Why Product Cost Management is (Finally) Gaining Acceptance with Global Manufacturers

The background music at this morning’s introductory session to aPriori’s Cost Insight conference said it all: “Never get fooled again.”

Manufacturers big and small waste time and money iterating on product designs, and the gap between “should cost” models and real total cost of ownership (TCO) is known to many procurement groups. But a growing openness to product cost management processes and tools, aPriori says, should end this confusion once and for all.

That’s not just the provider’s narrative either. With 65 companies in attendance this year at Cost Insight, the desire for better platforms for new product development, cost management and supplier collaboration is clear. In fact, the volatile, globalized business environment manufacturers are confronting today has created a perfect storm for the product cost management movement — one procurement is uniquely positioned to lead.

The Disruption of Manufacturing

Unless you’ve been living under a rock, you’ve likely heard, time and time again, about the technological developments upending manufacturing companies. The internet of things (IoT) and 3-D printing, to name just two, are leading what some are calling a fourth industrial revolution.

The fusion of internet-enabled technologies into everything from cars to dishwashers is making products more complex and, thus, more expensive. Figuring out how to integrate printed circuit boards into new products, for example, is muddying cost estimates for manufacturers and adding yet another component supplier to a sprawling supply ecosystem.

Managing costs such as these with dedicated software is gaining acceptance because it’s becoming more of a necessity for simplifying new product development. As aPriori CEO Stephanie Feraday said in her opening remarks, several companies she works with say that 30%–60% of product design time is lost to “churn.” Companies typically take two to four years (or longer) to scale manufacturing for a new product and bring it to market — even though the consumer landscape evolves far more quickly.

Plus, competing for consumers is not the only stage where global manufacturers are battling. Increased complexity in globalized supply chains is pushing OEMs to fight over the talent and supplier networks they need to stay ahead of competitors. According to Deloitte’s 2016 Global Manufacturing report, access to advanced manufacturing capacity/talent, cost competitiveness and workforce productivity are the top three drivers of competitiveness among manufacturers, with access to a complementary supplier network or ecosystem close behind.

The Need for Supplier Collaboration

Confronting the disrupted manufacturing environment will require cross-functional collaboration and a greater understanding of how the global supply market can open up new opportunities for product innovation.

Sounds like a golden opportunity for procurement and supply management.

“Back in the day, design used to be able to walk down the hall and talk to manufacturing [about the costs and requirements for a new product],” Feraday said. “That’s no longer the case today.” Instead, suppliers are spread out across several regions, with many OEMs handling only the design, assembly and sale of the final product.

This setup creates new opportunities for procurement to attain better pricing while reducing quote time and risk with suppliers. What’s more, forward-thinking organizations are creating “innovation communities” with their broader supply chains, in some cases even bringing suppliers into the design process and allowing them to change the original clay models. This is a far cry from the old process, in which numerous back-and-forths between design, procurement or supply chain groups, and suppliers led mainly to vague cost estimates and frustration.

It’s no wonder more and more CPOs are planning to increase their levels of supplier collaboration.

Stay tuned for more live coverage from Cost Insight 2017!

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