"Should-cost" metric leads to parts,materials savings
By Staff -- Manufacturing Business Technology, 8/1/2006 6:00:00 AM
Companies should consider direct-materials procurement as the next target for potential savings. So says The Center for Advance Purchasing, which indicates direct-materials costs account for more than 35 percent of spend for many large manufacturers.
Direct materials are the supplies and components used to make products. While assessing its procurement processes, the Large Power Systems Division of Peoria, Ill.-based Caterpillar devised a metric that proves valuable in holding the line on purchased materials.
The metric—known as the "should-cost" figure—involves analyzing information about a parts design, the materials that comprise it, and the market price of similar parts. Procurement specialists and design engineers then arrive at an estimate of what a part should cost to make—and how changes can affect that cost.
Caterpillar created this metric by building an advanced analytics program to identify the factors driving costs for its family of cast parts. In initial tests, Caterpillar reaped savings between 5 percent and 7 percent on the overall cost of the parts.
Caterpillar has since given the technology to a spin-off company called Akoya, and became its first customer. Now Akoya is selling the commercialized version of the solution—Akoya Cost Management Analytics (ACMA).
ACMA extracts data about parts from a company's design, purchasing, and financial systems and runs it through an analytical engine to identify the factors driving the product's cost. Users create "what-if?" scenarios for how changes affect design, materials, or manufacturing processes—which saves on parts and materials.
"Companies already design for quality, performance, reliability, quality, and manufacturing," says Brett Holland, Akoya's senior VP of product development. "What they haven't been doing is designing for cost. ACMA can do that."
