By Sriman Ravikanti
Global trade wars and cost competition are forcing original equipment manufacturers to design and manufacture a high value product at competitive prices. Delivering a product and meeting cost targets is a common constraint in the industry today. Most companies use traditional sourcing methods to overcome cost challenges. Traditional sourcing is the process of requesting quotes in a competitive cost environment, and has demonstrated success for a long period of time.
Challenges in Traditional Sourcing:
Per basic laws of supply and demand, product cost increases proportionately with the complexity of the part, and decrease with the increase in supply. However, increasing the competitive supply for the complex product won’t happen overnight. Traditional sourcing tends to lose its strength when the products being procured are of a medium to high complexity, low volume, and have a few qualified suppliers. Should-cost modeling is one solution to cover the gap.
The 4 elements of any product cost are material, variable, over-head and margins. Should-cost modeling is a process that estimates the cost of a product or service by considering all elements of cost. Should-cost helps companies select the right material, process, investment, and supplier.
Should-Cost Modeling Challenges :
Real success of should-costing is attainable only when original equipment manufacturers takes necessary actions to control costs. Accuracy is the key parameter for a successful cost model. In fact, you need to have more knowledge of supplier business than the supplier himself. It is obvious that supplier will challenge your assumptions, and you should encourage that because, “your model is working now”. This gives us an opportunity to discuss “what is wrong in my assumptions and what it is to be?”. Because of these conflicting discussions, often companies think should cost as a theoretical exercise. But this is not true, should cost is not a negotiation tool, rather it is leveraging tool.
Should-Costing & Its Application Across Product Life Cycle:
Though should-costing sounds like a procurement activity, it actually can assist development in your skills and knowledge to improve visibility and control of cost across product life cycle.
Make vs. Buy:
Process optimization/ production ramp-up:
CGN Global's Cost Model Framework:
The CGN Global Virtual Manufacturing Method (VMM) cost model is a rigid framework, in which all costs are allocated and recorded as if you were really making the part yourself.
Other unique features of the CGN VMM cost model include:
CGN also has capability and certified experts using market ready cost estimation software aPriori, Costimator, DFMA, SEER, Cleansheet.
Recently, CGN Global partnered with one of the top fortune 100 original equipment manufacturers to develop a cost strategy and accelerate a cost reduction initiative for their large casting and forgings group. The challenge was to develop cost models within a short time.
CGN leveraged Virtual Manufacturing Method (VMM) cost model framework to:
CGN facilitated client with significant cost savings by: