How to Craft a Better Cost Waterfall Chart

How to Craft a Better Cost Waterfall Chart

The name of the tool sounds appealing when first heard by supply management professionals. Who doesn’t want costs to drop like raging water from Niagara Falls. For those unfamiliar with a Cost Waterfall Chart, it’s a simple one-page strategic tool intended to outline a plan to reduce the cost of a complex product or assembly. The chart is helpful in swiftly visualizing a product’s current state and specific cost avoidance or reduction opportunities to arrive at the desired future state. Add this tool to your collection to help exude a more executive presence during your next presentation by condensing multiple updates into one compact chart.

The waterfall name comes from the visual look of the vertical bars in the tool. The chart is bookended with a leftmost current state product cost, the highest vertical bar. The rightmost vertical bar, future state product cost, is the lowest vertical bar. In between both current and future state costs are smaller vertical bars that step down like a waterfall, from largest to smallest costs. These smaller bars typically represent categories of cost reduction or cost avoidance opportunities. Typically, the populated output of this one-page chart is referred to as a Product Cost Reduction Action Plan to best convey it’s intended purpose.

There are a wide range of use cases for this versatile tool. When you’re looking to summarize your Product Cost Reduction Action Plan with the most brevity, this is the right vessel. Sourcing a new product or optimizing a product in production are the most common use cases. Many leaders are folding in this high impact chart into their new product commercialization plans, as the very exercise of creating the chart helps teams shape a clearer path forward for product cost.

How to Craft a Batter Cost Waterfall Chart

As with any impactful chart that conveys insights, the underlying data quality shapes its ultimate value. Below are seven steps to help you better prep your data inputs so you can reap more actionable information to act on now.

1. Outline Bill of Material (BOM) Target and Actual Costs

Input detailed costs for each part from the bottom, up. Adding thoughtful professional cost estimates significantly improves both product cost accuracy and volatility.

2. Establish Current and Future State Product Costs

Every great initiative outcome starts with a clear, current state line in the sand. As a tip, for new products where technical requirements are poorly defined, assign a confidence interval (CI) percentage to the current state cost. This CI context will level set leadership expectations should costs fluctuate as a product’s design matures.

3. Segment BOM Parts by Category

Organizing spend by type enables roll ups of major cost deltas, e.g., differences between targets and actuals, that will make up the smaller cost opportunity bars. These categories can be comprised of baskets of many similar parts which further aids the focus of your Product Cost Reduction Action Plan messaging.

4. Prioritize Major Cost Opportunities for Small Bars

Generally, displaying five to ten cost opportunities is best. Study the underlying category data. If you’re presenting this information to your leadership team and/or a broader group, ensure you have additional details on your Product Cost Reduction Action Plan to address each cost category in-depth if asked.

5. Summarize Balance of Long Tail Cost Opportunities

Total the balance of the cost reduction opportunities into a final, small bar “other” category. One common question when presenting a cost waterfall chart is: what is the remaining and total cost avoidance/optimization opportunity? Be prepared for questions of this type by already having the information outlined.

6. Prioritize Cost Opportunity Categories into Smaller Bars

Typically, supply management professionals use the chart to focus on addressable opportunities – those that are in their control – such as negotiations and/or resourcing a supplier. In some circumstances though, it may be appropriate during product development use cases to include cost avoidance opportunities that require the involvement of designers and engineers. Cost reduction opportunities like alternative manufacturing processes and sustainable materials come to mind here.

7. Tailor Chart to Best Communicate Your Story

As modern architect pioneer Ludwig Mies Van Der Rohe, succinctly put, “simplicity is superior to elaborate embellishment.” There can be opportunities to enhance your chart further, but typically, less is more. Adding subtle colors, for example, can help differentiate between supply chain-controlled initiatives and cost reduction opportunities that require technical signoff.

Alternative Approaches

There are several modifications to the chart that can be tailored to best fit your needs. A few examples include changing the smaller bars to include buckets of cost reductions by timespan, like January through December. Another approach is outlining cost reductions by product generation, for instance, a prototype, preproduction alpha version, beta version, and final production version.

Again, the key with any chart is to think first about the story you want to tell, then align it with the best approach to communicate your message most efficiently. It’s usually better to select one approach that best meets your needs while also making ongoing reporting less burdensome.

Ongoing Maintenance

This analysis work, although important, can become a heavy administrative lift. Chances are high that once you share your Product Cost Reduction Action Plan in this succinct one-page format, leadership will request this report periodically. This can be both good and bad.

Be prepared for this request by understanding the workload involved. The first time you gathered the data, you were learning so the process took longer. You’ll get more efficient the more times you create the report but set a realistic expectation for the optimized amount of time it’ll take you to refresh the data. One can only reduce physically exporting data from system(s) and inputting it into a spreadsheet by so much time.

Scaling Reporting

Embrace lightweight software tools, like Automated Plan For Every Part (PFEP) that can both store part cost data and present configurable reports. Once product cost data is placed into collaborative software environments such as an Automated PFEP, the administrative maintenance burden is slashed, as multiple team members can view, input, and edit the data.

The ongoing task of formatting data into the Product Cost Reduction Action Plan is eliminated as charts can automatically be presented within Automated PFEP software. Talented supply management teams are thus able to spend less time analyzing data and more time generating impactful results.

Finally, automation via Application Programming Interfaces (APIs) between select software systems can eliminate the ongoing data gathering maintenance. APIs can also improve data timelines by pulling earlier part technical data from Product Lifecycle Management (PLM) systems and pushing final part cost data into Enterprise Resource Planning (ERP) systems.

Leverage a cost waterfall chart to form a more robust Product Cost Reduction Action Plan and hone your communication skills in the process. Upon success, digitize your reporting to take your personal productivity to the next level. Time, not cost, is our most precious strategic sourcing resource. Freeing up our time to attack the right cost reduction and avoidance opportunities will empower you and your team to realize product cost optimization results more quickly.

-William