maintains the desired profit margins.
As a result, the company can rationalize its supply base by understanding the cost drivers and how they align with the suppliers' efficiencies. The company can also reduce part number count and effectively control complexity, resulting in greater product functionality with a more streamlined number of design features. Moreover, if the NPI team decides a different type of part is required, it can quickly consult established cost curves to obtain more accurate cost information for the new part. The net result is to help companies get their products to market faster with higher margins.
Information Drives NPI Success
One major manufacturer of complex machinery was developing a new product line involving hundreds of new parts. The product manager held internal workshops that brought together product designers and supply chain managers. In the workshops, team members looked at various parts within commodity groupings and used FBCA to evaluate and understand the ship costs, cost drivers and supplier efficiencies of the various parts in the groupings.
During the workshops, participants were able to bring up the information generated by their FBCA software on product costs, design elements, part comparability and supplier efficiencies. They used the aggregated information to help explain what they knew about the critical parts and determine how the part costs could be reduced. This facilitated a healthy dialogue that resulted in designers and supply chain managers jointly agreeing on new target ship costs for most of the parts. In some cases, the information showed prices that were out of alignment with target pricing and the prices of comparable parts. This led to effective renegotiations with current suppliers for better pricing. In other cases, designs were improved to lower costs. In yet other cases, alternative suppliers were suggested that were more efficient at producing the parts. Overall, the collaborative exercise enabled the teams to develop concrete action plans that led to substantial reductions in the overall costs of the parts.
This FBCA exercise can be a valuable part of a manufacturer's product lifecycle management strategy. For one thing, close collaboration within the design process can foster more innovative thinking and lead to better designs and product quality, as well as faster time-to-market. In many collaborative NPI teams, a light seems to go on when the team members realize the specific reasons why costs can be reduced. They can then assign actionable tasks to each other for achieving the reduction.
Advanced, collaborative FBCA software solutions enable decision-makers across the entire supply chain – from design, engineering and product planning, to supply management, manufacturing and finance – to better understand what drives product costs. This, in turn, helps all participants to make more informed and realistic decisions about how best to reduce and/or better manage actual costs, which can ultimately lead to new product success or failure.
Bottom-line Benefits and ROI
The primary objective and bottom-line benefits of FBCA are faster product launches with higher margins. In today's world of global supply chains, manufacturers are pressured to work harder and smarter than ever to hold the line on new product development, materials and production costs if they hope to remain competitive and profitable.
With the powerful analytics of FBCA, companies are better able to leverage the combined knowledge of their product development and supply chain professionals to identify new and innovative ways to manage costs. Some companies already using this advanced technology solution have reduced costs by as much as 15 to 20 percent for categories of parts, adding up to significant savings and improved business performance. Achieving these goals will help spell success for any manufacturer's new product introductions.
About the Author: Brett Holland is senior vice president of product development at Akoya Inc., a Northfield, Ill.-based developer of product lifecycle management solutions. In the past, Holland served as CEO of BoxDirect and vice president of new product development for PaperExchange. More information at www.akoyainc.com.