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Today, I’d like to welcome back Supply Excellence guest blogger, Doug Smock. Co-author of the supply management best-seller, Straight to the Bottom Line, Smock will continue his findings on new strategies and systems for product should- and future costing.
In a recent post on Spend Matters, Jason Busch briefly reviewed a CAD-based costing technology from a start-up that has partnered with Caterpillar to commercialize an automated tool for analyzing castings’ costs. Jason asks: “might this type of approach ultimately become the bridge between the procurement and design functions?”
It’s a good question because I’m glad that people are at least recognizing the need for better integration of supply and design. Bad question because it’s the totally wrong way to approach this monster issue. Best-in-class companies are completely redesigning the way that design and procurement interact at a very fundamental level.
Why?
- Because 80% of a product’s costs are locked in by the time it reaches the CAD phase.
- Almost 90% of the time it takes a product to get to market is consumed in produce planning and design
- Because excessive product complexity can balloon costs, bloat inventories, and slow responsiveness to major shifts in demand.
Companies have typically designed new products the way they bought components to make them. That is, in a very decentralized environment where engineers made specific choices each time they were engaged in a design. They had no access to data on previous types of products specified or sourced that could have been re-used. There was no effort to develop commonality or leverage that commonality with strategic supplies. Or even to bring those partner suppliers into the design phase.
One of the first companies to change was Harley Davidson, which nearly went under in the 1990s because engineers were kings of the show. Their products were no longer cost competitive. And not always the best. HD established an office of product cost and created a program of resident supplier engineers who would help on innovation. Companies such as Lucent and IBM now report metrics on how many specified products and systems are based on a pre-approved list. Supply managers play an important role in these project development committees. All of the data development and information-sharing fits into the field of product life cycle management, which is a business process. There are software tools that make the process easier and more seamless.
Once that is in place, you need to look at the fit for should-costing analysis. Again, this is first a process. It’s a way of understanding costs and making sure that your suppliers and your internal manufacturing processes are best-in-class. It’s a better way of developing costs than constantly putting business out to bid in electronic reverse auctions. Auctions have a role in a sourcing process, but not as a costing tool, which as I mentioned in my previous post, happens way too often.
More on should-costing in my next post. Incidentally, for my news reports on some costing solutions and approaches, check out: http://globalcpo.com/_wsn/page3.html.
3 responses so far ↓
1 Jessica Dunlop // Jun 27, 2006 at 3:36 pm
I’m not sure I entirely agree with last comments about reverse auctions. If done responsibly with qualified vendors, in my experience e-auctions are a good vehicle to give R&D feedback about the marketability of their new designs. It also shows the business the benefit of involving Purchasing at the front end of new product introduction projects.
If many vendors offer bids for a particular new designed item, then it gives early indication that costs can be kept competitive throughout the product lifecycle, particularly as the item shifts from prototype to manufacturing stages. In addition, it’s an indicator to Purchasing and Quality that supply risk is lower since there is a broader choice of capable vendors.
However, if less than 50% of invited vendors offer bids, it gives the business an opportunity talk to the invited vendors to find out the difficulties in the design and why there is reduce bid interest. Purchasing can then give feedback to R&D, who then have the option to redesign or leave as is.
If R&D redesigns, they aim to make the item more “marketable” thereby ensuring more vendors are capable to manufacture the item and bid competitive prices in future. Alternatively, the difficult design feature may be key to the new product and must be retained. This gives the business up front knowledge that future cost reductions will be difficult or require face to face negotiations with one or two vendors, and supply risk assessment is critical from the start.
Another benefit from a new product e-auction is that sales and marketing gain realistic expectations of which BOM components may offer easier cost improvements in later stages of the product lifecycle.
If the e-auction results show different vendors competitive at low, medium and high volumes, it also gives Operations a roadmap of the suppliers to use at various product stages as demand ramps or reduces. This gives Purchasing an indication of how to best set up supplier agreements that offer the most flexibility without making over promises to vendors.
The benefit of an e-auction in a new product project is that it can streamline resource and effort to positively impact future profits.
2 Tim Minahan // Jun 27, 2006 at 4:51 pm
Very true. Reverse auctions do get an unfair bad rap. In addition to providing one of the quickest ways to determine true market pricing (and to some degree future costing), reverse auctions actually bring MORE integrity and discipline to the sourcing process.
Reverse auctions require buyers to clearly define their specification requirements, rules for engagement, and award criteria at the beginning of the process.
Suppliers benefit by knowing how competitive they are in the negotiation — both in terms of if their bid is too high or too low. Suppliers also benefit by understanding which levers to pull to increase the competiveness of their bid — and the answer is not only to reduce price. Finally, when effectively run, reverse auctions give the supplier assurances of how the business will be awarded. (So they don’t need to fear that another supplier was awarded business based on where they took the sourcing manager to play golf.)
3 Supply Excellence » More on Harley and How to Rev Up Product Cost Management // Jun 28, 2006 at 8:15 am
[...] Smock’s Tips on Costing: Start by Getting (Re)Organized June 28, 2006 More on Harley and How to Rev Up Product Cost Management by Tim Minahan at 7:00am [...]
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