Use a dashboard to manage your product costs!

At most manufacturing sites, multiple products are produced, however product cost is measured by overall plant production, not product-by-product. If the cost of a particular product varies significantly from its standard cost (cost determined by product to simplify cost reporting and allow for variance reporting), it becomes difficult to identify that this is occurring since no monthly report of cost by product is available. Although the information is available in the ERP system, extracting it is usually a manual process. Without this direct tie back to cost, margins on individual products could be very small or negative without any awareness from the product management team.

Collation of Cost Data

To solve this problem, a dashboard that reports actual monthly costs on a product-by-product basis is needed. Most of the data that is required to do this resides in the MRP or ERP systems of companies although a number of cost categories are not keyed to a particular product. In order to provide maximum benefit actual costs of items should be used rather than standard costs . Labor hours expended to produce a product are usually clocked and allocated by product. It is beneficial to record as many operations as possible by product including quality, picking operations, manufacturing engineering and other labor categories that clock labor hours. Subcomponent costs that are produced internally should be based on a FIFO (First-In-First-Out), average cost or other method when pulling items for a higher-level component. The remaining costs for the facility including management, procurement, rent, utilities and other fixed costs should be distributed across all products on a cost, weight, labor or other basis. I would advocate against including amortization and depreciation costs, although the best decision for these costs will differ by company.

Other costs including freight costs

Other costs that are associated with a product should also be directly tied to the product. It is common practice to simply place freight in a bulk category instead of allocating it directly to a product. Freight costs can be significant and can represent a large percentage of the overall cost. If freight costs are directly allocated by product, it quickly becomes apparent when there are significant air freight costs for a particular product. Other costs, including external operations such as heat treatment and coating should also be included. If possible, external operation costs should also account for labor costs related to expediting and moving inventory.

Available Analytics Tools

Tools such as an analytics platform are beneficial to extract information out of your MRP or ERP system and combine that with other costs that need to be accounted for. These tools usually have excellent dashboard reporting capabilities that can be viewed across the company and utilized to manage cost by product.

In Summary

By using a product cost dashboard, it becomes possible to identify any sizeable variances on a product-by-product basis, allowing product managers the opportunity to address any discrepancies. A product cost dashboard highlights anomalies and makes it difficult to hide costs in other categories that are not usually scrutinized. In the end, tracking and improving individual product costs will improve a manufacturing site’s overall financial performance.