Cost Management

Cost Management

 

Eric Hiller shares an article on the top mistakes made in product cost management and design to value. 

Product cost management (PCM) and design-to-value (DtV) are two areas in companies capable of delivering the greatest of impact, but are sadly prone to the biggest blunders by leadership.

Eric A. Hiller, the managing partner of Hiller Associates and a specialist in product development and procurement, has unveiled some of the crucial errors that even the elite executives tend to commit in their PCM and DtV journeys.

Trying to save one’s way to growth

As great as product cost management and some of its sub disciplines like should-costing are at increasing your profit, but they will not grow your top line. To do that you’re going to need to focus on design-to-value. Make sure that you understand both the benefits and the limitations of these techniques.

Not understanding the massive leverage of COGS savings on margin

Cost of goods sold (COGS) is almost always the largest expense on the income statement of a product company. Often it is 70 to 90% of each dollar of revenue. People think of cost reductions in terms of big percentages (e.g. reducing product cost by 50%). That is one of the things that often scares people off from attempting such a transformation period, however you do not need to save massive percentages on cost of goods sold to meaningfully impact the bottom line People forget that margins at product companies are often thin, often less than 10%.

 

Key points covered include:

  • Cost of goods sold (COGS)
  • Cost avoidance
  • Under investing

 

Read the full article, Eric A. Hiller Reviews Top Mistakes Made by Executive Champions in Product Cost Management and DtV, on Medium. 

 

 

In this short video from Andrew Hone’s company identifies why only one in 25 cost-cutting programs work.

 

 

The video can also be accessed on Zenithstrategy.com 

 

Eric Hiller exposes the biggest blunders leaders make when it comes to product cost management and design to value. 

Product cost management (PCM) and design-to-value (DtV) are two areas in companies capable of delivering the greatest of impact, but are sadly prone to the biggest blunders by leadership.

Trying to save one’s way to growth

As great as product cost management and some of its sub disciplines like should-costing are at increasing your profit, but they will not grow your top line. To do that you’re going to need to focus on design-to-value. Make sure that you understand both the benefits and the limitations of these techniques.

Not understanding the massive leverage of COGS savings on margin

Cost of goods sold (COGS) is almost always the largest expense on the income statement of a product company. Often it is 70 to 90% of each dollar of revenue. People think of cost reductions in terms of big percentages (e.g. reducing product cost by 50%). That is one of the things that often scares people off from attempting such a transformation period, however you do not need to save massive percentages on cost of goods sold to meaningfully impact the bottom line People forget that margins at product companies are often thin, often less than 10%. Therefore, the leverage is huge. For example, if a company had a COGS of 80% and reduced it to 79%, they only saved 1% as a percent of sales. But, if the margin was 5%, reducing COGS of 1% equates to a 20% increase in margin. Executives might think design-to-value or product cost management transformations are “too expensive.” They are; they are too expensive NOT to do.

 

Key points in this article include:

  • Focusing on short term savings without a plan for long term Product Cost management 
  • Not believing cost avoidance is more important than cost savings
  • Thinking that a tool is the solution, not simply an enabler
  • Under investing in a separate team and capability building for the organization

 

Read the full article, The biggest mistakes executives make in design-to-value and product cost management, on Medium.com.

 

 

Eric Hiller recently published the first article in a series for Industry Week. This week, the article  focuses on how an executive (and other people who are not cost experts) can understand what the cost management team is communicating.

We have all been in a meeting where miscommunication happens. One of the biggest challenges when dealing with analytics in business is that the more powerful the analytics, the harder it is to explain to other people not involved directly in the analyzing. Exactly how the analytics works and why the results should be trusted by our colleagues and leadership is a challenge. The same is true with product (or service) cost management—specifically, when using what are commonly called “should-cost models”, (models for estimating the cost of a product or service).

A big part of the communication problem is that there is not just one type of cost model. Cost management is a broad field with a variety of methodologies to address the almost infinite world of situations for which one wants to know the cost of manufacture or service delivery. Even if an executive has some understanding of one particular cost-modeling technique, it can often be confusing when the analytics team uses different technique.

 

Questions answered in this article include:

  • At what level of the BoM (bill and material) or WBS (work breakdown structure) is the object or service being costed?
  • Does the cost model focus on the object or service, or does it focus on the process?
  • What analytical approach is used in the cost model? 

 

Read the full article, 5 Questions for Better Cost Management Discussions, on the Industry Week website. 

 

 

In this detailed article, Surbhee Grover identifies the decision-making inputs and new market approaches that will be required to survive in the new economy.

For entrepreneurs, coming out of COVID-19 isn’t the end of a crisis. It’s the beginning of a new way of thinking about their approach to product-market fit, financing, marketing and go-to-market strategies. And for some, will be a time to reflect on their personal approach to risk. The exponential pace of change to society will mean that only those entrepreneurs who have the greatest ability to adapt will survive. 

Framing how the world will be different is important, as these differences will both unlock new opportunity and create new goalposts for innovation, user adoption (B2C and B2B), team building, product-market fit, and venture funding. We believe a few things will be true:

 

Areas covered in this article include:

  • Brand relationships
  • Purchasing behaviour
  • Migration of talent and teams
  • Re-imagined supply chains
  • Data needs and sources

 

Read the full article, Shakeout of the Entrepreneurial Ecosystem What will it take to survive? And thrive?, on LinkedIn.

 

 

Tobias Baer explains why the second-order effects of the disruption caused by the Coronavirus are what should concern risk managers the most.

For risk managers, Covid-19 is both scary and a real-life test of our approach to risk management. As we are grappling with the virus and its fall-out, there are three sets of issues: the threat of the virus itself; the panic that it has caused; and lessons for operational risk management.

The risk of the virus itself is still hazy. I myself haven’t lost my cool yet considering facts such as that the total number of deaths from Covid-19 (less than 5,000 people globally as I write this) is dwarfed by the number of people who die in car accidents every year (more than 1 million in the US alone) and that while Covid-19’s overall mortality rate is estimated at 2%, it is less for the strong and healthy.  In fact, as the WSJ points out, while Covid-19’s mortality rate of 2% seems to be 12.5 times higher than the ordinary flu with a mortality rate of 0.16%, the 2% may be greatly overestimated if many benign Covid-19 infections have gone undetected.

 

Points covered in this article include:

  • Supply chain shortages
  • Operational risk mitigation
  • Mandatory equity buffers

 

Read the full article, Covid-19 and Risk Management, on LinkedIn.

 

Shane Heywood provides an article that reveals how beer manufacturers are collaborating with smallholder farms to get a more secure supply chain, lower the cost of raw materials, and empower more households with income, and all in addition to improving yields from farming that could change lives for the 2 Bn+ smallholder farmers in the world.

While interacting with 20+ smallholder farmers in Kenya, I, in addition to charities like One Acre Fund,  had the chance to see first hand how improved yields from farming could change lives for the 2 Bn+ smallholder farmers in the world.

Yet, it’s not only NGOs / charities that recognize the  value of farmers; beer manufacturers also work to collaborate with smallholder farmers. By incorporating the outputs from farmers as raw material, firms can get a more secure supply chain, lower the cost of raw materials, while empowering households with income.

 

Read the full article, Beer and Farmers in Sub-Saharan Africa: What’s next?, on Shane’s website.