PLM isn’t just about efficiency; it should be part of your top-line revenue strategy
by Martin van der Roest
As a business owner for 30 years, I’ve developed a few guiding principles about making business decisions. One of these principles is based on understanding the impact of a decision on the P&L, and visa-versa, identifying what proactive steps I can take to affect changes to the P&L.
A recently published white paper by Accenture parallels this idea (see next article below). It speaks to the benefits of PLM by highlighting its effect on time to market, reuse, scrap, quality, etc. It is informative, yet it prompted me to be more definitive. Can we map the contributions of PLM to the P&L … and what would that look like? So, I decided to take a stab at this.
Let’s start with a gross dissection of the P&L. As I see it, there are fundamentally three key sections. These include the sections for gross profit, operating expenses and net income. Gross profit is comprised of overall revenues and the associated cost of goods (COGS). I’ve always looked at operating expenses as primarily fixed costs we’ll incur regardless of how much business we do … such as lease, insurance, phone, debt service, etc. And finally, the net income shows the bottom line for the reporting period.
I want to focus on mapping PLM to revenues, COGS and operating expenses. I also recognize the complexities and the spectrum of attribution. “Binary” events in the roiling sea of activities may or may not be discernable. Hence, the points I make below represent a framework that might catalyze ideas for your own business and its unique characteristics.
PLM and Revenue
The big question is, how can PLM measurably contribute to revenues? Simply put, increased revenues can come from selling more, charging more, or both. Charging more strikes me as a marketing consideration. Can the market bear a higher price? With respect to PLM, I don’t see an attribution relationship here.
However, I do see a connection between PLM and increased revenues. Let me highlight a couple of key metrics …
- sales productivity
- quoting accuracy
There is absolutely no reason to extend PLM into the sales efforts. In a previous newsletter, PPLM Issue #7, we talked about leveraging CPQ (configure, price and quote) functionality to increase the number of quotes that could be produced in the same amount of time and resources. Repeatable and smart processes that leverage existing part data, configurable options and variants will be the key to shorter sales cycles. This is clearly one of PLM’s strengths.
Also, applying methods to ensure quoting accuracy will minimize laborious reviews, checks and downstream fumbles that can drive higher COGS.
PLM to drive increased revenues is real. Would an uptick in a few percentage points be worth it?
PLM and Cost of Goods Sold
Reuse, reduced scrap and rework, and increased warranty expenses are among the several “leakages” that contribute to inflated COGS. Collectively, we might refer to these items as the cost of quality. And this has historically been what PLM has been touted to respond to.
PLM done right, inherently optimizes part reuse and ensures accuracy and visibility that in-turn minimizes errors in what is made, ordered and assembled. I’ve read countless articles and presentations that identify a laundry list of all the things PLM can achieve. It can be mind-boggling and overwhelming. But rather than get tangled up in these features, consider that ultimately, it is about PLM’s ability to establish a single repository of data overlaid with repeatable processes. By doing this, the cost of quality will improve. In fact, this is the single KPI (key performance indicator) that can be tracked prior, during and after the deployment of PLM.
PLM and Operating Expenses
On the lower half of the P&L is the consideration for a boatload of operating expenses. Trying to map PLM into this area seems to get a bit foggy and mushy. In other words, measurable attribution can be challenging and potentially unproductive.
I’d say the contributions of PLM and the right PLM (plug for Aras) will show up as improved efficiencies and a lower total cost of ownership (TCO).
Alan Mendel, a principal at LeverX, is a longtime friend of mine. We had a serendipity encounter on a plane flight recently that allowed us to visit over several hours. He is truly a guru in the PLM space with nearly three decades of experience working in manufacturing, consulting with software vendors and now, helping customers implement PLM based on SAP’s platform.
I shared some thoughts with Alan about operating expenses. He commented, “Because of PLM’s ability to help individuals do more for less, companies could redirect resources to strengthen such activities as product research and new product development.”
Excellent point. Redirecting resources could help drive additional revenues, but would most likely have minimal impact on reducing operating expenses.
On the other hand, the TCO for PLM can be a worthwhile exercise to drill into. TCO is the expense associated with maintenance, software licenses or subscriptions and upgrades for example. Even if you have a homegrown system, there is the associated labor expense to maintain and support the DIY activities. In fact, the TCO can be more expensive than people think and it’s worth a second look.
Pro-Forma P&L Driven by PLM
PLM ATTRIBUTION MAPPED TO GROSS PROFIT - *NUMBERS ARE IN $M
Let me play out a sample scenario. Let’s say that a company currently does $100M in revenues and has a cost of goods at $60M that includes about $3M in scrap, rework, warranty, or what we called the “cost of quality.” Hence, the cost of quality is about 5% of materials. As I suggested above, it’s hard to correlate lower operating/overhead expense to PLM, so I’m leaving it out of this scenario. Thus, we’re just talking about revenues and COGS.
Further, let's speculate that by implementing a PLM solution, revenues can be bumped up by 5%, and the cost of quality can be dropped to 3% versus 5% of materials. So, a 5% increase in revenues can potentially produce an 8% increase in gross profits.
Based on this sample scenario and other work we have done, I strongly recommend that organizations start and/or refactor a PLM initiative with the prime directive to drive increased revenues and reduced COGS.
Yes, there may be a slight uptick in operating expenses, but I would guess that the impact on the net profits would be minimal.
We talked about the “business of engineering,” a term used by Aras as well as CIMdata. I believe that by addressing PLM while considering the P&L, reinforces the theme of the “business of engineering.” Moreover, it repositions PLM as a top-line strategy that will demand executive management’s attention.
Yes, it’s great to have secure vaulting of drawings, seamless integration points between apps, and automating workflows/process. But, without a clear correlation to the top-line, these nifty “features” strike me as just distractions and illusions of progress.