This weekend, I'd like to welcome Eric Hiller to Spend Matters. Eric, who is founder and Chief Product Officer at aPriori, will be contributing a series of guest weekend posts on the subject of driving Spend Management upstream. And this is the first installment. Please join in welcoming Eric to Spend Matters!.
Hello spendmatters fans! Good to meet you all. Many thanks to Jason Busch, not only for giving me a soap box to stand on and discuss Enterprise Cost Management (ECM), but also for teeing up this discussion with his posts on "Spend Management Goes Upstream" last week.
Let's talk about the languages we speak in business – no, not English, German, Chinese, etc., but the "functional" languages that we speak. Depending on where you walk in the halls of a large manufacturing company, you will hear very different words. In Sourcing you hear "RFQ," "AVL," "delivery"; in Design you hear "release," "strain," "feature"; in Manufacturing you hear "routing," "overhead rate," "cycle time". In fact, sometimes the same word means very different things. For example, is "volume" a quantity of parts to produce (Sourcing and Manufacturing) or something displaced in a swimming pool (Design)… or something your girlfriend she wishes she had more of in her hair (cosmetology)? The point is that words are powerful and elusive objects, and the ability to communicate is one of the keys to business success.
Most times, professionals can learn the language of another business function quickly, maybe in a few months. But, sometimes the translation from one "language" to another is much more difficult. Such is the case with Product Cost in discrete product and manufacturing companies. Ask your friendly design engineer to describe his favorite newly designed product, assembly, or part, and he will wax eloquent about its design, geometry, performance, material, etc. Now, ask him what it will cost to produce, and you likely will hear…. silence. And, its not just designers! The same experiment could be repeated with manufacturing, sourcing, marketing, etc.
Jason made a great point on his Tuesday 1/9/07 post that design engineers aren't the most "spendy" folks. Half of them are reading this post from their futons, munching on a Pringles dinner (by the way, no offense to my engineering brethren – I come from deep inside the product engineering profession myself). So, why do products regularly launch over their cost targets, if the people that design, source, and plan their manufacture are inherently frugal types? Answer: because translating the functional jargons (design specifications, sourcing strategy, and manufacturing plans) into the universal language of business, Cost, is very hard. In fact, my colleague (Frank Azzolino), talks about this as the "language of the boardroom," i.e. in the boardroom, most discussions beyond the legal come down to two things: time and money. This translation is especially difficult early in the product development cycle when there is still ample time to make sourcing, manufacturing planning, or design changes that can impact and reduce the Product Cost.
So, how do we perform this translation? We need a Rosetta Stone. Enter, the category of Enterprise Cost Management (ECM). ECM is a field of practice including all the techniques that companies use to assess, manage, control, and reduce costs, with the goal of maximizing profit. Today, we are only focusing on the "assess" or translation portion of ECM. The "Manage, Control, and Reduce cost" parts of ECM will have to wait for another post.
What is the benefit of making this translation: improved decision making. Once, the functional dialects are translated into the common language of cost, management can make decision that are more effective in meeting the companies overall goals, including growth, margins, etc.
One more thing… Why are we discussing Enterprise Cost Management (ECM) as a separate field rather defining it within the context of existing disciplines like ERP, PLM, SCM, etc.? Aren't there enough three letter acronyms in the world already and professors and consultants hocking their ‘novel' new spin on old ideas? Well, yes there are (too many, in fact). However, the problem of managing cost, be it product cost (direct material, labor, tooling, and direct overheads) or indirect spend (paperclips and the salary and overheads of anyone not wearing a blue collar) has not yet been solved. You see, ERP, PLM, SCM (name any other enterprise software category) can store cost information, once it's been generated, but none of them can generate this valuable content. ECM translates the product's design, sourcing strategy, and manufacturing plan, into the letters, vocabulary, and grammar that combine into the lingua franca of business: Cost. So, to shoehorn the unique activities of ECM into other enterprise categories that focus on different business problems is unnatural.
Tomorrow: a different look at the problem of missing our cost / profit targets… and one of the key solutions to the problem.