Solving the Complexity Conundrum in Achieving the right Product Cost
Business | September 24, 2022 | By
You go to an Apple store and purchase the latest 256 GB iPhone 14 Pro Max. And its Manufacturer’s Suggested Retail Price (MSRP) right off the shelf is $1199. But, the actual product cost of that model will be lesser than what you actually pay. We will not debate whether the phone is overpriced or not. This is to only point out that the cost of manufacturing is different from the MSRP.
Arriving at the optimized/target product cost is a huge challenge for product manufacturing companies. However, being successful in this process is a key factor that determines the product’s success. A small saving reflects positively on the bottom line.
The steps in New Product Development (NPD) process vary from company to company. But, one thing is common. At every stage of the NPD process, there will be changes to the product cost. In fact, before product cost, there is the BOM cost, which is the cumulative cost of all the parts/components of the BOM. And on top of the BOM cost, companies add their overheads to arrive at the product cost. Then it reaches the retailers who add their profit margins, overheads, and other factors. The other costs apart from the BOM cost are prone to change depending on the organization. In this blog, we will try to understand the complexity involved in optimizing BOM costs and how Zumen’s Product Cost module solves the complexity conundrum.
Product Cost Challenges and Solution
Let’s consider the iPhone 14 Pro Max model. In the conceptualization phase, a series of discussions between teams (Engineering, R&D, Manufacturing, Finance, Supply Chain, Procurement, Sourcing, etc.) happen, where they decide on the features, the technical specifications, and fix the project budget along with a cap on the product cost. And based on the results of earlier projects and estimates from value analysts, they set it at $550. The journey of the BOM cost starts with this estimate.
Now imagine that you are part of the NPD team conducting the direct material sourcing process using Zumen Source-to-Pay. Here are the benefits.
Real-Time Product Cost Updates
Every BOM has a set of parts, and every part has a cost or value attached to it. And we know that as the parts mature at every stage of the NPD process, so do the costs. Now imagine that we are at Gate 0 of the NPD process. Based on the company and it’s products, there are different gates. As the BOM travels through multiple gates of product development, there is addition and deletion of parts. Sometimes, companies add some exclusive parts just for that particular variant of the product. Because of all of these changes, there are cost variations. And usually, it moves in the upward direction.
As we move to the proto stage, the draft BOM might be let’s say, 60% complete. A cost review happens before moving to the next stage. The cost of the BOM could be $800 as against the estimated value of $550. Since this is only the proto phase, the plan will be to reduce the cost as close as possible to the estimated cost before it reaches the production phase. Companies engage in a number of activities to try to meet the estimated cost. And in most cases, product launches will occur only if they reach the target cost. The pain here is gathering the BOM data, which could be 1000s of parts, collating all their information, and presenting it for approval. And, the approval processes are lengthy in most companies. So what happens is that by the time the spreadsheet reaches the final stage of approval, some changes would have already been made. The cost that is now under review is an outdated one.
All of this ends with Zumen. As the cost of components changes, it automatically reflects in the Product Cost Approval (PCA) screen. No need for reconciliation, and no need to waste time gathering and collating data that will be outdated by the time it reaches the approver.
Detailed Picture for Stakeholders
When it comes to cost in NPD projects, there is so much at stake. There is a need for a comprehensive picture for the stakeholders. But sadly, the situation is not so. For example, when comparing two BOMs or when sending a BOM cost for approval, there is only the Value Analysts’ estimates (ZBC: Zero Based Cost) and the actual cost available. Stakeholders don’t have access to important data such as:
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- Percentage of BOM parts with PO releases and its share in the target cost
- Percentage of BOM parts for which there is a VA estimate and a Buyer estimate
- Quoted/settled/PO costs for all BOM parts from the suppliers, both the minimum and maximum values
- Reference BOM/Part used and its/their costs
- Cost savings and the best possible cost
- Suppliers’ share of business for every part of the BOM
- Zumen gives buyers and stakeholders all this information and a complete history of the cost lifecycle at different stages of the NPD process.
Additionally, there are system-level costs as well. In the iPhone 14 Pro Max model, a couple of systems are the Screen and Camera Module. It is possible to make sourcing decisions based on the system too, which is a sub-assembly of the product. If a single system meets the budget, those parts can be released for sourcing. There is no need to wait for approval for the entire BOM.
If you need to prioritize longer-lead-time parts, and systems, or want to review the costs of parts or systems with long lead times, you have it.
Customizable Approvals
Product manufacturing companies generally use ERP systems for approval workflows. And customizing the approval workflow in ERP is a tedious and time-consuming task.
With Zumen you can allow PO release without approval based on the need. For example, you can release the proto, pilot, or production POs without approval. Also, you can choose to allow purchasing or not based on part maturity levels at different gates of the NPD process. And, if there are multiple approvers, they can approve at the same time (parallel) or approve one by one (series). All of these customizations can be done with the click of a button.
Product within a Product
Zumen’s PCA module provides product manufacturing organizations with a comprehensive yet simple way to compare BOMs and part lists. We know that PLM has control over the BOM, and ERP has control over the cost. By integrating with PLM and ERP, Zumen leverages the best of both worlds.
To sum up, Zumen’s PCA module is truly a product within a product. To learn more, feel free to reach out to [email protected] or schedule a free demo.
