In 2008, Tesla faced a crisis. The Roadster was delayed, and cost overruns threatened the company's survival. Elon Musk walked into the boardroom with a straightforward question: How much does it cost to build a car? At the time, Tesla couldn't answer this question. Surprisingly, many companies today still struggle with this fundamental question.
The Importance of Knowing Your Costs:
Understanding your Bill of Materials (BOM) costs is essential for any manufacturing business. While Wall Street might make finance seem like a dark art, the reality is simple: you must bring in more money than you spend.
The Tesla Example:
Tesla's struggles in 2008 weren't just about production delays but also BOM transparency and control. The inability to track BOM costs accurately meant Tesla couldn't identify where they were hemorrhaging money. Initially, they had planned to sell the car for a little over 100K, but when they finally calculated the cost, it totaled 140K. Once they discovered how much the vehicle would cost, they could take the necessary steps to trim costs to avoid bankruptcy.
Why BOM Costs Matter:
- Accurate Pricing: Knowing the precise BOM costs helps in setting the right price for the final product. This ensures that the product is competitively priced while maintaining profitability.
- Margin Analysis: Detailed BOM costs allow for the analysis of profit margins and help in making informed decisions about price adjustments and promotional strategies.
- Budgeting: BOM costs provide a clear picture of the total expenditure required for producing a product, allowing for accurate budgeting and financial planning.
- Cost Optimization: By analyzing BOM costs, companies can identify expensive components and explore alternative materials or suppliers to reduce costs without compromising quality.
- Stock Control: Understanding BOM costs aids in maintaining optimal inventory levels, reducing excess stock, and minimizing holding costs.
- Supplier Negotiations: Detailed cost information strengthens the position in negotiations with suppliers for better pricing and terms.
- Supply Chain Visibility: Detailed BOM costs provide visibility into the supply chain, helping in identifying cost drivers and potential areas for savings.
- Risk Management: Understanding the cost components helps in assessing risks related to supplier dependencies and market fluctuations in material costs.
The Modern Manufacturing Landscape:
The stakes are higher in today's fast-paced manufacturing world. Technology advancements, global competition, and changing consumer demands require manufacturers to be more agile and cost-conscious than ever. Simple questions like "How much does it cost?" should never be in doubt.
Steps to Ensure Cost Transparency:
- Implement the proper systems: While it might seem counterintuitive, implementing a massive ERP (Enterprise Resource Planning) tool might be the worst thing you can do early in a product's lifecycle. The time and money that goes into implementing a massive software tool can distract from good business practices. During Tesla's BOM cost crisis, they were in the middle of implementing SAP; a tool is not a process. Making sure you use best practices before executing a tool will be critical.
- Audit your data: Too often, data is obscure. Quickly being able to look at your BOM, see what data is missing, and setting up methods to check your data quality regularly are all key components of effective data management. Good examples of metrics to track are as follows.some text
- % of parts with a sourcing strategy
- % of buy parts with standard costs
- % of buy parts with lead times
- % of inventory linked to PO
- Training and Awareness: Ensure that all stakeholders understand the importance of cost tracking and are equipped to manage it effectively. Driving ownership of details at the engineering level can help enforce data hygiene within your organization. For example, suppose an engineer is responsible for not only the design of a part but also for maintaining its sourcing strategy, standard cost, and lead times. In that case, you can measure your engineering team's scorecard per part to understand the % of your released parts with all the above data.
Conclusion:
The lesson from Tesla's 2008 crisis is clear: knowing your BOM costs is not just a matter of financial prudence but is critical to your organization's survival and success. In a world where the only constant is change, economic transparency and control are your best defenses against uncertainty.