Product Cost Management as a Link Between Enterprise Systems

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I have been discussing product cost management with Eric Hiller for some time and we recently caught up to discuss Siemens PLM’s PCM acquisition. Eric has contributed his views on my PLM and Product Cost Management (PCM) post and followed up with a guest ClarityonPLM post titled Product Cost a Priority? Not now, I’m Busy. After discussing market moves such as the Siemens PLM acquisition of Perfect Costing Solutions and subsequent entry into the PCM market Eric took the time to share his views here.

The following is another guest post from Eric Hiller of Hiller Associates:

You can reach Eric at: eric@hillerassociates.com

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A Bridge to Somewhere – Product Cost Management as a link between Enterprise Systems

On September 11, 2012, Siemens PLM announced the purchase of Perfect Costing Solutions (makers of Perfect Pro-Calc and Perfect Cal-Card) from Tsetinis & Partners.  This was an exciting event, as it was the first major exit event (acquisition or IPO) of a Product Cost Management software.  The timing was also auspicious, as Jim and I had recently been talking about me writing an article for Jim’s site on this subject, i.e.  where Product Cost Management might fit in the enterprise software stack.

What is PRODUCT COST MANAGEMENT ?

First, let’s define what we mean by Product Cost Management (PCM).  I defined PCM in a previous post on my site as:

Product Cost Management– An agreed, coherent, and publicized system of culture/goals, processes, people, and tools following the product lifecycle, that ensures the product meets its profit (or cost) target on the day that it launches to the customer.

Here is a graphical explanation of Product Cost Management, as well, including the software in the space.  Product Cost Management has been around in the specialty software world since the early 80’s, at least in some of its sub-disciplines, such as DFM/DFA, parametric models, and Target Costing.  In the 1990’s, applications for manual should costing and design-to-cost emerged.  However, it was in the first decade of the new millennium that the Product Cost Management software space more fully filled out with applications for CAD feature-based costing, spend management, and roll-up and tracking tools.

Yet, during all this time, none of the Product Cost Management applications were acquired by major software companies.  Furthermore, none of the Product Cost Management tools individually have a full suite of features for complete product cost management.   In fact, until about 18 months ago, the PLM players had virtually no Product Cost Management capabilities.  Since then both Solidworks and PTC have introduced their first offerings for Product Cost Management.  Now, another of the major enterprise category players (Siemens) has made a move, buying a Product Cost Management solution (Tsetinis Perfect Pro-Calc).

Now that things are heating up (or at least warming) in the Product Cost Management world, we should ask, where SHOULD ask the question:

Where SHOULD Product Cost Management reside in the software world? 

Jim broached the question indirectly in his article Did PLM Give Up On Product Cost Management.  Does Product Cost Management belong as part of PLM, ERP, SCM, or should it remain an independent specialty?

What does PRODUCT COST MANAGEMENT Software Fundamentally Do?

Before answering that question, we may want to take the advice of a serial killer (at least a fictional one).  In the movie Silence of the Lambs, Hannibal Lecter paraphrases Marcus Aurelius’ work in Meditations Book 8.11 to a young FBI agent trying to find another serial killer.  Dr. Lecter tells the agent: “First principles, Clarice. Simplicity. Read Marcus Aurelius. Of each particular thing ask: what is it in itself? What is its nature? What does he do, this man you seek?

We know what Product Cost Management is from the definition above, but what is it that Product Cost Management software really does?  I actually discussed this very question in my first internet article on PCM in 2007 called What’s the Language of Your Business.  The conclusion of that article was that Product Cost Management software was a translator, a Rosetta stone between two difference languages.  To summarize:

At its core Product Cost Management Software translates the language of physical things (geometry, tolerances, material selection, manufacturing routings, volume, supplier selection, etc.) into the language of finance: dollars.

Therefore, if this is what PCM software is or does, who would be interested in this bridge between the physical and financial world, a.k.a. the engineering world (and to some degree, the supply chain and manufacturing world) and the financial world?

Where does Product Cost Management Belong in the Enterprise Software World?

The answer seems reasonably obvious:  PLM, ERP, MRP, SCM, or SRM. Let’s look at these one by one.

  • MRP has mostly been absorbed into ERP, at least when considering the MRP applications targeted to bigger enterprises.  So, I don’t believe standalone MRP is a good candidate to acquire Product Cost Management software companies.
  • SCM is more interested in managing logistics, a cost that few of the Product Cost Management software solutions handle well, so I am not sure if SCM would be interested.  In addition, SCM players really don’t care a lot about the physical characteristics of parts, beyond weight and the part’s enclosing box.
  • SRM is concerned with source to pay, order, invoicing, and sourcing operations.  Its focus on product cost seems to be on collaboration between OEMs and Suppliers.  Product Cost Management functionality might be useful to SRM in helping with the selection of which supplier is appropriate to source for a given part, based on cost.

That leaves us with two possibilities: PLM and ERP

This is interesting, because for some years, PLM and ERP have both been vying for dominance in the organization by controlling the ‘master’ bill of materials.  Although there are still many specialty applications in every function, ERP has slowly but surely secured a firm position in almost every one of the functions, save one:  engineering.

Certainly, all the major ERP players have PLM offerings, but I don’t know many large discrete manufacturing companies that use them to the exclusion of PLM.  Engineering has been an island, a castle, a fortress that ERP has been unable to effectively breach.  Why?  Because PLM (powered the engine of CAD) speaks the very difficult and strange language called “physical things.”  Only engineering speaks this language fluently, although manufacturing and some people in sourcing may know it at a conversant level.

ERP, on the other hand, has a language based on a common tongue:  financial (i.e. dollars).  The financial language is spoken in somewhat different dialects by manufacturing, finance, and sourcing, but it all rests on the same root language.  Engineering has a very basic knowledge of the finance tongue.  This is a problem for PLM, because just as ERP is trying to invade the island nation of engineering, PLM is trying to establish beachheads on the organizational continent that ERP now occupies.

Product Cost Management is the land bridge between the continent and the island.  The question is, “Who will occupy the Product Cost Management Bridges?” (see the map illustration below)

A Bridge to Somewhere?

As a guy with background and degrees in both engineering and business, it is my belief that it is much harder for an outsider to learn engineering’s physical language than it is for an engineer to learn the finance language.  This is one of the reasons that ERP has struggled to grab a controlling foothold in the land of engineering.  I am not saying that having a strong Product Cost Management bridge linking ERP into the engineering world will be the coup de grace for ERP.  However, it can establish a lasting foothold for ERP in engineering, and give ERP the time and credibility to further infiltrate engineering.

Paradoxically, I am not sure if ERP is the most likely acquirer of the Product Cost Managementbridge.  The fact that Product Cost Management applications are by definition rooted in the physical as well as the financial world has scared off ERP from acquiring Product Cost Management software companies before.  PLM is very comfortable with the physical language.  Therefore, as we see with the Siemens/Tsetinis deal, it may be PLM who takes control of the Product Cost Management bridge first.  This would be a smart move, rather than PLM trying to build its own costing abilities (at least for cost estimation/modeling). It would be more cost effective to simply acquire the deep domain knowledge from one or more of the PCM providers, if the price is right for both parties.

There are three other possibilities beside the acquisition by large ERP or PLM players:

  • PRODUCT COST MANAGEMENT  Software stays independent as Best in Class specialist software – This is the status quo and several of the Product Cost Management software companies have survived for almost 25 years as NLFO (nice life for owner) firms.
  • PRODUCT COST MANAGEMENT  breaks out as its own category – We do not have much evidence of this being in the works yet.  Perhaps the market is not yet ready for Product Cost Management as a separate category, but will change their minds in another 10 years and we will see Product Cost Management initial public offerings.
  • PRODUCT COST MANAGEMENT  is rolled up or merged with another specialty analysis software – There are other independent companies that specialize in analyzing product attributes beyond cost, such as stress/strain, thermal, fuel economy, vibration, flow, compliance, etc.   I don’t believe this option for PCM’s future is imminent, especially because the large PLM companies have already bought so many of these applications.  However, there are a couple of independent players that are large enough to acquire a Product Cost Management company, or merge with them.

Who will occupy the physical to financial bridges?   Siemens has made the first move to acquire one of the bridges (Tsetinis).  My educated guess is that a PLM company will be the next acquirer as well.  However, there are eight or nine of the Product Cost Management bridges of varying width that link to the different stages of the engineering product life cycle. Given this variety, it is not unthinkable that one or more of the scenarios outlined above will occur simultaneously.

That is the analysis and view from my vantage point.  I would love to hear the predictions and thoughts of others, especially PCM experts or managers that benefit from PCM.  What do YOU (1) believe will likely happen and (2) what would you WANT to happen in the world of PCM mergers and acquisitions?