Product Costing

Elon Musk has a magic touch. Whatever he does seem to be a success and he thinks big. He successfully built and sold PayPal, sends gigantic rockets to space, designs and builds the best electric cars on earth, plots how to turn earth to run completely on solar energy and does a lot more. You would have rightly guessed that these are not purely luck and unexplained magic. As in all magic, there is a design to Elon Musk's magic too. One of his magical tools is First Principle thinking against Analogy Thinking. First Principle is a concept in physics where you reduce a given problem into fundamental facts and from there work your way up. How does Elon Musk use this principle to his advantage? Let's hear from the horse mouth.

In case you are not able to watch the video above(for whatever reason), a quick summary here. People normally use Analogy Thinking approach to arrive at a decision, but by using "First Principle" approach you can get significant insights. Let's taken an example, if you ask a battery company how much it costs to make a 1kwhr lithium ion battery, they would think 'currently it costs 1500$ to make so and so battery and based on that it should cost 700$ for a 1kwhr lithium ion battery'. This is "Analogy Thinking". Instead, if they go by "First Principle", they would start from basically what the battery is made of, like lithium, nickel, cadmium etc. What these metals and other raw materials cost in the commodity market for the given quantity. So, it turns out for making 1kwhr battery they would need 80$ worth of these raw materials. So essentially they need to figure out a clever way to put together all these raw materials to make a battery so that it costs just 200$. That's it.

So, here the problem is redefined and simplified and when you succeed in figuring out that clever way you become successful like Elon Musk. This is a great lesson for companies dealing with products. Companies should know what is the "First Principle" cost of their products at any given time and in the future too. This will provide them with breakthrough advantage against competitors. This is where an effectively implemented product costing solution would help. With increased maturity of PLM solutions enterprise the product costing solution is  becoming easier to implement. 

What does a product costing solutions consist of? Essentially, it should tell how much it would cost to produce, maintain and retire a given product, right from the conception till the product becomes obsolete. The cost of end product is calculated by exploding the Bills of Material of the product and calculating the cost of an individual part and way up to the product. So, calculating the cost of the individual part cost forms the core logic in "Product Costing" application. The cost of an individual part is a function of time, place, location in addition to its engineering specifications. That is where you need, when you need, how much you need and from whom you buy. 

In addition to the above variables there is one more dimension; the "maturity of the calculated cost". When the product is in initial, not-mature state the calculated cost is also of low maturity arrived based on a lot of assumptions and historical data. As the product design is finalized, manufacturing processes are charted out, suppliers are identified, quotations from them are received the cost arrived at becomes much more certain.

Hence the most important thing in a "Product Costing" solution is that it needs to be flexible enough to capture and use these varied information effectively. In the process the solution should always track the "First Principle Cost" because that's the real cost everything else is an opportunity to beat competition.

Choosing the right PLM system for an enterprise

  We are often faced with a trivial, yet so vital question by the customers, analysts and the community at large – “Which PLM platform is popular in my industry?”, “Is there a pattern of choice by an industry vertical to adopt a specific PLM to cater to its needs?” This is not just an interest around the recent growth of PLM domain. We have seen this many times – not just validating (or) reiterating their PLM strategy, but also to get into the comfort zone that they are on the winning side – “Invest Right”.

The topic can potentially throw an indefinite debate – the answer can be both “Yes” and “No”. The platform of choice has to suite their business needs against its capabilities. There is no denying fact about it. While we have observed that Hitech vertical have fair adoption of Enovia MatrixOne, EMS Industries have embraced Agile PLM, the core Automotive & Aerospace have Teamcenter and the likes of Auto Ancillaries have Windchill, there are many exceptions that defy this pattern. We anyway need to leave out the niche PLM such as Agile P4P (Prodika), FlexPLM, mentor DMS from this discussion – for the obvious reasons.

Let us take a step back by a decade or two. This was the time when the CAD was considered as the key driver for productivity and automation by the product design folks. By 1990’s, CAD achieved the goal of replacing the manually drafted drawings into a 2D and subsequently 3D models very effectively. The spurt in productivity resulted into the greater need to have CAD data management – a kind of Work Group Managers / Team Data Managers – all the CAD vendors (SDRC, UGS, PTC, Dassault, Autodesk) grabbed this opportunity to create such products – what was seen initially as a “value add” – later turned out to be a domain by itself – the PDM thus arrived and found its place in the enterprise IT landscape.

The evolution of PDM provides some clues on the pattern. CATIA was seen as strong in surface modeling – considered as the critical feature by Aerospace. Every aero major such as Boeing, Airbus have adopted it. IDEAS was very good at solid modeling – many heavy engineering industries and major Auto OEM’s have taken it. Pro/Engineer was powerful at parametric modeling – many Auto Ancillaries found it suitable to its productivity needs. Unigraphics (UG) was good at both solid and parametric modeling and was driven by GM

These CAD roots have paved way for the respective vendor to implement their PDM’s. Enovia VPM was the choice, where CATIA was used exhaustively. Metaphase was prominent where IDEAS installations were huge, Windchill came along with Pro/Engineer, iMAN along with Unigraphics.

These product vendors have held on to their customers and continuously improved their products into a full-fledged PLM’s, spurred by the acquisitions in the PLM players, of late. While these CAD players were busy addressing their existing clientele, there were new players emerged, such as MatrixOne and Agile Software. They started catering to the next emerging industry – Hitech. The biggies in Hitech needed an open platform to build their specific custom solutions – found MatrixOne and chose it that way. EMS industries in Silicon Valley wanted a very simple and ready to deploy, kind of PLM – found Agile the right one. Then, the niche segments followed such as in CPG – Prodika took the lead, in Apparel segment on FlexPLM, ECAD Management on Mentor DMS adoption – being the earliest enablers.

There is also another pattern – the big 3 in Auto (GM/Ford/Chrysler) influenced their tier 1’s to use their enterprise platform - Teamcenter for product data exchange, Nokia recommended its suppliers to embrace MatrixOne. However, the impact was more pronounced in CAD world rather than PLM space. Since 2000, every PLM product tried to bring their flavor of industry solutions as templates, popularly called accelerators, such as Automotive and Defence solutions (ADS), Hitech, CPG, Medical devices, Apparel accelerators, filling up the gaps that may exist in the products and to be seen as full suite solution providers. This created another pattern of adoption by the industries.

In short, it is very difficult to conclude on a specific solution, without doing a very objective product evaluation to a specific set of customer needs. It needs a thorough understanding of the customer’s vision, analysis of business requirements and their IT landscape. The pattern can only give an idea to the extent of ~30% of the core PLM fitment, leaving the rest 70% for thorough analysis of the specific requirements. The early adopters may be through a virtue of force and with limited vision. But, in today’s context, it has to be through a well thought analyzed choice – to obtain the cutting edge.

I am keen to know your thoughts on this!

Part

The core aspect of PLM is of course Part. Understanding it is crucial for any PLM practitioner. At the surface level it looks simpler, and one may even ask "Part is a part" and what more is there to understand in it. In this post we will go beneath the surface and explore various nuances of Part.

A "Part" can be defined as "The thing that has form, fit and function and is the whole or part of a product". The word Part is used to mean both the Design and the instances of the design depending on the context. In Engineering and PLM context Part will mean the Design and in Manufacturing, Sales, Service it may mean the instance of Design. Design Parts are uniquely identified with Part Number and Revision and Part Instances are normally identified with series or batch number. Since we are discussing about Part in the context of PLM hereafter in this post Part means Design Part unless specified otherwise.

While defining Part we mentioned the concept of Form, Fit and Function. What is form fit function?

Form : It refers to physical attributes of the Part. It may be shape, dimensions like length, width or height, weight, density, material composition, file size, file format.

Fit : It is the acceptable tolerance of the values of form and/or function attributes. For example if a rod's diameter is specified as 3+/-1% cm, 3cm diameter is the form and the acceptable tolerance range of 2.97 cm to 3.03 cm is the fit. A fit needs to be specified because, it is impossible to manufacture a part to a precise dimension. An acceptable tolerance limit will help a part to properly work in an assembly as per expectations.

Function : Function is the the objective of the part. Though function is derived from the form and fit, function may need to be explicitly specified because form and fit may not be defined in too much detail. So an intention of the function like "2ohm resistance"  needs to be specified instead of defining the underlying material and technical form of the resistor achieve a 2ohm resistance output.