Eric Hiller Discusses How to Make Superior Cost Management Decisions

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Management consultant Eric Hiller recently discussed how to make superior cost management decisions.

 Eric Hiller is an expert in operational analytics. As the managing partner of Hiller Associates, he specializes in Product Cost Management (PCM). He recently discussed how to improve cost management with the team at Industry Week, a monthly trade publication dating all the back to 1882. The following are several tips Eric Hiller offered on how to make superior cost management decisions.

Eric Hiller explained that cost management is an extremely broad field that uses a diverse amount of methodologies to address the countless situations in which one can find the cost of service delivery or manufacturing. At times, a cost modeling team will use one cost-modeling technique (e.g., bottom-up mechanistic costing) while the purchasing spend analytics team uses another (e.g., statistical analysis of historical data).

“This can lead to uncomfortable meetings, where executives and colleagues outside of the cost management team are confused about how to understand the results and/or have low confidence in the results,” Eric Hiller said.

Eric Hiller stated that the cost management team will then feel misunderstood or frustrated that executives are not trusting their conclusions. These misunderstandings can lead to deeper problems within the company.

“There’s no easy solution to the disparities between executive and cost management team findings,” Eric Hiller said. “But it is the job of the cost management team to fully educate their audiences.”

Eric Hiller explained that the cost management team typically has very high impact information to share in their results from determining the cost of product manufacturing or service delivery. However, that impact is wasted if they can not educate their audience on how they reached those results, and often, more importantly, how to implement the recommendations. However, Eric Hiller explained the onus is not only on the cost management team. Executives and other audiences must come into the conversation with open minds and be ready and willing to learn.

“Product cost management is a sector with advanced terminology and concepts,” Eric Hiller said. “Audiences truly need to invest time and energy in learning the terminology and its functions, so they can better understand what the cost management team is presenting.”

Many times, executives are well-versed in the financial, purchasing, and product development areas of the company, while they may not be as well-informed about the product (or service ) cost management. Being educated on the ins and outs of product cost management can result in a company that operates more smoothly, and ultimately, more profitably.

In fact, Eric Hiller knowing that executives sadly don’t often have time for extensive study, created a “Five Question Framework” to help executives put any cost management model or result in a clear context. The framework includes the following questions:

  1. At what level of the BoM (bill and material) or WBS (work breakdown structure) is the object or service being costed? (e.g., it is at the raw material level or targeting an entire product)
  2. Does the cost model focus on modeling the cost of the object or service directly with little concern for how it is made or deliver, or does it focus on the manufacturing processes that make the product or the tasks that make up the service?
  3. What analytical approach is used to make the cost model (e.g., bottom-up models, indexing, stochastic methods, similar comparison, etc.)?
  4. What lifecycle costs are included in the model and are associated with the product or service?
  5. Where in the product or service development cycle is the model to be applied (e.g., at the planning stage or before you negotiate with a supplier.)?

Eric Hiller finished by explaining that just as communication and cross-department education are keys to any successful business model, product and service cost management is also an activity that often will not succeed unless all the stakeholders are involved in the activity.