Management of cost variation

Management of cost in an automated environment

Effective management of cost is often one of the most challenging issues to overcome when designing a product configurator. Costs are influenced by a multitude of factors and are anything but static. Costs are often influenced by quantity, the urgency of requirement, choice of supplier and many other factors. Furthermore, costs will change over time as suppliers increase prices, or new competition occasionally drives costs down. How the management of cost is achieved in automated systems is a business decision, this article offers one possible strategy.

 

There are two choices required;

  1. Market-driven pricing or cost-plus pricing
  2. Actual costs or standard costs

 

Many configurator variables are parametric, and these add complexity to the use of market-driven pricing. It is not possible to define part numbers, costs for incremental changes in dimensions where the number of variables may approach infinity. It will be necessary to introduce scaling where the cost or price is based upon known geometry and factored to reflect variations.

Market-driven pricing would be difficult to implement in a product configurator because of the need to scale the prices to parametric variables.

Actual Costs

Actual costs are highly volatile and would be very difficult to use in a product configurator. The volatility of costs would frustrate customers who may receive two different quotes for the same product. The use of actual costs might hide considerable deviation without recording the reasons for the cost change.

Standard Costs

The most practical strategy for a product configurator is to use Standard costs and Cost-plus pricing

Standard costs are entered for each part number in a cost lookup table which remains static until changed manually. These costs will be reviewed periodically against “Actual Costs” which have been collected from purchase history. The decision to change a cost will be made by someone who is familiar with the purchase history. They will make decisions after understanding variables in the order which could affect the price paid to the supplier.

A variation report is usually run to compare data from the configurator and purchase records in the companies Engineering Resource Planning (ERP system). The scaling parameters for parametric variables will need to be considered.

The material of construction and product finish provide further variables which may be calculated without the need for a new part. The decision to manage these types of variables needs to be made when defining the rules used by the product configurator.

In a configured environment, over time and as multiple parts are considered, individual variances will be cancelled out by other parts where the variance occurs in the opposite direction. Overall it should be possible to achieve average cost variations of below 3%. The goal should not be to achieve zero deviation unless the parts are very consistent but to achieve an acceptable deviation to minimise risk. Considerable efficiency will be gained from automating the estimating and design processes where the aggregate cost deviation will be insignificant.

The purpose of the product configurator is to generate accurate information quickly and dynamically for potentially millions of product permutations. A well-managed cost base will ensure that these costs are available to reflect the configured product at all stages of the configuration process.

Effective management of cost

To summarise, standard costs should be used. Use variance reports to maintain standard costs, using actual costs as a comparison. This will allow the product configurator to calculate consistent information quickly and dynamically. To reduce the number of standard costs required, scaling parameters should be used. Prices using a cost-plus basis should be calculated. Individual cost variances will occur. Cost variances should be managed to within a range of 3% with a well-maintained system.

 

 

Written by Peter Slee-Smith, Edited by Jason Spencer – 22/03/2018

Gatehouse Design offers services around product configuration, along with other design services.

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