Cleansheet Approach

What if you know the “True” cost of a component or a product to make including where to make it, what to make, and how to make it? Next, what if you are considering a new product but not sure if this product is profitable (Sufficient margin) compared with average selling price in the market? What if you are considering applying a new production technology and getting rid of the existing labor intensive manufacturing model? Cleansheet is a great initiative and strong tool for you in any of these kinds of decision making situations. Procurement team can be in stronghold while negotiating with vendors with cost details, quality team can have a fair judgment in all the quality relative activities in production process and yield assumption, manufacturing engineer can trigger the optimization in production line where the effort costs the most, and product manager can have a more reliable business case and estimated margin in new product or potential feature would like to embedded.?

Cleansheet generation is an iterative process for cross functional teams, such as procurement, cost engineer, quality engineer, manufacturing engineer, designer, and product manager. It is used to calculate the target cost based on a “Fully optimized” manufacturing scenario. Don’t get me wrong, one should “NOT” challenge the procurement team or vendor just merely based on the cleansheet target cost because it is optimized and we should use the result with some fair assumptions (I will go through them later). Cleansheet approach has three major purposes: Determine a fair price, identify key cost drivers, and generate ideas for potential design or specification changes. Let me define the fair price here. One is also called “Should cost”. Should cost contains physical (Such as the machines used in production line, the number of labor forces on the assembly line, the cycle time of process, and the setup time for different batches), and financial (Such as raw material cost, labor rate, overhead rate, equipment/tooling amortization, profit, payment terms, etc). Cleansheet provides a “Should cost” calculation and allows the procurement team to understand the gap between quoted cost and Should cost; moreover, how to mitigate it. Marketing product manager sees if a proposed design can be sold at a targeted margin. Cleansheet data also generates the ideas of new product design, the opportunity of production process improvement, and identifies the ideal production footprint.

To build a cleansheet, the first principle is don’t get overwhelmed by a large amount of data. If the product is built in-house, the data could be easier to obtain than by EMS/CM. If the product is a whole new one, then the better way to initiate the cleansheet is to start the most similar product you have. An effective cleansheet requires: Understand where and how to find the important missing data, label the variable data (Such as labor time/rate, machine cycle time/rate, currency exchange rate, direct overhead cost, yield, SG&A, and inventory carrying cost), record the assumptions clearly (Such as monthly requested demand volume, expected batch volume, warranty period, payment term, required safety stock level) and adopt carefully in different cases/scenarios, and make educated guesses when required with clear remarks.

What data is required??

1. Outline/Visualize the production process
2. Outline the details required to produce the product. The details are raw material (Usage/grade/spec), BOM, production step, equipment/machine/tooling/fixture used, direct labor headcount required, cycle time, yield, scrap, rework (If required). One should build up the category expertise to make the estimation for production processes or those used by vendors.??
3. Allocate resource costs to material, labor, engineer, and equipment/machining. A fine quality cleansheet target cost relies on high quality and timely data. It is important for the organization to trust their chosen data source and its limitations.
4. Overhead and indirect cost needed to consider, such as amortization of one-off investment, equipment and tooling. Currency exchange rate, tax are also required. Profit margin is also needed if the product is outsourced to vendors.?

In practice, the more detailed the model is, the more useful it is. However, it may not fit in simple commodities like rubber bands and simple metal casting or the items bought from spot markets or the commodity with high level of supply competition, such as LCD panel and DRAM. Cleansheet always fits better in the cases which have high cost uncertainty, limited supplier base (In sole source case, cleansheet can be hardly applied), and product built with new technology. SKU level cleansheet should be able to tear down into subcategories with the corresponding single cleansheet. Each of the cleansheet in subcategory level can be combined into a tree structure to present the total cost of the SKU.??

The compilation of cleansheet belongs to the ultimate owner and usually could be cost engineer or procurement manager. Here comes why? 1. Dedicated subject matter expert who has deep specialized knowledge and know how in their own product or subcategory, 2. Most of the products are made by different materials and the production process, cost engineer or procurement team with knowledge in multiple categories are usually more effective than those who focus only one or two or only in manufacturing or in quality perspective, 3. Procurement team usually act as the negotiator and expect to be a problem solver with the capability to challenge the assumption of cleansheet made by other stakeholders and suppliers. They are critical to keep everyone’s mind open for opportunities and different approaches. Nonetheless the owner could also be any other group of people who can contribute more compared with others. If the business model is highly manufacturing intensive, engineers can contribute more accurate and timely data for production flows, labor, machine/equipment, tools, and overhead data. If the business model highly relies on suppliers to do contract manufacturing/EMS/OEM/ODM, then the procurement manager will provide more info in BOM, material and production data, and supplier capabilities. If the business is in the logistics industry, the Supply Chain team should have the data for transportation, fleet, air freight, and warehouse management and could be the right owner of cleansheet. The cleansheet owner is not only delivering the finalized reviewed cleansheet but also assure the latest product spec/labeled variable cost/design/manufacturing scenarios to refresh in cleansheet and provide the optimized cost model and suggestion to the team. Then, an action or project team should be formed to make it happen. Another key task for the owner is to maximize the reuse of cleansheet to achieve the individual KPI for different departments.?

There are few critical reminders: 1. Even though an owner is required, to complete cleansheet requires a collaboration of cross functional team and a supporting infrastructure to assure the effectiveness of data and ensure the efficiency of data input/extract and refresh the assumptions, 2. Be ready to change/update/sync the labeled variable data, energy price fluctuation/rising labor rate/volatile currency exchange rate/tax barrier/carbon neutrality and have a periodic review of your cleansheet to assure the competitiveness and optimization, 3. The assumptions of cleansheet needs to be challenged and updated based on reality and best practice, 4. Cleansheet is a learning process. You can see a very fast learning period while applying cleansheet in the first time, and it will close the gap between your understanding of the true cost driver of product and reality and it helps to explore a new way to reduce cost. To ensure the validity of cleansheet, the learning must be identified systematically, update and modifications to database, template, and supporting documents, 5. Some companies have dedicated cost engineering teams to identify the cost opportunity like IBM and Lenovo. It may sound costly intuitively but if practiced well, the contribution is significant, 6. Owner needs to understand the difference between fully optimized cost, fair cost, and keep the special offer/discount (The negotiation after business influence) out of cleansheet. If mixed topics, cleansheet cost will always become a mission impossible and demoralize the team efforts. In the end, nobody will NOT trust cleansheet.?????????

It is not easy for your factory or vendor to provide cleansheet with true data. It shares both strength and weakness naked and could stir the finance a bit since the cost base doesn’t fit the traditional accounting system (Activity based costing fits better). It is also not easy for cost engineer or procurement manager to own cleansheet since they will have to bear the brunt of the blame on potential failure or deferred cost reduction task. The cleansheet approach only considers bottom-up cost calculation without considering the influence of supplier competition. It is procurement manager’s responsibility to use cleansheet wisely in negotiating with your vendors and explore the true shape of iceberg.???