Simply put, because when you do, target costing becomes a reality. And with target costing, you can not only set, but achieve, realistic cost goals for key products. This is only achieved when you have good insight into end to end cost components from a raw material, energy, labour, and overhead perspective. And this is only achievable when you have the systems that allows you to gather real cost data right down to the raw materials, and not just average cost data from across buying organizations (that are used to feed statistical models).

Seven years ago today SI ran an article on how Target Costing Works and You can Do It Too! We quoted an article from the now-defunct Purchasing magazine on how purchasing learns cost modelling which noted that smart buyers are working with engineers, finance and suppliers to identify cost drivers in product development and eliminate them and that Whirlpol was able to close a gap of 30% between the target cost for a module on one product and the initial design cost.

We also noted that new players in the market, like Akoya (which was puchased by I-Cubed in 2014) and Apriori (which Whirlpool selected as a provider in 2013 [Source]) could be used to help set target costs as Akoya’s market intelligence and statistical models gave a decent target range and Apriori’s production cost models, when populated with raw material, energy, and overhead costs, gave an expected production cost.

But one thing these providers couldn’t necessarily do was figure out how low costs could go if the costs could be traced right down to raw material providers, which can only be done if the input component costs can be traced through the supply chain. But with a solution that allows all costs to be collected and correlated, aggregation and streamlining opportunities to be identified and captured, and high production / overhead costs to be identified, aggressive, but realistic target costs can be set and realized as the organization knows where to focus its cross functional teams. And that’s one of the big reasons why you want to get a grip on supply dynamics!

In our last post we introduced you to Supply Dynamics, a new direct procurement solution provider with a mature solution that was developed over the last 15 years, first as a skunkworks project inside, and supporting, O’Neal Industries, and then recently spun off into a new completely independent standalone best-of-breed offering.

We described their ability to collect relevant data feeds on the full product life cycle from raw material to finished product, correlate that data, track the product lifecycle from raw material to buyer warehouse, and, most importantly, to determine which data needs to be tracked in the first place using their efficient and inexpensive automatic extraction software that processes (CAD/CAM) blueprint files and builds up the appropriate bill of materials and manufacturing process overview automatically.

But their software can do more than that. Much more.

Their solution also tracks (contract) demand and sales forecasts and not only allows an organization to predict a 12-month rolling forecast at any time, but do so at the product, part, or raw material level — broken down by category, region, or other dimension of interest. Since the platform keeps such detailed records, it can do such detailed predictions.

Their solution also cross references all product data across not only all bill of materials but all suppliers. This means that you can see holistic metrics around each component and raw material. More specifically, for any given raw material, you can see the total forecast across all products for a year, how many assemblies it will be used in, how many BoM records it appears in, how many vendors are supplying, how many processors are working (if the raw material passes through a processor on the way to a component manufacturer), how many different processed forms it takes, etc. For steel you can see how many lbs the organization is expected to use, how many fasteners (or other primary component categories of interest) it will be used to create, how many raw material vendors supply it, how many processors process it into its various allows, how many alloys the the organization uses, how many grades of those alloys it employs across the product line, and how many individual specifications for various grades it has used over the years.

And the platform doesn’t just support bill of materials for an assembly or component, it also supports much more detailed bill of resource for individual parts that specify the material inputs in detail at a fine-grained level. For example, not just “steel” but “X52 Carbon Steel, API 5L Standard”. Also, any processing requirements. These are extracted from the part level blueprints, verified by the suppliers, and the entire process verified by Supply Dynamics’ in-house team of US experts.

From this combination of bill of resource data and forecasts, the platform is able to automatically identify aggregation opportunities across a raw material type (steel) or instance (stainless) type by looking at total weight / volume, vendor count, and demand split. The user simply specifies the business unit of interest; any restrictions on vendor, conversion process, form, spec, and time period; and the max % of allocation to a single vendor, the minimum number of current vendors providing the raw material, and/or a minimum volume / weight / spend requirement for it to be considered and the system reports on the top potential opportunities, which the buyer can quickly drill into to determine the real potential. Maybe the demand is too geographically disjoint, maybe the top suppliers are satisfying the majority of regional demands, or maybe the prices from the top suppliers are at market and no opportunity is there, but maybe the demand is centralized, too many suppliers are supplying the same location, or prices are above market and there is a great opportunity. Regardless of the truth, it’s very easy for a buyer to drill in and find out.

It also has geographic visualization capability so that, for any raw material, you can see where it’s produced, where it’s consumed, and whether the distribution looks right geographically. This makes it very quick to visually identify awards that just don’t make sense and figure out where effort should be focussed. The same is true for machine shop locations, processors, and suppliers. You can visualize your supply chain by raw material, part, component, assembly, or vendor. And you can cross reference this against D&B scores and disaster mapping to visually see which suppliers are ranked poor and which suppliers, processors, or manufacturers might be impacted by a disaster.

The Supply Dynamics platform is very powerful and would support any platform focussed more on the strategic sourcing or day-to-day procurement activities of a supply management organization with a large direct procurement need quite well. It’s a rather innovative new offering and one that SI expects we’ll be hearing more about as well in the new year. Especially since they are about to launch a new capability that might turn the marketplace on its head. Stay tuned.