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Author's profile photo Bernhard Meyer

How SAP’s Industry Cloud Solution “Product Lifecycle Costing” helps to make customer- and order-engineered products and solutions more profitable

I am Bernhard Meyer from the global industrial manufacturing team focusing on the product development and product lifecycle part of our customers value chain, but having at the same time the entire value chain on the radar.  In this blog post, I will tell you more about the solution capabilities of SAP Product Lifecycle Costing and how it supports industrial manufacturers to automate processes and standardize their products and most importantly: make estimations much more precise and comprehensible.


Why is this important?

Working with industrial manufacturers we see that they are focusing on five strategic priorities to pursue the vision to “exceed customer expectations with individualized, sustainable, smart products and solutions delivered at scale and as a service” (you can read more in Patrick Lamm’s blog).

“Design of standardized components & products” and “customer order-specific engineering” are basically the two different kind of R&D/Engineering processes in Industrial Manufacturing industry serving the four main customer order process types “Sell-from-Stock” (SFS), “Configure-to-Order” (CTO), Configure-to-Order-Plus” (CTO+) and “Engineer-to-Order” (ETO).

Doing this “design of standardized components and products” is mainly used in the SFS and CTO scenario, whereas “customer order-specific engineering” is used in CTO+ and ETO situations.

Independently there is the magic triangle of promises to achieve in every single quote situation serving different expectations.

The industrial manufacturer’s dilemma – Keep the Promises

If an end customer has once signed a contract, he expects to get his required product capability (scope) at the request time (delivery date) and for the negotiated price, independent of the used order process type. During the order fulfillment process the original equipment manufacturer (OEM) can now just “work against” these three (own)-estimated and negotiated promises. This is even more challenging when offering customer- and order-engineered products and solutions, because there are much more risks to consider and mitigate.

Today I will focus on the capabilities SAP is providing for the product cost / price / profitability pillar.

SAP’s answer is simple:
SAP Product Lifecycle Costing, one of our famous industry cloud solutions (my opinion). It comprehensively addresses the pain points of many industrial manufacturing customers.


Why is SAP Product Lifecycle Costing THE answer?

First, there are different scenarios where costing plays a role.

SAP%20is%20focusing%20on%20three%20primary%20use%20cases%20in%20the%20area%20of%20early%20product%20costing.%20This%20graphic%20depicts%20those%203%20use%20cases%20along%20the%20value%20chainSAP is focusing on three primary use cases in the area of early product costing. This graphic depicts those 3 use cases along the value chain

After start of production, all master data, like bills of material (BoMs), materials, prices, routings, and rates, are completely defined and available in SAP S/4HANA. Powerful cost calculation capabilities are available in this application to calculate product costs. These tools are deeply integrated, for example, into logistics and controlling.

But in the early phase of product development, the data needed is typically incomplete. As a result, there is a need for tools that allow for a cost estimate with incomplete bill of materials, temporary materials, and preliminary pricing information.


SAP Product Lifecycle Costing addresses this in three main use cases:

Use Case #1 : Preliminary cost estimate

This use case is relevant for all companies that require cost information within a project for a product that is being newly designed (new product introduction, as well new product introduction that is planned to be the successor) or a new version of an existing product (like continuous improvement). Often, the manufacturer wants to evaluate the potential cost elements, breakdown and drivers, before actually manufacturing the project. Typically, they will iterate towards target costs, along different milestones in the development project, and will do the cost estimate for a quantity of one.

This use case serves the “Design of standardized Components and Products” process.

Use Case #2 : Quotation costing

This use case centers around cost calculation related to an inquiry from a customer, where a quote needs to be generated. This could be an inquiry for a complex, customer-specific machine, for a set of products, or even a solution consisting of multiple products, with varying quantities of each product. The cost of these individual products or solutions cannot be calculated through a market price, which is why insights into each cost component is crucial.

This use case serves the “Customer order-specific engineering” process.

Use Case #3 : Lifecycle costing

The third use case is about costing for the whole product lifecycle. Here customers can compare the results of the early costing with the real costs after Start of Production (SOP).

Here they can consider all other costs such as operating costs or disposal costs, calculating over the entire future period, considering varying volumes as well as component and raw material prices, labor rates, or currency fluctuations.  This applies to customers that need to add initial and future one-off costs into the cost equation, to make sure they can hit their profit margins.


What makes SAP’s Product Lifecycle Costing solution successful?

I do not have now the intention to write down single capabilities of this mature product. If you are interested in more product specific highlights, I would like to redirect you to the lately published blog “Driving Product Profitability in the Cloud: Accelerating Time to Market with Higher Cost Confidence” from my colleague Sean Laughlin.

Just think about the time savings and efficiencies that would be gained in using these capabilities, like loading data directly from S/4HANA including a better visualization via 3D Views and finally the insights you would get from an analytics and reporting point of view.

For me, simply “awesome”.


SAP Product Lifecycle Costing: Calculation View


SAP Product Lifecycle Costing: Extensibility of Calculation View


SAP Product Lifecycle Costing: Reporting in SAP Cloud Analytics

Do you want to know more?

Learn more about how to leverage SAP Product Lifecycle Costing within your organization or contact us directly for any additional questions.

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