Improve Cost Control in Aerospace and Defense with Should Cost Analysis

Although Aerospace and Defense are viewed as part of the same industry, the challenges they face are completely different. While defense companies are facing stringent budget cuts and fiscal constraints, the commercial aerospace industry is experiencing a surge in demand, and is under significant cost and delivery cycle time pressure. However, both sectors face the fundamental challenges of managing rising production costs in the face of changing cost structures and market dynamics.

The challenges are further compounded by extensive supply chain and operational dependencies, complex products and long development cycles. As a result, defense and aerospace OEMs are striving to manage product costs across the extended lifecycle of their products. For aerospace OEMs, 50% – 80% of the product comes from the complex supply chain. To increase profitability, OEMs will need to closely review product costs, and determine opportunities for trade-offs and cost reduction.

The limitations of conventional cost management strategies
Conventional cost management approaches are often siloed and rarely cross-functional, which limits their ability to provide holistic insight into the entire production supply chain. Since optimization efforts are usually targeted, they fail to identify and measure significant hidden costs across complex operations. In a worst case scenario, targeted improvement efforts for a particular function can sometimes negatively impact the performance of others. Lack of holistic cross-functional visibility and adequate cost information often result in poor decision making.

Adopting cross-functional cost trade-off management
A majority of product costs are incurred early in the product development cycle, when the product details and cost drivers are least known or understood.

Should costing helps determine the cost of the part or product based on the raw materials used, and manufacturing and overhead production costs. It simulates and analyzes processes to understand the raw material required, define the manufacturing processes, and calculate the total costs using data related to material and processing.

Should costing helps organizations focus on, and identify, cost reduction opportunities – from the conceptualization stage through to the production stage. Therefore, it is recommended that should costing models be deployed in the initial phases of a product development cycle. This gives an accurate estimate of the manufacturing or sourcing costs of the product, and the eventual cost build‐up across various stages of the product lifecycle. Such visibility into cost drivers allows businesses to validate the prices early, select the most economical design option, and efficiently manage the project cost. It also helps analyze the design and compare the actual sourcing or development costs with the cost model, identify differences, and make timely trade-off decisions to reconcile.

Should Cost Analysis

Integrating cost analysis across the design and manufacturing lifecycle provides accurate information and empowers organizations to improve negotiations with their suppliers. Should costing is a valuable tool that can provide fact-based realistic action plans to help minimize project costs, without impacting supplier profit margins, in order to deliver greater business value.

Prakash Chandran
Practice Head – VAVE & Localization