PLM, Design Quality and Cost of a Product

I want to continue the topic I started yesterday about Value Engineering and discuss how PLM can be potentially used to manage cost of a product. In my view, cost is a very sensitive and complicated topic in the organization. When PLM is normally mentioned as a tool that allows us to manage and optimize product cost, in practice I see the cost topic as pretty complicated. Before discussing what practices I can apply in PLM to manage product cost, I want briefly review product cost components.

Product Cost Elements
There are quite many cost elements. I made some diagram to figure out them below. The main total product cost combined from Direct cost and Indirect cost. The major part of direct cost is material cost. Additional components of direct cost are purchased parts, labor and tooling. Indirect cost combined from Overhead, Selling Expenses, profit and discount. Direct and Indirect costs together can be presented as a product list price.

There is additional cost classification terminologies that apply to elements I just mentioned. Manufacturing cost is  combined of variable and fixed cost. Total cost combined from manufacturing cost and selling expenses. Finally, there is the selling price combined from total cost and profit.

Product Cost, Design Cost and PLM
If we will analyze all cost elements and compare it to the design cost, we can learn that design cost is insignificant in comparison to the manufacturing cost. And this is a very important observation, in my view. On one side, design cost, itself is very small. However, on the early design stages, we have a very significant impact on manufacturing and total product cost. It means that by improving design cost, we can get significant improvements and decrease product cost. It also means, that if the company is using PLM system that allows to estimate a final cost of the product on the early design stages, it can be huge benefits and can influence overall product design and manufacturing.

What is my conclusion today? I think, cost analyzes is something that should be considered as an important part of PLM system implementation. PLM has a potential to become a system to handle all cost related data and provide total cost estimation based on current design options. From what I know, such implementation happens rarely today. My hunch is that PLM implementations and technologies today are struggling to integrate systems that responsible for the cost related information – design, ERP, requirements, supply. I’d be interested to hear what are your practices in the cost management during design phase and later? Does it seem as an important issue for you?

Just my thoughts.
Best, Oleg

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12 Responses to PLM, Design Quality and Cost of a Product

  1. Nawal says:

    Most companies have some form of cost analysis during the ECO process. For example, in PLM, there is a task assigned to Mr. Joe, who goes into the ERP system or other tools to perform the cost analysis.

    Some companies have taken the approrach of using excel as the intermedatiate analysis tool to pool the data from PLM and ERP systems.

    I think some form of basic cost roll up capability is avaiable today. But if you want more complex definition of cost, then you have to go to SRM system. PLM merely feeds the BOM data.

    One reason there is no driver for this information. Pure specualtion here. Cost analysis is not done by designer but a buyer. He/she is not your traditional PLM user – currently using PLM only to download drawings. For doing analysis, he has got his own preferred tools like SRM or ERP.

    If companies say that engineers should the cost analysis upfront in the design, and not as a design release or ECO approval activity by a buyer, it will make sense to do the cost analysis in PLM. I think, most companies want to go there.

  2. Bhushan Teli says:

    Yes Oleg,
    you are right, cost analysis needs data from ERP/SRM & we don’t have good Integration with PLM.

    It’s always better if designer’s do cost analysis for the product they are designing[only thing he should be equipped with the data for it] i have few points for that why designers need to do that?

    1. a part can be manufactured by many ways with different material, it may be Casted/Fabricated or machined. Depending upon the process & material the cost varies.
    2. In many cases we have to go for Make or Buy Decsion for the parts.
    3…& many more
    If designers are keeping eye on the cost factor in the design phase, it will help in developing the products with the Targeted cost with best possible options. & we don’t have to do many changes afterwords to fit the product within the desired cost range.

    current PLM – ERP integration packages are just transferring the BOM, we need more integration so that other ERP data is accessed by PLM users[designers] as & when needed.

    Regards,
    Bhushan Teli

  3. Alec Gil says:

    I agree with Bhushan. The design stage cost analysis is (should be) just another iterative engineering activity. In other words, decisions such as make/buy, what materials to use, manufacturing processes, suppliers to select, etc. must be incorporated into the design process because they all affect cost and ultimately profitability. However, because the needed data is usually in disparate systems (PLM, ERP, perhaps others), “what if” cost analysis is far from trivial. Improved function specific integrations between the systems are needed or, better yet, a way to collect on-demand and present cost information to the users from different systems and repositories for better decision making.

  4. Nawal, I agree. In my view, companies want to move more cost-related decisions to engineering. Just because, the majority of manufacturing costs defined there. So, when it comes to purchasing people, they can influence the fraction of cost. However, disintegration of systems not allowing to do so. Excel is hand-made solution. However, you end up with the mess if you are taking to excel route. You need to hire “CEO” – Chief Excel Officer :)… Thanks for your comments! Best, Oleg

  5. Bhushan, Thanks! I agree with you and you emphasized well, that company will get much more flexibility in cost-related decision by integrating ERP/PLM/SRM in a better way. Cost is the main driver here, in my view. Best, Oleg

  6. Alec, Thanks for your comment! How do you see the role of the designer changes when a cost-related decisions move to earlier stages and become integrated in the organization? Do you see any shifts in organization’s role distributions? Thanks, Oleg

  7. Prashant Dhonde says:

    Good observation regarding cost management is a complex thing –

    Agile PLM allows to track labour cost and some other cost paramenters to be trackes.Also customers can manage target costing vs actual costing-

    But going ahead we surely need a well design cost management module which may be used in other departments where cost plays a pivotal role

    One of the confusion which I see is which system will drive the cost PLM/ERP.As many of this cost parameters come through ERP.

    Bringing in cost related activities in PLM somehow seems to be challenging as it has to be equivalent or more than ERP in terms of functinalities to bring customers to PLM to input this vales

  8. Prashant, Thanks for your comment. You are right, ERP-people feel they are responsible for “cost” topic. However, costing is a much broader. Because of corp. walls and wars, the solution is not always possible. In addition, technologies to integrate those silos are not cheap today. Best, Oleg

  9. Andy says:

    Oleg,

    Where I work we maintain very detailed cost information in our PLM system. We pull some cost information from the ERP system such as last price paid, standard cost, transportation cost. We have to go to other systems to grab forward looking costs such as quoted prices. And there are management systems that vault internally set items such as cost targets. Other aspects of cost such as field failure rates, yields, etc have to be grabbed where possible.

    Providing live cost data for an engineering BOM takes a lot of integration work in a large company. I do not know of any PLM system off the shelf that does a good job of it so we always build our own cost modules.

  10. Andy. Great conclusion! I agree, integration of multiple systems is complicated.. Therefore, chance of ready-to-go product is almost zero. So, you are building it as your own on top of Aras… Thanks! Oleg

  11. Andy says:

    Oleg,

    Yes, today we are starting to use Aras as our platform for these kinds of tools. For many years we used tools that were built using applications such as PowerBuilder. Aras has a lot more capability right out of the box than our previous generation of tools which is why we switched. We’ve looked at everyone’s PLM suite and never found anything that handled cost very well so we decided that we would need to build our own tool.

    I actually think there is a space in the market for a good cost tool. If I had the skills to design one myself I’d be tempted to do it but I don’t.

  12. Andy, Thanks for your comments! It is always interesting to read what do you folks doing with Aras. It seems to me dangerous to use Aras as a toolkit for everything you need to do. However, it makes sense when it related to product data. And cost it there, for sure. Best, Oleg

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