New section below on problems with "tools" that analyze products after design
Cost Reduction Strategy (home page) Seminars Consulting Articles Books Site Map
First, let’s look at cost reduction as Dysfunctional Engineering Incorporated:
So let’s look at what is wrong with this very common picture. The first shortcoming of this approach is leaving cost reduction until after the product is designed and already in production. In their haste to rush early production units to market, many companies defer cost concerns until later with “cost reduction” efforts. The first problem with this strategy is that it probably will not happen because of competing priorities, and thus, costs remain high for the life of the product. The second problem is that cost reduction simply cannot be very effective at all!
Cost-Cutting Doesn’t Work
Mercer Management Consulting analyzed 800 companies from 1987 to 1992. They identified 120 of these companies as “cost cutters.” Of those cost-cutting companies, “68% did not go on to achieve profitable revenue during the next five years.”1
There are also intangible impacts of an excessive focus on cost reduction: it absorbs effort and talent that could be applied to more productive activities, like developing better new products and improving operations. One division of a large international company did not have time for the author’s training on low-cost product development because they were too busy with 31 cost reduction efforts!
DON'T RELY ONLY ON "PROJECT MANAGEMENT" OR NPD "PROCESSES"
Many packaged (and expensive) product development "processes," even prominent ones, don’t even have a Product Design phase and skip from "concept testing" to "prototype testing." Check yours to see.
Here are the many problems caused by counter-productive processes:
DON’T COUNT ON PRODUCT DEVELOPMENT “TOOLS”
Although part design tools for specific processes and “design rule checking” may be useful if done in the original design process, the worst tools analyze products or parts after they are designed to look for “opportunities” to lower cos t by change order, usually in assembly. Here are several reasons why this is a bad strategy and may even be counterproductive:
• Once anything is designed, a lot is cast in concrete and boxed into many corners so it will be very hard to change. See article :7 Reasons Why “Cost Reduction” after Design Doesn’t Work" at http://www.design4manufacturability.com/cost_reduction.htm
• Further, just trying will waste valuable resources, that should have been applied designing better product in the first place. Ironically, any opportunities spotted by the tools, could have been avoided by better concurrent engineering in the first place if they practice thorough up-front work as described in: http://www.design4manufacturability.com/half-the-time.htm .
• A common tools is aimed at improving “design for assembly,” which is a small element of total cost. For instance, say labor cost is four percent of selling price. Even if such tools can really reduce assembly cost by 25%, that would only lower selling price by one percent! Compare that to the techniques on this site, which is called HalfCostProducts.com.
But such “gains” may not include all the total costs, which include all the costs of the change orders, including fixing quality problems that are likely in any change (see next subject)
• But despite all this, tools have an superficial appeal because:
• They are a Shrink-Wrapped solution that looks like it doesn’t require any real improvement to the product development process, like Concurrent Engineering.
• Some tools may rate or score product designs or cost-reduction change orders, and may give the impression that every project is “getting better,” which might look good in performance reviews and give the impression that ‘we are doing something.” However, savvy engineers can put scoring criteria on spread sheets and “game the system” possibly with counterproductive results, like:
• Design scores may encourage excessive part combinations, which may result from the normally noble goal of :reducing parts." However, this encourages hard-to-build monolithic parts like complex castings or molded parts. When this was in vogue decades ago, one company got an award for combining 30 functions into one piece of plastic. However there were only two vendors in the world who could such a complex part, and their parts were not interchangeable!
• The most costly result of the “combine parts’ mantra is large weldments, which
• have high skill demands which cause quality problems and can limit growth
• warp so much that mounting holes have to be machined after welding on large, expensive “gantry” mills. One semiconductor equipment company has a 11 foot cube frame that has to do this twice!
• Despite their good “score” (as one part), all of these large parts are so hard to build and so expensive, that Dr. Anderson offers a CostSteel Reduction Workshop to convert hard-to-build large parts to assemblies of CNC machined parts that can be assembled precisely and rigidly using various DFM techniques. See more at: http://www.design4manufacturability.com/steel-reduction-workshop.htm , whose first example is a machine frame replacement, that could be a backward-compatible "drop in" replacement for current products for a significant new-term return.
Beware of “training” that pitches tools to purchase,
which should be viewed as a
conflict of interest. Savvy companies make (or
should make) training suppliers swear (as the author has) that they
will not pitch tools for sale in a real training class or present, as
training, techniques that need their tools to implement. If engineers are
lured into a “class” expecting to learn, and then find out they need to buy a
tool to apply their “learning,” they will be not only be disappointed and will
then not come to any real training under that label. To avoid such
disappointments, any “classes” that teach anything that must use their purchased
tools should be clearly labeled as a tool demonstration or “tool
• The saddest consequences is all the “change energy” goes into these limited tools instead of much more effective methodologies like Design for Manufacturability and concurrent engineering.
Don’t forget: Analytic tools will not help the current projects,
but they will soak up resources to analyze previous products
Why Cost Is
Hard to Remove After Design
Cost is very difficult to remove after the product is designed. As shown in the illustration showing when cost is committed in the DFM article, 80% of the cost is designed into the product and is very difficult to remove later. Attempting cost reduction by changing the design encounters the following very common obstacles:
• There is always the common possibility that one change may force other changes.
• Trying to significantly lower cost after production release is usually futile because of many early “cast-in-concrete” decisions, which limit opportunities.
• Finally, the total cost of doing the change may not be paid back by the cost savings within the expected life of the product. Few companies really keep track of the total costs of changing designs.
Cost Reduction Problems of Focusing Only on Parts and Labor
All “cost” initiates should be suspect unless they are based on total cost. Only measuring parts and labor puts the whole cost focus there instead of the total cost which includes many more costs normally lumped together in “overhead.” And contrary to popular myth, overhead is not fixed. If companies implement, and design products for, lean production, floor space needs – normally a “fixed” cost – can be drastically reduced.
Counterproductive effects. Focusing only on parts labor can lead to seriously counterproductive effects. Truly low-cost products do not come from cheap parts, which are often chosen because they appear to lower the reported material costs. And to make matters worse, the internet now offers on-line part “auctions” that effectively steer manufacturers to the lowest bidder. However, cheap parts will usually explode other costs: for quality, service, operations, and other overhead costs.
Low-cost products do not result from “saving” cost by cutting product development and continuous improvement efforts. This may not be a stated policy per se but product development budgets can be impacted by corporate directives like, “all departments will reduce their budgets by 15%.”
Low Labor Rate May Not Lower Labor Cost. Moving production to “low labor rate” countries is another cost reduction fallacy (see Outsourcing article). Lower labor efficiency alone might cancel out anticipated labor rate savings, for instance if labor cost is one third but labor productivity is also one third. And cheap labor rarely stays that way.
Many Designs Are Needlessly Labor-Intensive. Many decisions to move to production to low-labor-rate are based on labor-intensive designs. However, DFM can reduce labor content to the point where moving to low-labor-rate areas can no longer be justified.
Distance Compromises Concurrent Engineering. Greater distance between headquarters and engineers compromises control and concurrent engineering. The effect of separating engineering from manufacturing is discussed in the section, Outsourcing and Product Development, in this site’s article on Outsourcing.
Cheap Parts and Cheap Labor Compromises Quality. Quality may suffer if the cheapest labor plant has not established an effective quality culture. Quality may also suffer if recurring defects are produced overseas and not detected until hundreds of defective products are discovered at the end of the long transoceanic “pipeline.” Overseas production also slows delivery, thus making it hard to implement lean production, build-to-order, and mass customization.
Cutting Corners is No Way to Cut Cost
Similarly, “cutting corners” in any manner will probably end up costing much more later, for instance for quality costs. Omitting features and cheapening the products is an unwise strategy to reduce cost. Sure, the stripped-down product may cost less, but it could ruin a company’s reputation, especially if the brand has a reputation for quality and full-featured products. One highly-respected company decided to offer a stripped-down big-dollar product through Home Depot, but when a magazine compared a single product of eight competitors, it rated this product second to last because of “outmoded features,” which conveyed a poor image for the brand, although, ironically, that brand offers many better products.
There are two ways to determine the selling price. The usual way is to add the desired profit to the cost which gives the selling price. The other way is to first determine the ideal selling price and subtract the desired profit which they yields the "target cost." This appears to be a logical way to sell products at the right price. However, consider the consequences if the engineers do not know how to design low-cost products, or worse, try to take cost out of products after they are designed (see above reasons why this doesn't work).
In the first scenario, a higher cost will result in a higher price, so the product may not sell as well as it should - not good, but not a disaster.
In the Target Costing scenario, if engineers have a fixed cost target but they don't know how to achieve it, then they will cut corners, look for cheaper parts and low-bid vendors, or move production offshore to low-labor-rate locations, none of which will really lower the total cost. And these can severely compromise quality, delay delivery, and, ironically, raise prices or lower profits because these problems raise the total cost - and this can be a disaster that can threaten the reputation of the brand and the company. For example, Mercedes had a good reputation for reliability. After Mercedes embarked on Target Costing, its J.D. Powers long-term reliability ranking slipped from # 1to # 27! Consumer Reports now ranks Mercedes near the bottom of is reliability lists; See http://www.consumerreports.org/cro/cars/types/reliability-comparison-index.htm. This happened because its engineers didn't know how to achieve real cost reductions and did "whatever it took" to reach the cost targets (as mentioned above).
Another problem with most Target Costing programs is incomplete definitions of "cost," usually parts and labor, or in some cases, just parts (one large multi-national company forces its divisions conduct Target Costing workshops, where they march down each line on the Bill-of-Materials for four days, recording the sum of their cost reduction estimates for each part). However, in order to have a meaningful "target," the "cost" must be based on total cost. If quality costs are not quantified, then people may be tempted to specify cheap parts or low-bid vendors, which will probably raise the total cost more than the expected "savings."
If companies really know how to develop low cost products by design, then, and only then, can they effectively use target costing, but only if (1) "cost" include all the costs and (2) the focus must be on all the cost reduction strategies presented on this site's home page, not just on the targets, which, unfortunately, is the focus in most Target Costing programs.
"Design to cost" is the government contractor version of Target Costing , which establishes many cost goals. However, these cost goals can only be achieved if development teams really know how to design low cost products as shown on this site and in the article: http://www.design4manufacturability.com/designing_low_cost_products.htm
To discuss How to and How Not to Lower Cost, send phone or email:
Correcting counterproductive policies may be a prerequisite to designing Half-Cost Products.
Copyright © 2017 by Dr. David M. Anderson, P.E., fASME, CMC
1. Robert G. Atkins and Adrian J. Slywotzky, “You Can Profit From a Recession,” Wall Street Journal, February 5, 2001, p. A22.
For more information call or e-mail:
Dr. David M. Anderson, P.E., CMC
Cost Reduction Strategy (home page) Seminars Consulting Credentials Client List Articles Books Site Map