Calculations During Product Development

September 6, 2006 by admin

The product design cost estimate (PDCE) function – the ability to perform calculations during product development – gives mySAP ERP 2005 an additional new planning functionality. The PCDE function supplements the existing calculation functions for product cost planning in SAP ERP Central Component. Existing calculation functions do an excellent job of calculating product costs, but only after a product has undergone final design and been created in the application. Calculations can occur only after all routings and bills of material (BOMs) are complete and repetitive manufacturing can begin.

Seventy Percent of Product Costs Defined in the Development Phase

It is also important for manufacturing companies to calculate the price of products at the beginning of development because up to 70 percent of costs are set in stone during this phase. That’s why you must manage target costs consistently. The later you discover that an individual component or the product itself is too expensive, the higher the additional costs of redesigning the product. And because considerable time elapses between the start of development and product marketing, you must consider specific risks during the development process. Any significant change in the costs of raw materials, technology, or labor greatly affects the cost of the finished product and your company’s financial success.
The simulations involved here demand a great deal of effort. Simulations include assumed changes in the cost of raw materials, the effect of changes on manufacturing costs, and the management of various simulations. Many issues that affect development can be handled only with labor-intensive auxiliary calculations. Examples include a breakdown of costs by cost blocks, countries, plants, or other criteria.

Integration of the Calculation Base

SAP PDCE Import-Agent

SAP PDCE Import-Agent

At the beginning of new product development, you create a description for the calculation object using the PDCE function. Of course, you can access the technical documentation of previous development for this or follow-up calculations. The documentation can include lists of BOMs, routings, and technical specification for manufacture of the product that are already created and managed in applications like mySAP Product Lifecycle Management (mySAP PLM).
Access to data in mySAP PLM or other PLM solutions is also important in other contexts. For example, work processes or materials from existing products are always being used and reused in calculations that have already been created. The reason? The use of existing planning and or similar or standard part saves time and money. Their effect on the target costs is often quite significant. You can use the import agents of PDCE to integrate structure, price, or quantity information with the new calculation project.

Setting Up the Calculation Structure Without Existing Base Material

Calculation Structure: Winter Dreams

Calculation Structure: Winter Dreams

With the PDCE functionality, you can also set up work operations or materials from scratch. If no defaults are appropriate to serve as the basis of a calculation structure, you must create and assign the required objects as “temporary.” For example, you can display the calculation structure of a chocolate product in tree diagram that consists only of temporary materials and internal activities. Both prices and quantities are created for each material and internal activity. As the end product, “subassemblies” are created as “temporary calculation material.”
The calculation structure is hierarchical. The uppermost nodes represent the end product; the lowermost node represents the first work operation. The first (lowest) work operation, “mix ingredients,” manufactures the first “component” of the end product, chocolate with vanilla and cinnamon. The following levels of the calculation structure run through the remaining work operations until the product is packaged as a bar of chocolate. A price and quantity component must be created for each of the temporary materials and work operations. The end product, a candy bar named Winter Dreams, is a “temporary calculation material with margin.” The target price and target margin are stored at this level.

Several Iterations to the Default Cost

Detail View of the Calculation Result

Detail View of the Calculation Result

At the level of the end product, the software displays the calculation result in the detail view. CHF 25 is given as the target price for a kilogram of chocolate: CHF 2.50 for each candy bar of 100 grams. From the targeted margin of 40 percent, the PDCE function calculates permitted costs of _15 per kilogram. If the SAP function now uses the stored cost structure to calculate temporary costs of CHF 16.32 per kilogram, it misses the default cost. In this case, the development process would require additional iterations.

Breakdown of Manufacturing Costs

Breakdown of Manufacturing Costs

Options include procurement from third parties; the selection of other raw materials, production methods, or vendors; changes to the recipe; or changes to the calculation of lot sizes in order to use economies of scale. To display these options, you can break down costs according to the cost structure. You can break down costs according to material and production costs and again by fixed costs and variable portion. You can also store your own breakdown characteristics.

Changing Costs of Raw Materials

Changing Costs of Raw Materials

Changing Costs of Raw Materials

Using the PDCE function, you can calculate the effect of changed prices for raw materials on the manufacturing costs that you have already calculated and on the margins. Chocolate manufacturers, for example, depend upon the worldwide market price of cocoa. Other industries are just as dependent on the costs of oil, metal, or grain.
These kinds of simulations first use the import agents to transfer the existing calculations from SAP ERP Central Component to mySAP ERP for use with the PDCE function. Changes to the value or quantity structure of the individual calculation materials affect the price of the end product.
For example, if the prices of Criollo and Trinitario cocoa increase during manufacture of the Winter Dreams candy bar, the manufacturing costs per kilogram increase from CHF 16.31 to CHF 17.08. In reality, the increase affects the margin because of increased demand in the global market.

Transparent Cost Structure, Visible Options for Intervention

The PDCE functionality offers an option to determine the cost structure of the new product in a manner that is similar to documenting product development as routings or BOMs in mySAP PLM. The actual calculation is based upon the comprehensive formula records that are used to determine the costs of individual calculation materials. The greatest advantage of this ability is the option to flexibly access the currently documented status of product development.
The cost structure remains transparent even during the construction process. In particular, you can identify cost-intensive product components early on. That is tremendously important for suppliers that usually receive clear default prices from their customers. Simulating the effect of price changes, for example, helps make the options for intervention visible.

Martin Strohmeier

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