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FINANCE > SOFTWARE & SYSTEMS

Why the Aerospace Industry Needs to Use 'Should


Costing'

Should costing is a process, whereby one can


determine the cost of the part or product, based on the
raw materials used, manufacturing costs and overhead
production costs.

Adinarayana Malleboina, project lead, engineering services, Geometric


Limited | Oct 20, 2011
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The aerospace industry today is a buyer driven market, where reducing product
cost and delivery cycle time are critical for aerospace OEMs and their key suppliers
to remain competitive. However, these companies produce highly complex
products that require long development cycles and are manufactured in low
volumes.

Aerospace companies continue to face (and address) challenges in managing


product costs over a very long lifecycle of their aircrafts. It is very clear that these
companies have to embrace a more concurrent approach to their operational
processes and constantly review product costs to identify opportunities for cost
reduction.

Since most of the aerospace OEMs source a large percentage of their component
from suppliers (commonly 50-70%), this area requires special focus. It is
important for OEMs to understand the costs involved in production of a part or a
component sourced from an external supplier, as it will enable effective price
negotiations with suppliers and also help assess

the capability of potential suppliers. Understanding of component costing and measurement


systems are aligned with the lean philosphy, and complements value stream organization by
driving continous improvement and supporting pull and flow production.

Companies worldwide should aim to identify the major cost drivers of components
they design, manufacture and procure, much earlier in the product development
cycle. With cost assessments early in the product development process, one can
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eliminate significant costs prior to production and get quantifiable savings in


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material, tooling, labor, and overhead, by evaluating alternative designs, processes


and sources.

Current costing techniques vary throughout the aerospace industry and include
the use of both proprietary and non-proprietary methods. Most companies still
retain a traditional cost estimating department that uses experienced individuals
backed by large proprietary databases. However, lack of adequate cost information
can lead to poor decision making, time consuming redesigns, and high component
costs. Zero based costing has been around for quite some time, but the availability
of digital engineering models and specialized costing software have significantly
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enhanced the effectiveness of should costing and analysis.


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A well managed should costing and analysis initiative is clearly a critical activity
for the aerospace companies, and sets the stage for consistent cost management,
that leads to increase in profitability and stakeholder returns.

What is Should Costing?

Should costing is a process, whereby one can determine the cost of the part or
product, based on the raw materials used, manufacturing costs and overhead
production costs. This can be achieved by analyzing the engineering models to
understand the raw material required, defining the manufacturing processes
required to deliver the required form features, and calculating the total costs
through the use of rate data related to material costs and processing costs. The
ultimate goal of any should cost analysis initiative is to provide enough
information to enable (depending on the stage) designers to modify raw material
or form feature requirements, or enable suppliers to modify manufacturing
processes with a view to reduce costs.

Should costing, thus, provides a framework that enables a systematic focus on


opportunities to reduce costs right from the conceptualization stage through the
production life of the product.

Steady State Execution Flow of Should Cost Estimation


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Scope of Should Costing in Aerospace

Aerospace manufacturing has achieved significant productivity improvements over


the years, through development of new processes and by performing multiple
operations on a single machine. Kaizen (continuous improvement) activities are
also widely used in the aerospace industry to increase quality, and throughput, and
reduce work-in-progress and setup times.

Proliferation of should costing in product development lifecycle can help


aerospace companies accurately estimate the costs associated with developing and
producing components and products, and take timely decisions throughout the
product development lifecycle. During design stage, it keeps the design engineers
aware of movements in product cost and enables them to select most economical
designs for manufacturing, improve material utilization, reduce number of
features and relax tolerance during new product development. It also helps
designers analyze the design and make timely trade-off decisions with respect to
cost and functionality.

When the product reaches industrialization, should cost models help to keep
sourcing cost low. Cost models empower the purchasing team with knowledge of
manufacturing processes, machines used, etc. which helps them effectively
negotiate with suppliers. The costing model also provides a basis to seek out the
right supplier, by comparing between the actual procurement or manufacturing
cost and the cost model; and reconcile differences.
Although various cost estimation software are available in market to perform cost
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modeling, the core of good should costing solution lies in deep understanding of
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aerospace manufacturing processes to keep component costs low. While designing


a component, companies need to keep production costs as low as possible and at
the same time maintain quality. Knowledge and selection of best materials and
manufacturing processes is essential to develop accurate should cost models.

Should cost estimates in aerospace industry are based on the mathematical


calculation of feed, speed, RPM, IPR, IPM and other inputs such as historical data
of process, best practices, raw material rates, work center rates, special process
specifications. Our experience in working the aerospace majors for global should
costing operations, shows that the should costing team has to have good
knowledge of machining factors such as nature of cut, work material, cutting fluid
application and capacity of machine tools, particulary for specialized materails like
titanuim and inconel, to develop accurate cost models.
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Ability to leverage software engineering skills to set up intuitive knowledgebase of


data related to machine tools, feed, speeds and MRR, and automate region cost
specific templates also plays an important role in accuracy of cost models for
global soucring. It helps improve the product quality and reduce costs by
eliminating or minimizing trial and error iterations involved in cost modeling
processs.

Conclusion
Aerospace companies need take a more holistic approach towards should costing
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as a tool that can not only help contain costs, but can help provide answers to
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many questions, such as whether to apply the same manufacturing strategy to a


new product or not, or whether to manufacture in-house or outsource to a
supplier. It helps define the competitive cost positioning in the market and
eventually formulate a cost management strategy of new and existing products. A
well managed should costing analysis provides the basis for continuous cost
management and waste elimination to achieve cost efficiencies.

Adinarayana Malleboina, is a project lead, Engineering Services at Geometric


Limited.
TAGS: BUDGETING & REPORTING CORPORATE FINANCE & TAX COST MANAGEMENT &

BPM GOVERNANCE, RISK & COMPLIANCE TREASURY & CASH MANAGEMENT

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FINANCE > SOFTWARE & SYSTEMS

Mining the Minds: How to Leverage the Workforce's


Knowledge

Business intelligence tools are useful but not sufficient


for better decision making. New technologies are
surfacing that leverage the knowledge of what an
organizations most valuable asset: its employees.

Gary Cokins | Feb 24, 2015

My belief is that organizations underutilize the potential of its employees. Do you


believe your organization taps the full potential that you can offer? Imagine if
organizations collaboratively tapped the analytical knowledge within their
organization to achieve the popular Best-in-Class performance term. With the
emergence of interest in business analytics and Big Data, what we can imagine is
becoming a reality.

Business intelligence (BI) software tools are useful but not sufficient for potentially
better decision making. New technologies are surfacing that leverages the
knowledge of what is arguably an organizations most valuable asset its own
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employees.
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Current research from the North Point Group, a software and consulting firm,
reveals that there is nearly 2X the amount of data and only 47% of the required
knowledge in the average organization that is needed to make timely and accurate
decisions. The research concludes that the continual mining of transactional
databases (e.g., ERP systems) provides only a partial contribution to make good
decisions.

A Need for Speed to Results

By using business analytics methods (e.g. regression, correlation, clustering,


segmentation) results like these examples can be attained:

Improving the accuracy of data and timeliness of financial reporting

Improving the Time to Market of an offering by 35.6%

Reducing the sales cycle - 8.5% in 12 months; 30% in 36 months

However, obtaining this kind of improved financial performance with traditional


BI software tools can take substantial time and effort and requires a significant
financial investment. Emerging technologies are now commercially available with
capabilities that can reduce the time, effort, and cost.

To understand how this can be achieved we must understand the connection


between business analytics and enterprise and corporate performance
management (EPM/CPM) methods (e.g., a strategy map with its companion
balanced scorecard; customer profitability using activity-based costing principles;
driver-based rolling financial forecasts; lean management). This requires one to
further expand their mindset to include the integration of enterprise risk
management (ERM) with these EPM/CPM methods. Organizations will stagnate
and eventually perish unless they leverage risks that provide growth opportunities.
Fundamental Business Activities The Engines of the Business
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How can this be accomplished? As background, every organization possesses an


engine of business processes which the North Point Group that performed the
earlier mentioned research refers to as Fundamental Business Activities (FBAs).
FBAs are the essential elements of running a business. For example, the finance
function is impacted by the cause and effect relationships between functional areas
and activities like satisfying customer demands and competitive analysis that
finance doesnt manage or control, yet these activities impact the performance of
the finance function and their activities.

This understanding leads to questions: (1) Do you have all of the required FBAs to
achieve Best-in-Class performance? (2) If so, what is the performance level of
those FBAs? Identifying the business needs or gaps between where the
organization is today and where they would like to be in the future is a first step.
The next step is to identify and take actions and to achieve sustained performance
leadership. Both can be better achieved by involving employees the beginning of
mining the minds.

Executives, managers, and employee teams already know many of the risks that
should be mitigated in an organization and also which of the risks that should
potentially be leveraged to solve a problem or pursue an opportunity. However,
capturing, understanding and leveraging the existing KEP (Knowledge, Experience
and Performance) and the missing KEP into improved enterprise performance is
achieved by far few organizations.

Mining the minds of the organizations employees to capture and use the following
analytics is achievable today. For example, the North Point Group combines these
tools:

KEP Index to identify the Knowledge, Experience and Performance of the functional
organization.

MENU Organization Performance Index to measure how effective and efficient the
company is running and the organization performance from Finance to Operations that affect
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and are affected by the functional areas performance.

Business Model Improvement Index to measure the financial impact from


improvements to the business model.

Speed Indices to identify the speed of the organization relative to identifying missing
critical information, cost improvement opportunities, customer connectivity issues, business
model improvement opportunities, etc.

These analytical tools collectively provide the insight as to where to improve


organizational performance. The findings are obtained by providing the
stakeholders of the organization with the FBAs that need to be reviewed to
understand the missing or poorly performed FBAs as well as the missing KEP.
Employees have the knowledge to improve organizational performance.

In the past the best leaders and executives had the best answers. That is not true
today. Now the best leaders and executives have the best questions! They can no
longer rely on their past experiences or intuition that got them promoted to their
C-suite roles. They need to create a culture for analytics including skills and
competencies in their work force to be analytical.

Do organizations have the knowledge to know what to ask for, where to get it if
they do not and how to use it? Success at becoming a Best-in-Class performing
organization can be achieved by providing analyzable information for insights and
decision making.

TAGS: FINANCE INFORMATION TECHNOLOGY IDEAXCHANGE INDUSTRY

PERSPECTIVES
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