The Language of Cost Estimating
Manufacturing in North America is under siege as companies struggle against increasing challenges to deliver quality products on time and at the required price. All these functions must be performed while managing the profitability and growth requirements of a demanding public marketplace.
Observing the mechanical computer-aided design (MCAD) and product lifecycle management (PLM) product sectors, there is a maturing and saturated CAD market and a PLM market that continues to miss the hopeful expectations of industry pundits. There have not been significant advances in MCAD since the late 1980s. The industry changed with "feature-based solid modeling" and has now become a commodity since all of the providers are on an even playing field. The PLM market has underperformed for a variety of reasons. The theory of product lifecycle management is sound, but the vision has eluded many companies, taken far longer, cost much more than expected and failed to deliver as promised.
A central rationale for the failure is the inherent disconnect between the goals and objectives of the product-centric engineering constituents and a company's financially based business objectives. The best example of this departmental conflict is the stark difference between the language of engineering and the language of business.
MCAD and PLM historically have focused on the engineering and design aspects of product delivery. The language of engineering as spoken by MCAD and PLM is based on physical attributes of the product and technological capabilities of the software solutions used. The result is a series of conversations about features, rounds, fillets and chamfers.
Business operations focus on financially related concerns such as margin, contribution and profit. The language of the business is time and money. It is no secret that the profit motive drives critical company decisions. It is also no secret that the ability for the product to achieve the expected financial goals is driven by design and manufacturing decisions that occur early in, and continually throughout, the product delivery process.
The holy grail of "collaboration" is meaningless if the parties are not speaking a common language. The only way to translate the language of engineering into the language of business is "cost," specifically, product cost.
Total cost management
Major PLM and MCAD providers long for acceptance and penetration outside of engineering departments at the same time that the major enterprise resource planning (ERP) vendors strive to enter the engineering and product delivery arena.
In each of these application platforms, PLM and ERP, cost can be managed. On the ERP side, costs are always historical; these costs are available to be managed only after production. While it is more difficult to manage costs on the PLM side of the house, it is often potentially more valuable. The need for real-time, predictive costs are essential to allow design and manufacturing teams to avoid and eliminate costs early in the process, when critical cost-driving decisions are made. Currently the array of MCAD, PLM and ERP applications do not allow for the ability to generate this early cost knowledge.
Extending beyond the design engineering value, accurate product cost estimates offload the estimating burden from manufacturing engineers and planners who already are challenged with demanding production schedules, decreasing capital investment and a dwindling experience base.
Additionally, predictive cost assessments offer procurement and sourcing professionals much needed "should cost" data to make better, more efficient sourcing decisions while negotiating from a fact-based position.
Finally, program and project management both benefit from real-time visibility to product cost information continually throughout the product development and delivery process, avoiding the sudden shock of bad news late in the process.
Product cost knowledge is the common language spoken across the enterprise and is clearly focused on the business goals (as opposed to parochial product or feature-oriented goals) that reduce costs, increase margins and contribution, drive profits and support growth.
AACE, the Association for the Advancement of Cost Engineering, stated, "Most people would agree that 'engineers' and engineering — or, more generally, the 'application of scientific principles and techniques' — are most often responsible for creating functional things or strategic assets … total cost management."
The organization acknowledged that industrial engineering has multiple dimensions. The calculation and analysis of tasks performed to support physical design are critical elements in cost estimating and good decision making.
"There are other important dimensions of money, time and other resources that are invested in the creation of the designed asset," asserted John K. Hollmann, an AACE technical board member.
Cost engineering and total cost management require that a professional must estimate the potential cost, determine the activities needed to design and build a product, as well as estimate how long these activities will take.
Thomas Charkiewicz, president of MTI Systems, noted, "Many of the world's largest and most successful manufacturing organizations utilize technology and lean methodologies to identify part cost reduction opportunities throughout the product development lifecycle, leading to millions of dollars in cost savings. Companies must be able to quickly and easily identify the cost drivers in the products they design, manufacture and procure."
Competitive-edge cost estimating
To generate savings and efficiency, original equipment manufacturers are looking at more than market-priced quotes from suppliers. They are learning the real cost of manufactured products. Solutions must allow designers and engineers to see quickly and accurately the real time and cost to make parts any place in the world, whether in-house or by a supplier. Companies must be able to justify to suppliers the prices one expects to pay.
Ninety percent of industrial engineering organizations report using a spreadsheet as the central or primary method for cost estimation. The results are poorly bid jobs that result in lost business or jobs that deliver a lower margin than predicted. The amount of waste can be measured in time, labor, duplicative data entry and introduction of errors. Spreadsheets are the least lean method of cost estimation.
- An industry-wide survey of more than 10,000 job shops nationwide regarding the effect that cost estimating has on business revealed that:
- Ninety-three percent have added a "fudge factor" to quotes because they were unsure of the pricing estimate accuracy.
- Seventy-nine percent have not responded to a request for quote because they did not have time to quote by the stated deadline.
Seventy-one percent have customers requesting pricing justification, including a detailed cost breakout, when submitting a quote.
- Sixty-four percent of the respondents said their company has lost jobs because of overestimating what their costs would be to make a part during the quoting process.
- Ninety-three percent believed their company has lost money on a job because the actual cost of manufacturing the part was more than estimated.
"The majority of manufacturing organizations have no idea how influential cost estimating is to their bottom line," Charkiewicz said. "Most believe their current system of estimating, usually a spreadsheet with numbers generated from experience, is working fine. However, those companies that take the time to analyze this method quickly discover the inefficiencies spreadsheets present when compared to database-driven tools that are designed specifically for cost estimating. Companies need to be able to estimate product costs quickly, accurately and with consistency."
Purchase-part cost savings
To perform a "real cost" estimate, it is necessary to break down both the time to manufacture a part and the cost of labor or shop rate of the supplier. Manufacturing times are generated through process and/or parametric estimating methods, and labor rates also must be carefully calculated.
Estimators can analyze quickly how various manufacturing processes, tooling types and material changes will affect production time and cost. Technology solutions must produce complete, detailed process plans, specifying the necessary set-up, tooling, machine times and more. The result of such efficiencies is a lean manufacturing plan that increases productivity and profitability.
Whether a formal or information lean initiative is utilized, the ability to evaluate whether a part can be made more cost effectively in house or by a supplier is critical. Industrial engineers must have the analytical tools to know in-house capabilities versus those of suppliers. Only with these data can the cost-effective decision be made about whether to make or buy a part.
Reducing new design costs
Side-by-side manufacturing time and cost comparisons based on part features or material changes allow design engineers to create the most functional yet cost-effective design of a new part.
Discrete-part manufacturing companies are experiencing a demanding and difficult combination of price pressure from customers, rising costs (internally and from vendors), international competition and income growth pressure from investors.
Cost of goods sold has become an increasingly important metric as the largest expense item on the income statement; typically 70 percent to 90 percent of revenue. Manufacturers are forced to focus on product cost and profit margins with renewed vigor.
Cost targets, an important component of design-to-cost strategies, now are being defined early and with greater granularity, even down to the individual component level. Meeting these detailed cost targets at product launch (avoiding expensive, lengthy post-production cost reduction phases) is a new challenge, and manufacturers are struggling to find effective systems and tools to assist in this effort.
New product introduction (NPI) refers to the complete business process within an organization for introducing new products or product models to market. Today's NPI process is a cross-functional business process, including both internal functions and external suppliers or partners. Most manufacturers still are struggling to break the historical functional divisions or silos, notably between marketing, engineering, manufacturing and procurement. These struggles continue to exist because important product, process and customer information still is trapped in these functions, emerging only at serial release stages or gates.
Product costs (material, direct labor, direct overhead and tooling) and target costs (the costs that must be met to meet key business objectives) are key components and information central to the product development team's daily decisions. It is important that the NPI process includes mechanisms for providing information in a continuously refined and updated manner as the project moves from conception through product launch to delivery.
Cost estimating methods are characterized by incremental and offline operation as follows:
- Intuitive: based on the experience of the estimator
- Analogical: based on similar sets or systems
- Parametric: based on parameters characterizing the product without describing it completely
- Analytical: based on a decomposition of the work required into elementary tasks
The ability to model production facilities, including machine capabilities, raw materials and facility cost structure, and the specific cost accounting methods allow "forward–looking," real-time cost estimates. This cost information leverages existing information and data systems in a single cost platform, captures company specific costing practices, and makes this information available across the enterprise and accessible by any user in the organization.
Some methods are better than others depending on the context and stage in the product development process. There is a trade-off that exists between the level of cost detail and the time spent obtaining the cost information. Detailed analytical costing systems require knowledge of a wide array of manufacturing parameters and are suited for use only in a cost estimating department. Such systems will not suit the needs of a designer, engineer or procurement professional since they rarely have the time or knowledge base to perform cost estimation at this detailed level.
Practical costing in the product design phase must be accurate, flexible, simple, timely and economical. There must be a present and clear relationship between the designer's decision and costs.
Currently most manufacturers have the information needed to provide adequate and effective cost collaboration scattered across the organization. It is very difficult to cascade timely information across departments. The knowledge to synthesize the many pieces of the cost puzzle often resides with a few cost experts in the organization, and they often do not have enough time to meet the needs of their many constituents.
Discrete-part manufacturing companies are looking for ways to streamline their NPI processes through improved product cost management and control. A solution is required to provide seamless cost analysis from early concept design through development, manufacturing planning, procurement sourcing, pilot production and on to full production and delivery after product launch. After completion of the NPI process, the team must support sales and service and engineering change in response to field problems.