Managing Product Life Cycle Costs

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Shields M. D. and S. M. Young. 1991. Managing product life cycle costs: An organizational model. Journal of Cost Management (Fall): 39-51.

Summary by Mary Anne Browne
Master of Accountancy Program
University of South Florida, Fall 2000

Purpose: To present an organizational model of product life cycle cost management (PLCCM) programs.

Components of PLCCM
Life cycle costing- to increase procurement effectiveness and encourage a longer planning
horizon.

Life cycle costs include the producer’s costs.

Whole life costs include the producer’s and consumer’s costs.

Product LCC Estimation Methods

Analogy

Identify a similar product and adjust for differences.

Parametric Models

Predict a cost by nonlinear regression model with independent variables like manufacturing
complexity, design familiarity, weight, performance, and schedule compression.

Industrial Engineering Models (Cost Accounting)

Use estimates of labor time and rates, material quantities and prices, and an allocation for indirect cost to develop product cost.

Product life cycle management- to manage and market a product through the various stages of its life cycle.
Perspectives

Marketing - Startup, Growth, Maturity, Decline

Production - Product conception, Design, Product and Process development, Production,
Logistics

Consumer - Purchase, Operating, Support, Maintenance, Disposal

Societal - Disposal costs, Externality costs (health costs, safety costs, etc.)

Trade-off Decisions:

Market share - ROI - Price - Profits

Volume - Performance - Quality - Advertising

Organizational structure - to organize activities and job responsibilities for effective product management.

Eliminate "over the wall" structures.
Multifunctional teams-flat structure, less hierarchy, employee participation, horizontal communication, decentralized decision-making and cross-departmental autonomous teams

Cost reduction methods - to continuously reduce product costs.
Japanese target strategies-market share, prices, costs.

Elimination of variance analysis.

Trends and Generalizations from 9 site visits:

PLCCMs are important, Current systems are fragmented, Lack of leadership, Resistance, Many pre-manufacuring systems used, Increasing investments in AMT, Few changes to organizational structures, No link to performance evaluation, Inadequate education, Existing cost accounting systems not effective

Goal of a PLCCM

Employees make decisions and take actions that cause a product to be designed, produced, marketed, distributed, operated, maintained, serviced, and disposed of in a way that creates and increases long-term competitive advantage for the organization.

Important Principles for PLCCM system:

The organizational structure and processes maximize the broad vision and the integration of all employees and activities to achieve the goal

A culture of continuous improvement is necessary.

Guidelines for a PLCCM system

1.The human integrated enterprise

A flat organization structure with cross-trained employees is a key to success.

2.Whole life costs

Consumer costs are becoming increasingly important.

3.Relevant costs

All activities affected by a decision be identified and the associated costs used for decision-making.

4.Investment

Invest in premanufacturing assets (CAD, CAPP) and people skills.

5.Increased resources up front

The greatest opportunities for cost reduction occur before manufacturing begins.

6.Target costing

Establishes goals for success in the global market.

7.Cost reduction, not cost control

Continuous improvement to achieve targets.

8.Performance evaluation

Performance evaluations should reinforce the whole life cost perspective.

9.Reducing employee resistance

Open communication and employee involvement in the design of the PLCCM system can help decrease resistance. Leadership actions are an example to employees. Effective controls, continuous education, and compensation are necessary to change employee behavior.

10.Continuous education

Reinforces and increases the effectiveness of the other nine guidelines.

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Guidelines for a PLCCM system
1.The human integrated enterprise	A flat organization structure with cross-trained employees is a key to success.
2.Whole life costs	Consumer costs are becoming increasingly important.
3.Relevant costs	All activities affected by a decision be identified and the associated costs used for decision-making.
4.Investment	Invest in premanufacturing assets (CAD, CAPP) and people skills.
5.Increased resources up front	The greatest opportunities for cost reduction occur before manufacturing begins.
6.Target costing	Establishes goals for success in the global market.
7.Cost reduction, not cost control	Continuous improvement to achieve targets.
8.Performance evaluation	Performance evaluations should reinforce the whole life cost perspective.
9.Reducing employee resistance	Open communication and employee involvement in the design of the PLCCM system can help decrease resistance. Leadership actions are an example to employees. Effective controls, continuous education, and compensation are necessary to change employee behavior.
10.Continuous education	Reinforces and increases the effectiveness of the other nine guidelines.