Getting Ahead of the Product Cost Management Curve

This morning, I'd like to welcome Akoya's Co-Founder and SVP Brett Holland to Spend Matters. In this post, Brett shares his thoughts on how companies can get ahead of the product cost management curve.

First of all, I want to thank Eric Hiller for his weekend posts over the last month. While reading all his posts, the takeaway for me was not so much the ins and outs of mechanistic or empirical modeling, but the fact that engineering teams in more and more manufacturing companies are starting to focus quite a bit more energy on product cost management. This article and the next will delve into this movement and discuss the effects that this trend will have on procurement and supply management professionals.

As Jim Brown laid out in Aberdeen's Product Lifecycle Collaboration Benchmark Report from last year, and has become widely accepted, the top two goals of product development VPs these days are 1) accelerating time to market and 2) reducing direct product costs. Combine the focus on direct product cost reduction with the new cost management technology on the market to help manufacturers understand and better control costs in their direct materials/highly engineered parts, and you quickly see that a hotbed issue is being brought right to the doorstep of procurement and supply management professionals.

Imagine life when engineering and product development have much more direct insight into cost saving opportunities. Every week, maybe every day, someone else will come walking into your office and say, "Hey, I just found another $100K in savings for you. When can you get on it!" Not too pleasant, would you agree?

But I firmly believe that procurement and supply management play a very critical role in understanding the product cost implications associated with the sourcing and purchasing of these engineered components. There is no reason, with the solutions available today from Akoyaand others, that procurement and supply management professionals cannot arm themselves with much more information about what drives costs and where there are opportunities to save money in the direct materials category. As such, procurement and supply management can and should lead these conversations regarding product costs. The conversation above would certainly be much different, and collectively you would find yourselves making great strides toward achieving the goals of accelerating time to market and reducing product costs.

In one respect, I have a difference of opinion from Eric and his posts -- I don't believe that there are inherently better or worse approaches to product cost management. The fact is, most of the current approaches in the market are highly complimentary to each other. I truly believe that manufacturing companies should be working with all types of product cost management techniques to maximize their position in an ever increasingly competitive environment. Each of the new breed of product cost management solutions is much less resource intensive than tools of old, and most can be deployed quickly with non-intrusive, on-demand technology. Investment can also map to the benefit stream, making this a self funding proposition.

Both analytics and mechanistic models have their place, while current manual methods should be continued and improved whenever possible. Great companies will take advantage of all opportunities to control and reduce their product costs. Caterpillar, for one, is an example of a company I know very well that is serious about cost control and is utilizing both analytics (statistics) and mechanistic models to reduce its direct material and design costs. With all of the investments made in MCAD and PLM systems over the past few years, now is the time for manufacturers to focus on leveraging those investments to analyze the rich data now available to them.

So if you are having trouble hitting your product cost reduction goals, there are many new and great options available today to help you. The pot of money in direct product costs is growing as a percentage of overall costs, which provides an opportunity for your company. The time is clearly now for procurement and supply management professionals to take the lead in this growing field of product cost management.

Next week, we will take a look at the tangible ways that procurement and supply management can use the new solutions in the market to take the lead in product cost management.

Brett Holland
SVP Product Strategy, Akoya Inc.

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