A knowledge-based decision support system for cost estimation and pricing decisions in versatile manufacturing companies

international journal of

production economics

ELSEVIER

Int. J. Production Economics 53 (1997) 119-139

A knowledge-based decision support system for cost estimation and pricing decisions in versatile manufacturing companies Brian G. Kingsmana,*,

Antonio

Artur de Souzab

aDepartment of Management Science, The Management School, Lancaster University Bailrigg, Lancaster LA1 4YX, UK b Departamento

de Engenharia de Producao, Escola de Engenharia da Universidade Federal de Minas Gerais, Caixa Postal 209 Campus Pampulha, 30.161-970 - Belo Horizonte - MG, Brazil

Received 20 June 1996; accepted 11 October 1996

Abstract Versatile manufacturing companies make mainly customised products, competing for each order with other supplier companies on the basis of price, technical expertise, delivery time and reliability in meeting due dates. They include engineer-to-order and make-to-order companies. Versatility is required in continually having to design and configure how to manufacture new or modified products, having continually to deal with varying production loads and having to deal with each customer order individually, even if it is for a very similar product to one sold earlier. A major problem is determining the cost of producing the order and then the price to be quoted. The standard textbook approach of first making a cost estimate, using activity-based costing for example, and then adding some pre-determined profit margin is not how companies do, and have to, operate in practice. Estimation on the basis of the times required for the various production processes needed plus the costs of the materials is only a starting point. Research into a number of such companies have shown that cost estimation and pricing has to be regarded as a single process, it cannot be separated into two distinct activities. It is a complex process, not only requiring the manipulation of known information, but also requiring extensive use of managerial experience and judgement. A model of the cost estimation and pricing process is presented, focusing on the factors influencing the process at the different decision stages in the treatment of a customer enquiry and the rules the cost estimators and bid managers apply when using their judgement to decide about these factors. The main sources of bias and errors that cost estimators make are also discussed. Almost 200 heuristic ‘expert’ rules have been identified. A prototype decision support system incorporating the process model and the rules has been developed. The general types of rules and the form of the DSS are reviewed in the paper. Keywords:

systems;

Make-to-order manufacturing; Engineer-to-order manufacturing; Enquiry management; Bidding; Versatile manufacturing

* Corresponding

author.

0925-5273/97/$17.00 Copyright 5; 1997 Elsevier Science B.V. All rights reserved PII SO925-5273(97)001 16-3

Cost estimation;

Pricing; Decision

support

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1. Introduction Versatile manufacturing (VM) companies make mainly customised products, competing for each order with other supplier companies on the basis of price, technical expertise, delivery time and reliability in meeting due dates. They include engineer-toorder (ETO) and make-to-order (MTO) companies. Versatility is required in continually having to design and configure how to manufacture new or modified products, having continually to deal with varying production loads and having to deal with each customer order individually, even if it is for a very similar product to one sold earlier. A major problem is determining the cost of producing the order and then the price to quote. The term VM companies has been introduced in place of the usual ET0 and MT0 companies to emphasise the point that as much attention needs to be given to marketing and pricing as to the organisation of production. These problems have been discussed in previous papers by the authors; see, for example, Kingsman et al. (1994). That paper concentrated on improving coordination between sales and production at the customer enquiry stage, describing ideas and models for a decision support system to aid the planning process. Two major components were STRAP, a model for quantitative marketing analysis that assesses past enquiries to generate a set of matrices indicating the probability of winning orders according to the price and lead time quoted, and GADDA, which generates alternative feasible delivery dates and the ‘cost’ of achieving each date in terms of any capacity adjustments such as working overtime, reallocating operators or splitting batches. GADDA used a dynamic capacity planning model based on an input/output planning approach based on a hierarchy of backlogs of work. These two modules would provide an input into EDMA, the module to determine the price to quote which would need to take account of qualitative considerations and judgements. It was reported that further research was continuing on identifying what qualitative considerations were used in making the decisions at the final stage of determining the price, and the judgmental rules to improve the accuracy of the estimation process for pricing

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purposes. This paper describes the results obtained in this research and shows that cost estimation and pricing in versatile manufacturing process is an even more complex process than presented previously. The paper first discusses the difficulties found with current cost estimation and pricing processes. It then reviews decision support and expert systems and their application to cost estimation. A general process model for the combined cost estimation and pricing process is presented. This includes all the stages of the process of dealing with customer enquires until the final bid offer is accepted or rejected by the customer, a general model of how the final price offer is established and the types of rules and heuristics that are used by the bid managers and estimators at the different stages. Finally, a prototype knowledge-based decision support system, called CEPSS, that implements the overall process model is presented.

2. The difficulties in cost estimation and price setting Due to the nature of their operations, the cost estimation process in versatile manufacturing companies is in general very complex. Because they make one-of-a-kind or special order products, costing in these companies requires the manufacturing costs to be collected and assigned to specific jobs, rather than to set time periods. All of the companies studied in this research used some form of activitybased costing to determine the estimated cost. The cost of manufacturing a product to satisfy an enquiry may be divided into costs directly related to the number of units in the current enquiry, such as direct labour, power and machine costs, direct materials plus any work subcontracted out, etc., partially direct costs due to product sustaining activities such as design work or product enhancement work (which may be spread over several orders), entirely indirect costs such as batch and control activities related to the type and volume of work, such as the costs of production planning, inspection, supervision, etc., and, finally, the traditional overheads, those activities to sustain the company facility itself. Companies may use predetermined overhead rates to assign or allocate

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factory overhead costs to products, not easy when the products produced are continually changing. Manufacturing companies that have to produce equipment and deliver it installed face additional difficulties in the cost estimation process. Historically, manufacturing companies have had high variable costs because the production process requires many materials and extensive labour. But as more and more companies automate their production facilities, variable costs are substituted by fixed costs. Even VM companies are becoming more capital intensive, suggest Ricketts and Gray (1988). This makes the cost estimation process more complex, because it is very difficult to estimate the indirect and semi-direct costs under the traditional approaches to costing and pricing. For most VM companies bidding is everything. The more customer enquiries to which a company replies with bids, the more chances it has of getting orders. For example, in one company where a significant estimation effort was required for every order, only one out of ten bids made became an order. Because many estimates had to be prepared to win few orders, it was found that there is insufficient time to learn from past errors, for example, particular individuals persistently overestimating or underestimating particular types of job. Having to prepare estimates quickly, risks making large errors. Tolerance requirements, for instance, are a great difficulty because the estimation of the precise times required becomes very time consuming and open to errors. This limited time also affects the ability of the cost estimator to consider and analyse different production alternatives, like different welding processes, or an alternative sequence of operations. Successful estimating and subsequent bidding require speed, accuracy and consistency.

Table 1 Actual to estimated Estimate 5000

in fs

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121

Current methods however make it impossible to achieve any two of these together, let alone all three. Furthermore, there is usually no organised comparison of estimates with the actual costs for the orders the company wins. The claim by the estimators that this was due to the information systems being mainly for accounting purposes, recording data in different formats at different stages, was verified in four of the companies studied that allowed access to the detailed records. At the estimation stage the costs recorded were discriminated by activity and by product component, but the actual costs were recorded by activity and by worker, so it was not possible to identify cost variances. It is generally possible also, at least for non-defence work, to get a reasonable idea of the winning price. So companies could compare their estimated cost for an order that they lost with the competitor’s price that won the bid. This did not happen in any of the companies studied. Because they rarely compare the estimates with the actual costs, cost estimators tend to be unaware of how large the cost variances can be, and hence how inaccurate the estimates can be. Table 1 shows some examples of the ratio of the actual to the estimated cost parts of a possible order for two activities, mechanical design and fabrication. This shows the range of the inaccuracies that can occur, the actual cost ranging from 1/12.5th of the estimate to 32.6 times the estimate. The upper extreme is where a component part estimated at &60 actually cost El958 whilst the lower is a part estimated at &6000 that only cost just over &500. Given such results, due to the difficulties discusses, companies should realise the need to invest effort to try to learn from past mistakes.

cost ratios Mechanical

design

6.35, 24.8, 32.6 0.42, 0.82, 0.83, 1.42, 1.8, 6.35 1.3 0.76, 1.42 0.086

Fabrication 0.5, 1.82, 2.1, 3.1, 5.25, 7.69, 30 0.6, 1.18, 1.46 0.77, 0.99, 2.1 0.42, 0.79, 1.2, 1.5

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Another difficulty, frequently faced, is the lack of clarity in the specifications provided by the customer. The customer sometimes does not know exactly what he wants. Other customers submit only very rough design drawings or deliberately leave parts of the specifications vague, hoping the VM manufacturer comes up with a better solution than they had envisaged, particularly a lower cost one. Thus, cost estimates sometimes have to be prepared from incomplete drawings and without complete specifications. Theoretically, according to the accounting literature, see, for example, Needles et al. (1994) the cost estimation stage should be independent from and precede the pricing setting stage. The price is then the cost plus some desired profit margin. A major finding of this research is that most of the companies (10 out of 12) set a price rather than a profit margin, showing that cost estimation and pricing are inter-dependent processes in VM companies. An estimated cost using activity-based costing methods is determined, which forms the basis for setting the selling price. This involves combining estimates for sub-sets of activities and parts of the product from several different estimators, each with their own biases and errors. The estimated cost is first adjusted according to the factors influencing the cost estimation and pricing process to prepare price’. Management then, starting an ‘initial from this ‘initial price’ and taking account of the company’s characteristics and plans, use their knowledge of the product, of the production system and of the market conditions and economic and technological trends to set competitive prices. These various adjustments are always made through rule of thumb methods. If the costs can be estimated with accuracy and with confidence and there is the possibility of making savings in manufacturing, then the price may be reduced in order to secure the order. Conversely, if the costs are estimated quickly and without attention to details, then the price is very likely to be set higher in order to compensate for possible variations in the cost. This is all very different to the view presented in the accounting literature for price setting, clearly reflecting the difference between versatile manufacturing and continuous production companies.

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3. Computer-based

decision aids

As discussed above, currently cost estimation and pricing is a very unstructured decision-making process. Much of the information required for the decisions are incomplete and imprecise. Cost estimators need both knowledge about the manufacturing processes/methods and practical knowledge from experience. This leads to the need to use rules to guide their decisions, requiring judgements considering many variables and factors. In such an environment, several authors, Bierman et al. (1990) for example, have claimed that computerised estimating methods would give two advantages, time savings and accuracy. The problem is to improve managerial decision-making in cost estimation and pricing, Alternative approaches suggested include using expert systems (ES), knowledge-based systems (KBS) and decision support systems (DSS), although some authors imply that ESs and KBSs are equivalent. This is not the place to discuss the details of experts systems and decision support systems, their similarities and differences. There are several textbooks which do this, a recent example being Turban (1995). Expert systems are a sub-area of artificial intelligence that has received much commercial attention in recent years in the management field. An expert system, according to the British Computer Society, (Connel, 1987) is regarded as the embodiment within a computer of a knowledge-based component in such a form that the system can offer intelligent advice or take an intelligent decision about a processing function. Expert systems can model, at least in part, the rule knowledge required for the decision making process, and then help by making the process quicker, more consistent, and more accurate, claim authors such as Ignizio (1991) and Edwards and Connell (1989). They differ from conventional software because they use advanced programming techniques and algorithms to support their logical operations, the pattern matching, search strategies and generation of hypotheses and inferences that are part of automated logical reasoning, see Wiig (1990). ESs usually have five basic components, a user interface, an explanation module, an inference engine, a knowledge base and a knowledge acquisition module.

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The characteristics of expert systems, in terms of representing rule knowledge, suggest cost estimation and pricing as a suitable domain for the application of such technology. There have been some attempts at this but generally restricted to modelling the procedural techniques to use, with no attempt to model the practical knowledge. Rather than consider the actual mental processes of the decision makers, these studies “formalise” the theoretical methods, mainly from books and manuals in a computer program. They also tend to rely on hard numerical data. Biegel et al. (1986) present a rule-based expert support system for cost estimation of the painting of buildings. The system uses a decision tree to select, on numerical data, the most appropriate painting process and then applies the associated formula to estimate the cost of painting based on the dimensions of the building. However, such a system does not meet the needs identified in this research because it does not indicate how the costs would differ if the shape of the building, the location, or the weather conditions, etc., were changed. Ntuen and Mallik (1987) present a framework for expert systems applications in project cost estimation, but it only considers the technical procedures, again based on numerical data. Stutz and Zocher (1988) present an expert system for the cost estimation of engineering jobs, using productivity factors from experts to adjust the possible variations in terms of length of the project. A similar application is also presented by Stamb (1991). Doney (1988) presents a discussion about ESs and their potential applications in job-shop cost estimation, but indicates the benefits and limitations only in a superficial way. Arens (1991) presents an expert system-based support tool for cost estimation of developmental equipment, intended for estimators with little experience to give support on the technical procedures required. Ramirez and Touran (1991) present a DSS for estimating welding costs, part of which is a rule-based expert system for selecting one from four welding processes, although few details of the total system are given. Only two studies that attempted to model the actual cost estimation decision-making process in MT0 companies were found in the literature. King and Phythian (1992) studied the decision-making

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process in cost estimation to develop an expert support system for tender enquiry evaluation. However, the system supports only a small part of the estimation process, the decision whether or not to submit a bid, which is but one of many stages in a complex process as discussed later in the paper. Salamah (1989) used knowledge from textbooks and interviews to model the cost estimation decision process prior to design of buildings as an expert support system. Some of the examples mentioned above are decision support rather than expert systems. DSSs have a different origin to ESs, evolving from the integration of developments in computer science, information systems and operational research. The emphasis is somewhat different, being intended to support managerial decision makers, rather than replace the manager with an ‘expert’. Sprague and Watson (1986) for example define DSSs as interactive computer-based systems that help decision makers utilise data and models to solve unstructured problems. A key element is that the operation of a DSS always require the active participation of one or more managers. DSSs are usually composed of four subsystems, data management, model management, knowledge manager and dialogue management. The model management subsystem consists of software for statistical, financial and other quantitative models that provide the analysis capability in a DSS. A key capability of a DSS is to invoke, run, change, combine, and inspect models. DSSs and ESs have many features that overlap. Their differences are primarily in terms of the emphasis in the employment of these features, for example, both DSSs and ESs are likely to include rules and mathematical relations, but ESs are much more focused on the former and DSSs on the latter. ESs are problem-solving systems and are not easily integrated into a decision-making environment dealing with ill-structured decisions. ESs are more related to replacing experts, and DSSs are more related to aiding decision makers. ESs make judgements and recommend specific decision alternatives to the user, like a consultant. There has been much work on the integration of ES and DSS technologies since the late 1980’s. Indeed, many researchers claim that there is a natural synergy between the prescriptive problem

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structuring techniques used in the DSS model base and the rule-based architecture used in ES. ESs can be integrated into all basic components of DSSs: data management subsystem, model management subsystem and user interface. DSSs that include a knowledge sub-system are usually called intelligent DSS or knowledge-based DSS. This is this type of DSS that is developed in this research. Before discussing the system developed, there is a need to more fully understand the cost estimation and pricing process and the rules that are used. Finding ‘the expert’ or group of ‘experts’ from whom to derive the expert rules is not easy. The various estimators in all the companies studied regarded themselves as experts, and, as mentioned in Section 1 there was little data on estimated and actual costs to identify the real experts. The approach used in the research was to take the rules from each estimator and test them out with the others. The final set of rules are thus the ‘informal collective view’ of a group of estimators covering a wide variety of types of VM companies, including service companies.

4. The research methodology Some authors, e.g., Qualls (1977) Drury (1992) and Needles et al. (1994), have argued that companies use a cost-plus method for pricing, but adjusting the estimated cost rather than the ‘initial price’, as defined in Section 2, in a rather simple way according to demand and some limited market factors. However, there has been little study about the way managers and estimators in VM companies deal with the different factors influencing the pricing and quotation process, either in the accounting, or the operations management or expert systems literature. The research described here is the first major attempt to identify and interpret the cognitive processes underlying the cost estimation and pricing process in versatile manufacturing companies and to develop a process model. The conceptual model presented has been developed, as in Newell’s (1982) model of intelligent action as a representation of the decision processes that aims at allowing its

Economics

Table 2 Classification

53 (1997) 119- 139

of the companies

studied

Type

Number

Manufacturing - engineering Manufacturing furniture Chemical Bank - service packages for companies Security and cleaning packages Management training packages for large companies

5

1 2 1

I 2

implementation as a computer-based DSS/expert system. There are a range of methods to perform such a study. The studies in a company began with an examination of written documents, company guides and working manuals, where possible, cost data and unobtrusive observation. The main data collection method was semi-structured interviews with key personnel in the companies, estimators, cost managers, production managers, salesmen and sales managers and controllers. Verbal protocols were used to complement the interviews. The purpose here was to discover if what the estimators said in the interviews was in fact what they did in making decisions. The verbal protocols consisted of asking estimators to verbalise, immediately, their thoughts aloud instead of only giving the decisions. The verbal protocols were based on recalled cases of products that estimators had dealt with at an earlier time. It was not feasible to deal with current decisions. Emphasis in the analysis was given to content analysis. The protocols were initially analysed to identify which heuristics were used by cost estimators and subsequently to check if there was a common sequence among different estimators. The research was carried out with 12 versatile manufacturing companies; see Table 2 for the industries covered. These were selected for their geographical convenience and their willingness to co-operate rather than by some stratified sampling process. The companies covered a variety of activities (see Table 2) some not normally associated with classical manufacturing and the use of the another of the reasons term make-to-order, for adopting Versatile Manufacturing as the better

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descriptive term. Each of them provided different products for each customer, although the ‘product’ might be a service or a package of services. In-depth research was continued with one of the engineering companies by regular contact with two of the estimators and the financial controller for over 2 years. This company was used to validate the prototype DSS developed in the research.

5. The cost estimation

and pricing process model

The process model consists of the general structure of the cost estimation and pricing decision making process, the flow of the operations used in the process, the work routines and procedures used by the estimators, and the main decisions. From the interviews and research in the 12 companies, it was found that the cost estimation and pricing process in the companies studied can be divided into 11 main sequential stages, as shown in Fig. 1. The stages are an amalgam of the experience of all of the companies, and did not necessarily exist as distinct stages in every case. There are four critical decisions in the process, internal decisions at stages 2, 3 and 8, at which the process may be terminated or re-consideration and recycling through earlier stages be necessary, and the external decision by the customer after stage 10. The outcome of these critical decisions should also lead to the routine collection of relevant information to guide future decisions. It was found in the fieldwork that the same cost estimator was ‘responsible’ for more than one stage. Thus, six different cost estimator roles were identified. These were enquiry evaluator at stages 1,2 and 3, Estimation Time Evaluator at stages 4 and 5, Time Estimator at stages 6 and 9, Prime Cost Assembler at stage 7, Price Evaluator at stages 8 and 11 and Final Price producer at stage 10. The various roles were given a variety of titles in the 12 companies involved in the research. It was also observed in a few companies that one cost estimator played several of the roles. For simplicity, the general term cost estimator will continue to be used in this paper to refer to those carrying out the six roles identified, which could be an individual or a committee.

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The 11 stages can be divided in two different types. Stages requiring judgements or decisions: These stages are the ones that require cost estimators to use judgement to deal with the factors influencing the process and then make decisions on what to do; for example, will success on an enquiry from a new customer lead to profitable extra future business, what is the state of the market, how important is it to get the order, how much time to spend preparing the estimates, how competitive should the price be, etc. In order to deal with these factors, cost estimators use heuristics, or decision rules. These are rules of thumb, not always articulated, derived from experience that are a way of coping with the many uncertainties that inherent in the problem situation. Actions and Information Transfers: There are three of these stages, 1, 5 and 10, covering the arrival of the customer enquiry (information flow), the allocation of the design/estimation tasks to specific individuals or departments (actions) and the price proposal going to the customer (information flow). However, their inclusion in the model is important for understanding the whole cost estimation and pricing process. Generally, the customers send the enquiry to several companies. Sometimes customers come first to a particular company before going to its competitors, because they know and value the quality of work offered, and/or its ability to complete the service in a given time. The major role at this stage is to assign an enquiry identification number and enter details into a database. The first decision is made after stage 2, the initial evaluation, on whether to make a bid for the work involved in the enquiry. The objective is to decide if the company is able to make a product to meet what is required at a profit and which is viable in terms of the delivery time requested. Moreover, it is necessary for the Enquiry Evaluator to assess the chances the company has against its competitors. The Enquiry Evaluator may have to consult with other experts in the company. The second decision is made after Stage 3, reviewing the specifications and drawings to decide if they are a clear enough basis to prepare the estimates. If the customer cannot provide any

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Bid 1 Rejected 4 Seek Reasons

\

t I. Receive Enquiry <

c

2. Initial Evaluation

J 4 Re’ect te/l Enquiry

Seek Clarification Additional Information .-..

3. Review Specifications

/

w 11.a~~~tger re-negotiation 4. Decide level of detail for design and estimation

*

t 1O+eS,udb,t to Customer

2

c t

4 8. Tender Vetting Contract Details

Fig. 1. The process

model and the

c

7. Prime Cost Proposal

11main stages in dealing with enquiries in make-to-order

manufacturing

companies

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additional information, then the company may decide that it is not worth pursuing the enquiry any further, or alternatively base the estimation on a set of assumptions added to the original specifications provided and made part of the bid. The fourth stage, defining how the estimates will be prepared, means specifying how much time should be spent in the estimation process, which component parts of the product should be estimated and what factors should be considered in making estimation decisions (e.g. subcontracting. In two of the 12 companies, this stage was omitted as an explicit activity, as all cost estimates were prepared to the same level of accuracy. The fifth stage is merely the action of distributing the estimation work to the departments and individuals concerned. The sixth stage, prepare estimates, is the one that takes most time. The costs for materials are prepared by ‘Materials Estimators’, who in some cases are the same persons that act as time estimators but in others are specialists working fulltime on the prices of materials. Usually, further meetings are needed to clarify parts of the specification between the estimators and the estimation time evaluator or to bring in another estimator with some expertise now needed for the order. The first of the major decisions on price, the price to bid, is an internal decision resulting from a two stage process. The initial step, stage 7, prepare prime cost proposal, is to combine all the time and cost estimates. Currently, the different estimator departments prepare the estimates manually on preprinted forms, although one company was starting to make partial use of a spreadsheet. The prime cost assembler has to verify that costs have been provided for all the components of the product, by checking every drawing against the estimates, to avoid having some parts of the product missed out. Two of the companies mentioned that sometimes losses are incurred because parts of the product were forgotten during the preparation of the estimates, whilst another said that sometimes losses were due to the simple error of overlooking a cost estimate form in the overall summing-up of costs. The ‘prime cost proposal’ is more than just the ‘final estimated cost’ in many companies. The prime cost assembler also prepares a summary of

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information about the final estimated cost, containing judgements on possible risks with cost variances, likelihood of errors and about the mark-up on materials added to the estimated costs. For medium and large orders, or ones where intense competent is expected, or there is a long term strategic interest, this estimated final cost is presented to the next stage, the Tender Vetting Committee. However, if the enquiry is for orders considered to be small and ‘normal’ or where no difficulties are foreseen, it is usual for the prime cost assembler, after consultation with his superior, to recommend a price to set for the enquiry. Once the prime cost proposal is prepared, a directors/managers meeting, often called the tender vetting meeting or tender vetting committee, stage 8 of the process, is held in order to analyse the cost proposal and all the factors affecting it. The object of the tender vetting meeting is to set the price to be quoted for the product it will supply to meet the customer’s stated need. The price evaluator role at this meeting is to consider in detail the prime cost proposal and the ‘summary’ of additional information prepared by the prime cost assembler. The tender vetting committee may conclude that the price is not acceptable because it does not give enough profit or is too high to win the order. This could be due to the way the estimates were prepared. The estimates, or parts of them, are sent for further work at stage 6. This is stage 9, refining estimates, which is usually performed by the same cost estimators as did the original work, although a more experienced person might be used. When estimates are sent for revision then Stages 7 and 8 may also have to be performed again. Alternatively, the committee may decide to seek further information on the customer or the market before making a final decision at a second meeting of the committee. The second price decision is the crux of the whole process, whether or not the customer accepts the bid. This follows stage 10, the submission ofthe price to the customer. The customer may accept the bid or reject it. If the customer decision is not to accept the price, then the company should attempt to find out the reasons wherever possible. Another possibility is that the customer may ask for further negotiations on the price (Stage 11). Although the

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company has offered the lowest price, it may still be higher than the customer expected to pay. The customer may wish to consider modifying the specifications to lower the cost. Further estimation of an agreed modified specification repeating stages 6-10 will then be necessary with a new price being set by the tender vetting committee. It was common practice for the evaluators at stages 2 and 4 to seek authorisation from a higher level on accepting or rejecting the enquiry and on the effort to put into preparing estimates, particularly for enquiries for large orders, orders of strategic importance or orders of which the evaluator had little experience. This authorisation was usually to reduce the responsibility (and subsequent blame) for decisions that might have a large financial impact.

6. Modelling the final price offer Although the companies studied do not have a definite formula to obtain the final price, a general model can be derived, although not necessarily all of the companies in the study would use all of its components. The final price to be quoted can be represented by the following process model: Price = final estimated variances

cost + risk with cost

+ risk with mistakes

estimators

+ mark-up

by the

on materials

+ profit margin. It was found that the price is always based on the final estimated cost, which can be represented by the following process model: Final

estimated

cost

= 1 (estimated times* hour rates) + cost adjustment + cost of materials

+ contribution

to overheads.

The direct cost is calculated by multiplying the estimated times of each activity needed by its hourly rate. Cost adjustments may be made in order to correct for expected cost variances, for example, a specific time estimator generally under-estimating a particular activity. Cost adjustments may also be

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negative, meaning that the estimated cost should be reduced. For example, at the tender vetting stage, after the estimates have been completed, it may be found that part of the job can be sub-contracted at a lower cost. The final estimated cost also includes the estimates for the costs of direct materials and the contribution to overheads. The ‘risk with cost variances’ is an adjustment added to the final estimated cost to allow for inaccuracies arising from how it was prepared, dependent on how much time was spent, the complexity of the job, the short delivery time required, etc. The ‘risk with mistakes by the estimators’ is another adjustment to compensate for errors made by the time estimators, for example, choosing the wrong manufacturing process so a more costly one had to be used at an actual much higher cost. The markup on materials is usually low and arises mainly from expected inflation, shortage of supplies or expected variations in exchange rates for imported materials. The mark-up on materials may be higher in cases where there was not enough time to confirm prices with the suppliers. These various adjustments arise from the many possible sources of errors that can arise in the cost estimation process due to the use of rules of thumb or heuristics. This is widely accepted as an efficient way to make decisions under uncertainty, but it is also accepted that rules lead to errors or to systematically biased outcomes, e.g., Bazerman (1985). Cost estimators are not exempt from this. The main forms of biases found during the research are shown in Table 3, although it was not possible to determine their relative importance. It is very important for every company to investigate the main sources of biases/errors in order to be able to identify and explain the variances, as well as to take corrective measures. The cost adjustments will vary between estimators in the same company as well as between companies Finally, the ‘profit margin’ in principle corresponds to the desired return on capital. Versatile manufacturing companies have to steer between ensuring that the price they set for a product will be acceptable to the customer, but ensure also that the company survives. Thus, the price should ensure that all direct costs are recovered, a contribution to the overheads is made and finally a profit margin.

B.G. Kingsman,

Table 3 Sources of biases/errors (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k)

in cost estimation

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process

Restricted time for preparing the estimates (time pressure) Reliability of information provided by the client Reliability of the quality of raw materials Reliability of the shop floor professionals’ skills (workers’ performance) Reliability of the correct functioning of the machinery (equipments’ performance) Estimators interest in the product Confidence in the cost/time ratios used in the costing system Not recognising the limitations of the experience with similar product components/activities Dependency on others’ estimations Production capacity Lack of self confidence

All of these must be achieved in the long run, but not necessarily on each order. It was found that even within the same company, the difference between the price quoted and the final estimated cost varies greatly from enquiry to enquiry. Sometimes companies decide to quote prices very competitively for certain products and accept to have no profit or even losses. Short-run objectives may force the company to quote a low price to bring in some business at almost any cost. Long-run objectives, like entering a new market niche, may for example force the company to charge only part of the development cost in the short-run. It was found in the research that some companies treat small orders differently. Four of the companies tended to use a pre-specified profit margin for small orders. But it is used only when the small orders are considered ‘very normal’, that is, the orders do not present any significant risk of losses. This pre-specified profit margin was set annually when the budgets were prepared, and tended not to vary significantly from year to year.

7. The nature of the rules used for estimation pricing Once general pricing research the rules attention

and

the problem situation was identified, the rules that govern the cost estimation and process were identified. Early on in the it was realised that in order to understand more clearly it was necessary to give some to the factors that create the need for the

rules. In that sense, effort was made to identify/ isolate the factors simultaneously to the identification of the rules. The final product is a set of rules grouped according to the factors. It was found in the research that cost estimators usually apply the rules by checking a condition or state, related to the factor, and then arrive at a conclusion. Thus the rules are in the form of ‘If condition then action’. The factors can be seen as a series of properties or conditions of the environment (or entity under consideration) that impact on and affect the judgements and decisions. The cost estimators said that they check the condition or state as if they were asking themselves questions. Some examples of these questions are shown in Table 4. Most of the rules were identified through interviews with cost estimators. The interviews contained questions aimed directly at identifying the factors affecting the decisions and the related rules. The rules were derived, in the case of the interviews, from statements made by the cost estimators. Some examples of these, in the words of the estimators are given in Table 5. Verbal protocols were also used in the process of eliciting the rules to complement the interviews. The use of verbal protocols served to confirm and to clarify many rules, and also to identify some that were not mentioned during the interviews. The verbal protocols allowed most of the rules to be identified and located in the different stages of the process. They played a vital role in identifying the actual sequence in which the rules are normally used. Many of the rules identified with

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Table 4 The type of questions

estimators

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ask of themselves

- Is there any serious competition for this product? _ Is this product technically more complex than most of the products that have been produced (e.g. large complex assembling of parts) _ Is the customer looking for a high quality product? - Does the customer prefer high quality rather than short delivery time? _ In the past, has the customer accepted re-specification, flexibility in delivery, or changes in materials in order to reduce price? - Is there any possibility of future contracts with this customer?- Will be possible to sell the same product to other customers? _ Does the customer have other needs (possible future orders) besides the product being estimated at the moment? - Is there a potential market of other customers for the product being estimated or for similar products?

Table 5 Examples

of statements

leading

to derivation

of rule is

“Analysis of the availability of production capacity is important to avoid problems with possible shortage of capacity during the job, and to measure the efforts which are worth making during the estimation process, for example if the company is in full capacity then the cost estimation can be done quickly by over-estimating, which reduces the risk of losses, Another consideration regarding capacity is sub-contracting. If during the production of the job there will be shortage of capacity, then it is important to estimate if the cost of subcontracting would be higher” “In cases ofjobs with inherent high risk, products which can be dangerous for the employees, the contribution margin expected from the job has to be significant to compensate not only for the financial cost, but also part of the cost of a potential accident” “If the job in consideration is one that represents going into a particular market that has significant strategic importance, and may create future opportunities to the company, then under-estimating the cost must be considered in order to attract the customer” “When sub-contracting may be required, then it has to be checked if this may lead to delay in the production process, and what would be the cost of this. It has also to be checked if the quality in the possible subcontracted part of the job will create problems with the customer quality requirements”

Table 6 The four outcomes

of the rules

Outcomes State or property enquiry

Recommendations Action Advice Issue to resolve

Description of the

The state/property of some aspects of the enquiry is usually measured in a yes/no form, the enquiry possesses or does not possess that property. These properties are also used as conditions for other rules.

Decisions and procedures the cost estimator considers should be carried out, without further discussion by a wider group Decisions and procedures that the cost estimator thinks should be carefully considered and carried out if possible An issue to be discussed rather than a oefinite action to be taken. Further investigation is required prior to any action being taken, but action should follow after those discussions

the interviews were only clearly understood following the use of verbal protocols. The rules may lead to determining definite properties (states) about the enquiry or to subjective recommendations. There are four types of outcome

including three alternative type of recommendations as given in Table 6. It was found in the research that the cost estimators classify the factors that they consider into four broad groups: product-related, customer-

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J Production

related, company-related and market competitiveness. Each group covers a range of issues, which form different sub-groups related to the decisions at the different stages in the process. Within each sub-group there are many factors whose state/condition needs to be established and which leads to an outcome affecting the decision. It was found that many of these factors were mentioned by all the companies studied and were taken into consideration by all companies in the same way. There were also some factors and outcomes specific to individual companies or given different weights in coming to decisions. The main relationships between the cost estimation and pricing process stages and the four groups of factors, indicating which groups of factors most influence each ‘stage with judgement/decision’, are shown in Fig. 2. There was a general tendency to regard the company-related rules, particularly the ones about the workload and the budget, as the most important because they are crucial for the survival of the company. For example, if the company is in a period of very low workload, then the company should do everything it can to supply the customer with the most competitive price possible in order to secure the order. The customer-related rules were treated as the second most important ones, with the rules concerning the condition of the competitors coming third. Finally came the product-related rules. Answering the questions and applying the rules was an implicit rather than explicit process, a mental exercise rather than a formal decision process. Because of time constraints and the informal way the rules were applied, no attempts were made currently by any estimator to ensure that all aspects pertaining to the enquiry were considered. Interestingly, two estimators said they never thought about classifying the factors before, and commented that this exercise helped them understanding better the way they make their judgement about the factors.

8. Cost estimation and pricing decision support system (CEPSS) A decision support system called cost estimation and pricing support system (CEPSS), was

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131

developed as a support tool for assisting cost estimators in MT0 companies to make better decisions when estimating the cost and setting the price for jobs from the process model and rules described in the preceding section. CEPSS is a hybrid system, a DSS that incorporates expert systems rule-based techniques. It is composed of four main modules: estimation, rules, adjustment, and knowledge bases. It also contains three databases: historic cost, applied rules, and applied recommendations and requires links to a company’s information systems. The estimation module is used to record the time estimates for each product. In addition, it is proposed that at the same time, the estimators should record their confidence in the estimate, the similarity of the product or component part being estimated to previous jobs and their experience with the particular component. The purpose of recording all this information for each time estimate is to allow for future analysis of the cost data. Once the actual costs are generated it would be possible to analyse the cost variances between actuals and estimated and check if they are related to the level of confidence, similarity and/or experience. This would be part of the activity in the adjustment module, which would be used periodically to analyse the historic cost data and provide the estimators with information. The historic cost database contains the time estimates. The rules module is to be used by the cost estimators when using their judgement about the different factors influencing the decisions in the different stages of the cost estimation and pricing process. The rules module consists of a knowledge base with the domain knowledge (expertise), constituted by decision rules. It presents a series of questions to the cost estimators and based on the answers it fires the appropriate rules, generating a series of recommendations, as described in the previous section. CEPSS’s rules module is a forward chaining system, i.e., the rules are fired in response to answers given to questions that are aimed at arriving at some conclusion. The prototype of CEPSS developed in this research concentrated mainly upon the rules module, due to the importance of this module for the research. The applied rules and applied recommendations

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53 (1997) 119-139

FACTORS INFLUENCING DECISIONS

STAGES WITH JUDGEMENTS/DECISIONS

Existing New product Potential for Future Business Risk of high scrap rates, machine accidents Products Life Cycle j Specifications

(’

/

rI”““u

Reliability in specifying need Interest in having the product Cutomer’s main preferences: price, quality, lead time? Customer pays on time

Related

Financial Situation Production Loads How project fits into current work pattern

Major Influence I

Fig. 2. The factors

influencing

judgements

at the stages in the cost estimation

and pricing

process

in dealing

with customer

enquiries

B.G. Kingsman,

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J Production

databases are to be used to record the results (output) generated by the rules module for each enquiry evaluated. So, it would be possible to review the results of the analyses of a given enquiry after it had been completed. The integration of CEPSS components with the stages of the cost estimation and pricing process is shown in Fig. 3. It can be seen that the Rules Module directly aids in stages 2, 4 and 8 (initial evaluation, how the estimates will be prepared and the tender vetting meeting). Other stages, such as 6, 7 and 9 are also aided by the rules module but indirectly through the estimation module. It is proposed that the activities performed in stages 5 and 6 (distribution of the work and prepare the estimates) should be recorded entirely through CEPSS, in the estimation module. In time, the time estimators could prepare the estimates sitting in front of the computer screen with CEPSS, so there would be no need to record the estimates on pre-printed forms. The rules module and part of the estimation module were implemented in the prototype CEPSS. It was written using the Database Management and Application Development Tool dBASE IV for DOS Version 2 and the Borland dBASE compiler. This was selected rather than use some expert system shell because of familiarity with its built-in programming language and its suitability for easy linking into databases. Excel was used for implementation of parts of the estimation module. In the rules module of CEPSS, all the rules are classified firstly according to the major stages of the process to which they primarily relate and secondly according to the sub-groups of factors in which they fall. There are 30 rules for stage 2, the initial evaluation of the enquiry, 83 rules for stage 4, determining how the estimates will be made, and 88 rules for stages 7 and 8, determining the price to quote. The subgroups concerned in these rules are listed in Fig. 4. As mentioned earlier, to apply the rules the cost estimators check the factors by means of asking questions. The answers to the questions can lead to different outcomes at each of the eleven stages of the estimation and pricing process. Some simple examples of the rules are given in Fig. 5.

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133

The main menu of the rules module, as implemented in the prototype, on entry shows the stages that have already been analysed through CEPSS, so informing any user of the current status of the enquiry. The system stores the answers made to the questions in each of the rules, for the earlier stages up to the current time, so the basis for any recommendations made earlier can be examined. The module allows analyses to be carried out for enquiry evaluation (stage 2) defining how the estimates will be prepared l

l

(stage 4), prepare estimates (stage 6), set price proposal (stage 8) refine estimates (stage 9) re-negotiate price (stage 11). Some of the rules are used in more than one stage, although the outcomes will differ according to the stage. Thus the rules to be used in re negotiations of the price would be part of the rules used in stage 8 (tender vetting meeting), those related to the negotiable aspects of the enquiry. The recommendation from these rules would indicate how to handle the negotiation, and not how to set the price as in stage 8. The same rules are required in preparing estimates and refining estimates, because these two stages are in fact about the same activity and make use of a sub-set of the rules for stage 4. The difference is that stage 9 is limited to revising only that part of the estimates prepared for some component of the product, aiming at having more accurate estimates. Often, the information available for a given enquiry changes through time and as the enquiry passes from stage to stage. Suppose that in the middle of preparing the estimates, stage 6, new information is received that, because of financial difficulties, the customer no longer wants an early delivery. The estimator may wish to see what changes to the original decision on how to prepare the estimates should be made. This is achieved by re-analysing the parts of stage 4 (define how the estimates will be prepared) affected by the new information. This may indicate that the estimates be prepared on the basis that there will be plenty of time for the manufacturing, so giving a lower cost by avoiding the need to subcontract parts of the work at a higher cost. l

l

l

l

134

B.G. Kingsman.

APPLIED

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53 (1997) 119-139

RULES

RECOMMENDATIONS

HISTORIC MANUFACTURING

COST

- Estimated Costs Costs

-Actual

Fig. 3. The flow diagram

for CEPSS

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A.A. de SouzaJInt. J. Production

Rules Used in Stage 2: ” Enquiry Evaluation Group 1: Product Subgroup Subgroup Subgroup

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135

*’

Related 1.1: Existing/New Product 1.2: Further Analysis 1.3: Potential for Future Business

Rules Used in Stage 4: n Define How the Estimates

Will Be Prepared”

Group 1: Product Related Subgroup 1.4: Risk with Accidents/Scrapping Subgroup 1.5: Products Life Cycle Group 2: Customer Related Subgroup 2.1: Reliability in Terms of the Products Specifications Subgroup 2.2: Interest in the Product Subgroup 2.3: Customer’s main preference: price, quality or delivery time Subgroup 2.4: Reliability of the Customer Subgroup 2.5: Relation with Customer Subgroup 2.6: Potential for Future Business wtth Customer Subgroup 2.7: Delivery Time Group 4: Market Competitiveness Subgroup 4.1: WorkLoad

Rules Used in Stage 8: *I Setting Price Proposal

- Tender Vetting Meeting *’

Group I’ Product Related Subgroup 1 1: Existmg/New Product Subgroup 1 2: Further Analysis Group 2: Customer Related Subgroup 2.8: Negottation Group 3: Company Related Subgroup 3.1: Financial Situation According to Budget Subgroup 3.2: Production Subgroup 3 3: Participation of a grven project in the total production Group 4: Market Competitrveness Subgroup 4.1: WorkLoad Subgroup 4.2, Competitors for the Order Subgroup 4.3: Potential for Entering into New Market Sector

Fig. 4. Summary

of the rules used in each stage, as implemented

The critical decisions that have to be made are at stage 2 on whether to reject or accept the enquiry, stage 4 on how to prepare the estimates and stage 8 setting the price proposal. The answers to all the questions posed in the rules have to be related to the particular decisions that can be made. The alternative decisions at stage 2 are clear, but less so for the other two. The information assessed and the judgements made are in the main qualitative, even if a consensus view of a group of managers. Thus the decisions made can only be indicative of what to do. They cannot be a precise answer to spend 73 hours of effort on estimation or charge a price of

load

in CEPSS

prototype.

E54526. They are more analogous to the way a barometer uses pressure changes to indicate the general type of weather to expect in the near future rather than to a thermometer which gives an exact measurement of the temperature. Bearing in mind the pricing model presented in section 3 and the findings on how the companies converted cost estimates to prices, three decision options, outcomes, on pricing at the tender vetting stage were set as _ increase the profit margin, - quote price with normal profit margin, _ reduce the profit margin.

B.G. Kingsman.

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Wes

A.A. de SouzaJInt. J. Production

Used in Stage 2: ‘* Enquiry Evaluation

Rule 1-3 If Then

Rule l-26 If

Then

Gles

Then

Rule 2-71 If Then

1

(State or property of an Enquiry) The product has not been produced before Has a similar product been produced on which estimates 3 - Don’t Know based? Ans : 1 -Yes, 2 - No,

Then

for this new enquiry can be

(Action) (There is strategic Interest In developing this product) and [(It is ltkely that there will be demand for this product from other customers) or (It is likely that the technology to be used or developed on the product manufacturing WIII have application for other products) or (The development of this product will assist tn obtatning future business from the customer)] Recommendation 11: The price to be quoted should include only part of the development cost. The rest of it must be covered by future sales of the same product/technology

Will Be Prepared”

(Issue to Resolve) This enquiry is for a product that is technically more advanced than those normally produced Recommendation 20: Consider if a higher price can be achieved in order to cover the risk of adverse cost vanations and time delays during manufactunng due to the complexity of the product (Advice) There is a shortage of work for the time over which this product will be manufactured Recommendation 43: Besides estimating tightly, consider offering short delivery time to attract the customer

Rules Used in Stage 8: ” Setting Price Proposal Rule 4-7 If

53 (1997) 119-139

”

Used in Stage 4: ” Define How the Estimates

Rule 2-l 5 If

Economics

- Tender Vetting Meeting ”

(Action) (The product has been produced before) and (the prevrous price plus inflation adjustment is still competitive) and (it is an old customer) Recommendation 52. Increase the price only by the inflation rate to keep the customer’s business

Fig. 5. Some example

Companies consider a ‘normal price’ as that which covers the direct costs and makes a contribution to overheads and gives a reasonable profit. Companies consider their ‘normal price’ a competitive price acceptable to customers, that will maintain an acceptable stream of incoming orders assuming no major change in the market environment and not being pressed to obtain additional orders to relieve immediate financial problems. Some of the companies had identified circumstances where they believed that they could set a ‘higher than normal

of the rules used in CEPSS

price’. However, all the companies studied complained that the market was becoming more competitive. It was thus more common for companies to be setting prices lower than a ‘normal’ rather than higher than normal. Examples of the rules on the circumstances where a ‘higher than normal price’ or a ‘lower than normal price’ may be set are given in Fig. 6. Similarly the decision options at stage 4, on how much time is to be spent on preparing the estimates were set as

B. G. Kingsman, A.A. de Souza/Int. J. Production Economics 53 (1997) II 9-139

RULES

AND

1) It considers

CONDITIONS

WHERE

COMPANY

MAY

SET HIGHER

PRICE

rt has a winning edge, being the market leader, has a reputation

better quality at the same price, for technological

or process expertise,

137

for

believes it is

the only supplrer able to deliver within the time required. 2) It prepared the estimates 3) Supplying

quickly and expects the risks of cost variances

further batches of previous product, particularly

to be high.

if a low price had been

quoted for the initial order, as the customer can not easily go to with another company. 4) The customer requirements,

has created problems in the past with supervision,

quality assurance

testtng, payments,

etc.

5) It knows that the customer

RULES

AND

WHERE

1) The product being estimated

2) The workload

of specifications,

likes to haggle.

CONDITIONS

the estimates

re-negotiation

COMPANY

HAS TO SET LOWER

PRICE

has been produced before for the same customer

and

on that occasion were prepared very tightly. is very low, so tt has plenty of spare capacity and needs some cash

inflow. 3) A new product for an old valued customer, customer

‘sweet’.

orders, so company

Alternatively,

to be done as a ‘loss-leader’

only charges part of the development

4) There are many competitors

to keep the

the product may have good potential for repeat costs.

for the enquiry and they are known to be aggressive

and to have the same or a better quality. 5) The lob enables d to enter a new market and/or develop a new technology

Fig. 6 Examples

of rules and conditions

- prepare the estimates quickly, ~ prepare the estimates normally, ~ prepare the estimates tightly. The answers to the questions are classified as being associated with one of the three possible outcomes or with none of them. In some cases an answer may lead onto several further questions before an outcome can be chosen. In other cases it may not be possible to form a definitive opinion on a factor. Clearly, the current condition of different factors may lead to alternative outcomes; some may indicate increasing the price whilst others suggest a need to quote a low price. Thus at the end of the analysis there will be conflicting recommendations on what to do. A way to overcome this is required. The definition of how this should be achieved took

on pricing.

a considerable proportion of the research field work, requiring many interviews. A scoring process was found to be most appropriate. Each rule (question and associated outcomes) was allocated a weight. The scoring system is presented to the user as soon as it is fired by the rules. Depending on the answers to the questions, the rules fire the scoring system with the most appropriate option and asks for the weight. The weight associated with each of the questions is then added to the ‘score’ for the particular option, if any, associated with the yes/no answer. The final result is a total score for each option. A summation of the weights for each decision option is used, rather than a weighted average, because the estimator may not be able to form a definite judgement on

138

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some of the questions. It was thought that the decision finally should be based only on those factors on which the estimators had determined a definite view. Any factor on which they had no opinion should not count to the scoring process. For example, a final score at the tender vetting stage like the following: Increase the profit margin -+ 14 Quote price with normal profit margin --f 7 Reduce the profit margin ---f3 would be a strong indication that the final price should be higher than normal. It is proposed that the cost estimators should define the weights they would like to use to represent the importance of each of the factors in their decision. This is an off line exercise, carried out once and perhaps reviewed once per year. The values agreed are then input into the system as agreed constants. Once the weights are defined then they should be maintained unchanged and all the users of the system should use the same set of weights. The cost estimators pointed out, during the tests with the prototype, that the information obtained from the scoring system served as a yardstick on how the factors affect the decisions. The set of weights used in the prototype CEPSS represent the perceptions of a sample of cost estimators in one company about the relative inguence of the factors. The weight 0 signifies that the cost estimator considers that the factor has no or very little effect on the decisions. The next weight, 1, signifies that the factor has little influence but is worth considering. The weight 2 signifies that the factor has medium influence, or, as the cost estimators indicated, normal influence. The next weight, 3, is used when a factor has a high influence. The last weight, 4, is used when the influence of a factor is very strong. The output of the rules module for each of the stages covered will be a summary of the information gained by the answers to the questions, a list of the recommendations with the issues to resolve and actions etc., plus the summary of the results of the scoring system as given in the example above. It thus be seen that the aim is to assist the estimators not replace them. CEPSS was tested by having the cost estimators in one company ‘play’ with parts of it on real or

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53 (1997) 119-139

made-up past enquiries. This process lasted for over 3 months and several refinements were made. The tests were then repeated over a shorter period in a second company. One of the last tests was on an order that the first company had won, but which the company had found cost them significantly more to make than they had estimated. The estimator involved in that order applied CEPSS on the basis of the information he had at the time the decisions about that order were taken. This cost estimator concluded that with the output of the rules module he would have been able to foresee that the cost would be higher than had been estimated. Either they could have tried increasing the price quoted, or they would have had foreknowledge that they would make little profit on the order. Another enquiry which the company had lost because of quoting too high a price was also processed through CEPSS by the estimator. The estimator said that the recommendations of the Rules Module would have been very helpful as it was a difficult enquiry to handle. The recommendations were that a reduced profit margin, and so a more competitive price, should be sought. These two examples, although done after the event, suggest that the process model, the rules discovered and their implementation in the form of a knowledge-based decision support system make a major contribution to assisting to managers and engineers faced with the difficult and complex problem of deciding what price to bid in response to a customer enquiry in VM companies.

9. Summary

and conclusions

This paper has shown that the cost estimation and pricing process in dealing with customer enquiries in VM companies, whether make-to-order or engineer-to-order, is a very complex process. It has presented a general process model applies to all such companies. The research described showed that the managers and estimators concerned have developed a large number of heuristic rules to aid them in their judgements and decisions at the various stages of the overall process. These were applied as an implicit rather than as an explicit process. Some of the managers involved in the

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research found this formalisation and codification of the processes extremely helpful. A prototype knowledge based decision support system to implement the process model and the decision rules has been presented. It has been written in dBase IV in a form that can be easily extended by any user to incorporate their own decision rules. The DSS has been tested by having cost estimators replay some of their previous decisions on particularly difficult enquiries. Their conclusion after this exercise was the process model, the rules and the prototype Knowledge Based DSS would make a major contribution to assisting managers and engineers to deal more effectively with customer enquiries in VM companies.

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