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
