Manufacturing managers are tasked with the constant mission of looking for ways to meet or exceed target growth rates through innovation, new marketing strategies, organizational logistics, and cost management.
One consistently effective method for meeting financial goals is to reduce internal costs, also referred to as product value management. Strategic attention to internal cost management allows for greater cost reduction, risk management, and ultimately, expanded margins and growth.
Keeping product costs low requires a well-researched, practical strategy.
Understanding Factors Affecting Your Costs
Before developing a plan to lower your company’s product costs, first achieve a full understanding of each factor that contributes to product cost. How many designs are developed for each product? Creating alternative designs—each with a different cost associated—for one product, fitting the same function and form, can add up quickly.
Plant cost structure and capabilities have a huge impact on manufacturing costs, along with costs associated with your internal process control. Cost management typically is performed by experts who have strong manufacturing backgrounds and specialize in cost reduction analysis.
Understanding how each factor fits into the production process, why it’s necessary, and how it drives up the total cost can help you to identify opportunities to lessen costs without sacrificing production quality.
Developing a Plan for Cost Management
Manufacturing managers should be aware that roughly 60 to 70 percent of a product’s cost is based on decisions made during conceptual development; that number increases to 85-90 percent of total cost by the time the product has been designed. When a company attempts to reduce costs by cutting R&D, sales, or administrative expenses, the problem is difficult to control.
Resourceful cost control starts from ground zero and continues throughout each stage.
Most companies utilize some form of design-to-value (DTV) or design-to-cost (DTC) system to reduce costs. The former analyzes customer needs as a factor of value propositions, and the latter defines all possible costs of a product and uses models to lessen those costs at each juncture.
Design-to-value (DTV) assesses which product features will provide the most value for customers. This method is most commonly introduced for products with evolving features. The DTV model hinges upon the ability to ascertain effectively and accurately what a customer desires, and how those desires affect product pricing all the way through the supply chain.
DTV analysis often uses market research, such as focus groups, customer clinics, and conjoint analysis to understand where customers will make tradeoffs between value and price. Reviews along each stage of the product life cycle allow the DTV method to manage cost drivers—e.g. raw materials and distribution networks—to better create objective price models.
Design-to-value also attempts to capture second-order decision-making from customers, such as how pricing for a new or updated feature will affect volume.
Unlike DTV, design-to-cost (DTC) treats a target cost as an immutable parameter that the product must achieve without fail. Target costs are developed based on predetermined pricing formulas that account for price elasticity, production volume, and the amortization of costs not likely to recur.
DTC typically occurs in industries where products and their features are relatively static, and competitive advantages occur more through pricing models. The biggest impediments to cost reduction are through cost drivers, the pressures of which DTC seeks to lessen.
DTC utilizes known inputs—such as energy and labor costs, raw material costs, and necessary square footage—to determine cost models. Then, the method employs short-term (supply chain) fixes alongside the consideration of longer-term strategies.
Ideally, DTC is used systematically throughout a product’s life cycle, but more critically at the initial design stage.
Applying Your Principles: DTV, DTC, or Both
Regardless of the method you choose to employ support cost management, you must ensure that cost models are updated throughout each iteration of the product life cycle. Your company must rigorously apply product cost management in a cross-functional manner that balances both formal elements and company culture.
Strive to develop processes that integrates design, engineering, and manufacturing. Consider production costs during the outline phases and design for manufacturability. Implement processes and safeguards to avoid “creeping elegance,” the phenomenon wherein designers add advanced features that are costly and nonessential.
The DTV and DTC are often treated as two discrete methods without overlap, yet they can work in conjunction within the same company. This is possible especially if applied repeatedly at each design iteration.
Cost Management Tasks & ToolsWith a DTV or DTC strategy in place, or a combination of the two, you’ll need to identify specific tasks for your team to manage costs. Depending on your industry and regulatory environment, cost reduction viability will vary.
Repeatable tasks have performed well for many cost-conscious manufacturers—such as batch analyzing prices of commodities to find outliers, evaluating multiple designs and alternatives to a change order, and evaluating multiple cost-reduction ideas on current products.
DTV methods are known for using two specific cost management tasks:
- Teardowns: Engineers will disassemble competitors’ products to identify differences and areas for cost reduction.
- Clean-sheet modeling: Objectively determines how much each product should cost and develops strategies around expense reduction through product redesign or negotiation with suppliers.
The tools you use are just as important as the strategy you design. In the 2016 Global Manufacturing Competitiveness Index, CEOs surveyed reported that advanced manufacturing technologies will be key to increasing competitiveness in the industry.
Examples of effective tools include BOM cost-tracking systems, data analytics systems, KPI reporting systems for tracking, and generalized product cost estimation systems. The goal of these systems, as they relate to managers, are to create more windows for cost reduction rather than waiting for experts to weigh in, which might only occur once or twice during a product cycle.
Ongoing Cost Reduction is Key to Sustainable Production
Strategic cost reduction takes place during the entirety of a product’s life cycle, and continues until that product is obsolete. Remember, you should develop and implement tools that can be utilized by anyone (not just cost reduction experts), at any point along the design, engineering, and manufacturing workflow. By assessing costs at any stage along that timeline, multiple team members can act to reduce such costs where appropriate.
Aaron Continelli, president of Cre8tive Technology and Design, started things small in 2005. What began as a one-person consulting firm has now become a staff of 58 with three office locations. Specializing in ERP system sales and services, Cre8tive Technology and Design became an EPICOR Partner (Value Added Reseller) in 2007. Since then, Cre8tive Technology and Design has emerged as one of EPICOR’s ELITE and won the 2013 and 2015 Americas Partner of the Year as the Top Revenue Producer.