- Cost Transformation
Planning new products using PFMP aims to increase variety for customers while reducing the capitals required to develop, produce and market the products. This is mainly achieved by sharing the capitals between product variants at the design stage. 'Capitals' are the resources included in the integrated reporting framework, for example financial, manufactured, intellectual, human, social and relationship, and natural.
The key reason to adopt this approach is cost minimisation. The more that capitals can be shared by design, the lower product costs will typically be. This approach may also positively impact their sustainability. From the start of the process, the management accountant should proactively support all functions involved in developing new product families.
What is it?
Typically the elements needed to bring a new product to market include:
- Components: These are the individual parts that make up the end product. They're usually manufactured or natural, and itemised in bills of material (BOM). Product variants' design should maximise the commonality of parts between variants. It should also optimise module design so fewer modules are needed to produce the range of variants.
Carefully structuring components in the design stage reduces the risk of later having to reconsider the structure to meet customer needs. It also improves costing logic transparency, and increases buy-in of the cost structure for functions involved in the product's development. Involving management accounting in setting the product family's structure also provides an opportunity to hone costs.
- Processes: This includes all the processes needed to bring a new product to market. For example – R&D, sales and marketing, procurement, engineering, testing, production, assembly and, possibly, end of life processes.
Management accountants should factor all costs into the product – not just the direct costs. While it's easy to see how planning a product family focused on market segments might be helpful to sales and marketing, all functions should be considered. For example, a market-focused product family structure could increase complexity and costs of production. Management accountants need to minimise overall product costs.
- Knowledge or know-how: This includes a business' intellectual capital – such as patents, applications, technology and operating models – that provides it with a competitive edge. Nurturing and protecting this know-how comes at a cost and the management accountant should reflect this as a component of the product's overall cost.
This has the additional benefit of bringing focus to knowledge management, which is important for sustaining a business' competitive edge.
- People and relationships: This includes employees and all stakeholders of a business. The customer is the most obvious stakeholder, but the supply chain is also significant. Less obvious are the societies that the business operates within, which can exert significant influence on a business' ability to succeed over time.
Developing a product family structure should take account of all identified stakeholders, even just to rule some out as immaterial to decision making. Accounting for the influences and needs of stakeholders is likely to come at a cost. The management accountant should ensure that these costs are managed and accounted for in the product's cost structure.
What benefits does the process provide?
- It engages all the relevant faculties of a business so as to improve the chances of success and reduce costs.
- It recognises the factors needed to bring a product to market early on, so businesses can make early and robust decisions during the product's development – i.e. before it's too late to have an effect on outcomes.
- It explicitly recognises the influences of all stakeholders on possible future outcomes, which helps with cost identification and proactive cost management.
- It optimises product structure, taking account of markets and the business' operating model.
- It provides an opportunity to make the product's costing logical and understandable – improving buy-in to the cost structures.
- Cost drivers are identified early, as the product development process progresses. This provides mechanisms for proactively managing go-to-market costs as well as costs throughout the product's lifecycle.
Implementing PFMP? Questions to consider
- For new product proposals, is there an opportunity to serve multiple markets from a common platform?
- Looking across all existing products and new product proposals, are there opportunities to rationalise by sharing common components or modules?
- Looking across all existing products and new product proposals, are there ways of structuring products into families that more efficiently serve our market segments or business model?
- Are cost structures aligned to product families?
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