The evolution of product cost management tools and the state of the art

Spend Matters welcomes this two-part guest post from Eric Hiller, Managing Partner of Hiller Associates, a business performance consultancy specializing in product cost management (PCM). 

A lot has happened in the world of procurement software in the last 20 years. Purchasing has added a lot of new tools to what was mostly a relationship-focused discipline. These developments include:

  • Data-rich environments of spreadsheets, MRP and ERP systems
  • Supply chain management and supplier relationship management systems
  • Online auctions
  • Spend analytics tools/product cost management (PCM) software

Although the relationship side of the business is just as important as ever (some might say more important), purchasing analytics are here to stay, and they continue to become more prevalent in the discipline. The same is true for product cost management tools and their offshoots of service cost management tools. In this series, I am going to discuss the evolution of these tools and the state of the art.

Our roadmap to this journey through time and technology is shown in Figure 1.

There are many dimensions on which we could differentiate various spend analytics/PCM tools. For the sake of simplicity, at a high level, we can break them into four groups by HOW solving the problem of calculation product cost and driving savings. (Note: Many of these products might have capabilities in multiple of these streams, but I have binned them by their major focus.) The categories are:

  1. Manual platforms for custom costing/accounting — These solutions focus on maximum flexibility, either in covering the most breadth spend or modeling cost with the most customizable depth to any product/service. They are primarily targeted to the cost accountant, controllers and highly specialized cost engineers.
  2. Manual process-model driven analysis — This is the most traditional and developed of software categories for bottom-up should-costing. These tools seek to balance custom control of cost models with speed and throughput of spend analysis. These products are primarily targeted to the specialized cost engineers or purchasing and manufacturing professionals with good product and manufacturing knowledge.
  3. 3-D CAD-driven automated feature-based analysis — These PCM tools offer nearly real-time cost calculation, directly from 3-D solid models of a part or sub-assembly. They focus on the speed of analysis (including batch processing large buckets of spend). They are targeted at design engineering and product-minded purchasing and cost professionals.
  4. Stochastic, statistical or index-based spend analytics — These tools, unlike the other categories, analyze spend from historical data using top-down analytics and can theoretically use a “big data” approach. They focus on identifying outliers in spend and mass analysis of spend. When they have a good user interface, they tend to be the easier-to-understand tool for most purchasing agents and analysts.

The ancient times of cost accounting

Cost accounting has probably been around as long as commerce itself, beginning with agribusiness. However, until the 20th century, it was a paper (or papyrus?) affair. That changed with the advent of affordable computing power, which did not really explode until that power was put in the hands of individual cost management professionals with a PC.

The 1st Product Cost Management Industrial Revolution: Spreadsheets

Legend has it that the first accountant to ever see a WYSIWYG spreadsheet demonstrated in front of him started shaking, because he was in awe of the power and flexibility of this tool. Computer spreadsheets started to be used in earnest in the 1970s in business mainframes and academia. One of their applications was cost accounting, an early accounting-focused variant of should-costing. However, what made them “the killer app” was Dan Bricklin’s VisiCalc in 1979 on the Apple II and the IBM PC in 1980. VisiCalc found applications too myriad to discuss and was followed quickly by Lotus 123 and then, the still-reigning heavyweight champ of spreadsheets: Microsoft Excel.

In the early days of PCM and spend analytics, the toolset was little more than spreadsheets operated by a cost management accountant (probably a plant accountant) or a purchasing agent. However, this is not a thing of the past, because a large percentage of companies (I would guess 70%+) still use homebrew cost models in spreadsheets as their PCM/analytics workhorse today.

Early PCM specialist software

The great thing about modern spreadsheets is the impressive power they put in the hands of non-programming mortals in the cost management or purchasing departments. Even ex-programmers in engineering love them, because of their speed and flexibility. However, that seductive power becomes a gilded cage, as spreadsheets are notoriously hard to maintain, use on batches of spend and share among users (even with the addition of web-collaborative spreadsheets, such as Google Spreadsheets, which cause security chills for many IT departments).

Therefore, it soon became apparent that understanding and controlling product and service cost was a valuable enough endeavor to warrant more computing power and specialization than a spreadsheet could offer. Therefore, people started to create specific estimation software, to be used within a plant or other specific environments. Among the advantages of that software over spreadsheets was the ability to have version-controlled, programmatic, sharable process models that could be attached to a formal database of costing inputs. One of the first and still relevant for these use cases is Costimator by MTI Systems.

While MTI was serving the smaller machine shop segment of the market in quoting and estimating, the customers of these shops (Fortune 1000 companies) were conversely very interested in not overpaying. Some companies begin to make their own in-house systems with manufacturing process models for cost. Not surprisingly, many of these systems started in the aerospace/defense and automotive industries. The cost models were similar to the job shop estimators, in that they relied on manually entered part geometry as the primary input.

Some of these systems started on main frames. However, with PC computing power exploding, third-party companies also started to make professional best-of-breed software for PCM. Many of these started as internal spreadsheets within consulting firms, which did PCM work on behalf of Fortune 1000 clients. As their PCM practices grew, they started to transition their spreadsheets to software with graphical user interfaces (GUI) to help them in their own consulting work. They continued to invest in these in-house software, until the point that the software became mature enough to offer to their customers, who by this point were hoping to bring some of these PCM skills in-house.

In the United States, a good example of this is Seer by Galorath. Galorath started out serving the aerospace and defense industries. Its product grew from early versions with process models for mechanical parts to including electronics, systems and eventually software development costing.

Costimator and Seer started in the United States. In Europe, work was happening in parallel. There was a company called Cognition that eventually disappeared, with similar software. However, another major player in the manually driven, bottom-up process model space was successful. It started in a consulting firm called Tsetinis & Partner, which was a partial industry consortium. They produced a product called Tsetinis Perfect ProCalc that became a popular PCM product with EU consultants and cost engineers. In 2012, this product was purchased by Siemens PLM and embedded as the PCM module in Teamcenter.

Group technology

As cost technology was evolving, in parallel, the manufacturing and engineering side of business was interested in increasing profit and speed to market by understanding which parts were similar from a design or manufacturing standpoint. In the 1980s, a system of product coding known as Group Technology (GT) was invented. Although it had some success in manufacturing and design, it was a very manual process that required massive effort to “code” parts. The effort to maintain was also high, so after initial interest, GT never gained widespread sustainable use or acceptance. GT was not directly a PCM or spend analytics software, but some of its ideas would be used later in spend analytics products.

Design for manufacturing (DFM) and assembly (DFA) software

In parallel, during the late 1970s, driven by outsourcing and competitiveness to Japan and Asia, companies in Europe and the U.S. started to focus on designing their products to be much easier and cost effective to assemble. This had a follow-on benefit of increasing quality, and U.S. manufacturing (most notably automotive) was struggling with quality as well. Although DFMA was not, directly, a product cost methodology, it was so similar and useful in the efforts that sometimes it is thought of in the same vein as product cost management.

The two main players in the space were Sapphire and Boothroyd Dewhurst DFMA. Sapphire does not seem to exist today, but Boothroyd Dewhurst still does and has grown beyond its initial sole focus on DFMA to also include manual process-model costing abilities.

This brings us to the close of the first revolution in product cost management. In the second installment in this series, we’ll look at the next wave: feature-based automated 3-D CAD costing tools, advanced cost-accounting and control systems; the role of little and big data; and the future of product cost management.

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First Voice

  1. Jason Busch:

    Fantastic piece Eric. Great to hear your voice again. You are the true expert in the product costing market. The history lesson is a great start. Cant’t wait for the rest.

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