Estimating Excellence

New technology helps IBM leverage its cost estimation strategy

New technology helps IBM leverage its cost estimation strategy

David Hannon
Purchasing Magazine - January 13, 2005

First rolled out in the first quarter of 2003, IBM's new cost-estimating tool is the latest in its series of corporate initiatives aimed at lowering its end-to-end supply chain costs.

In an interview with PURCHASING magazine, and as John Kagan explained at PURCHASING's online 2004 Global Procurement Conference in October, IBM's latest estimating tool has proven invaluable in helping IBM manage purchasing costs, starting in the design stage.

Kagan, manager of brand cost management and Technical Evaluation Center at IBM, is just as quick to explain how the new tool advances the mission of IBM's global cost-estimating team - which is to provide assessments of alternative designs in order to identify low-cost approaches as well as competitive estimates and analysis in order to assess a products' competitiveness.

"We have realized in excess of $10 million in savings and avoidance so far in using the Costimator," software from MTI Systems in West Springfield, Mass., says Kagan,

"The savings were identified through design alternatives that we have implemented, as well as through negotiations with our supply base to lower our costs."

(MTI provided software customizations per IBM's requirements for the initial rollout, as well as on-site training in North Carolina for key commodity experts.

And IBM, working with MTI Systems, developed what Kagan calls "an aggressive customization and implementation schedule.")

The Costimator tool has also been an asset, says Kagan, in making suppliers aware that IBM understands what its designs - including those of the ODM - should cost.

"The suppliers are aware we are doing these estimates for these products and they will have to meet our estimates to win awards and maintain business," says Kagan. "We are now seeing quotes come in closer to our estimates than before."

In addition, he says that there is more discipline in the supply base to provide the fully costed bill of materials that we will compare to our estimates to see where the areas for improvement are and where we can work with our suppliers on cost. And it starts from the beginning with design optimization and process optimization and negotiation with suppliers."

The tool reduces the time for quotes and negotiating production costs. In fact, some IBM suppliers are so impressed, they have begun to use the Costimator tool in their own spend.

One of the major differences in moving to the MTI Systems tool for cost-estimating was that in the legacy tool, all rate and price data was developed internally by IBM based on input from different geographies and researched by the teams responsible for keeping those rates and material costs updated.

The new tool has rates for materials, machinery and labor supplied by MTI Systems in support of IBM's historical price data.

It also has a feature where IBM can build up a process standard for a type of process or part, which helps in estimating so IBM does not have to build an estimate from scratch - it can use the standards to develop an estimate and develop it for parts.

The impetus for the shift to Costimator was the realization that the company needed a more user-friendly Windows-like application that would be more flexible.

(IBM had been using a cost estimating tool called Pisces that it had developed on its own early in the 1980s. That built on what it had done since the early 1960s when its industrial engineers provided manufacturing process times and throughput estimates.

In the early 1970s, IBM developed its should-cost estimating strategy and its more formalized competitive estimating and analysis began in the 1980s at its Boca Raton, Fla. plant.)

But to achieve its mission of providing aggressive, yet achievable hardware costs for both IBM's products and its competitors' products, the change was needed.

"We provide competitive analysis to identify cost opportunities which support our development, procurement and cost management organizations, and ultimately providing the most cost competitive products to our customers."

IBM's estimating mission

  • Provide aggressive yet achievable cost estimates for IBM and its competitors' products.
  • Provide comparisons and analysis of IBM costs to competitors' costs.
  • Provide support to Development Engineering, Brand Cost Management and World Wide Procurement organizations in an effort to deliver the most cost competitive products to the business.