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7 REASONS WHY “COST REDUCTION” AFTER DESIGN DOESN’T WORK

 

Except for truly low-hanging-fruit, trying to “cost reduction” after the product is designed won’t work because:


1. Cost is designed into the product; 80% of cost is committed by design and by the time it gets to manufacturing, only 5% is left as shown in this graph, first published in Dr. David Anderson first DFM book in 1990:

2. Cost is hard to remove later because so much is cast in concrete and boxed into many corners by arbitrary decisions that are not undone easily.

3. The changes will cost money, which exponentially increases with development time, so it may not be paid back within the life of the product.

4. The changes will eat up calendar time, especially if requalifications are required, which may delay the real time-to-market.

5. The changes will consume valuable resources whose efforts could be reaping more rewards by developing low-cost products in the first place.

6. Changes induce more problems, thus needing yet more corrective changes, thus expending more hours, calendar time, and money to do the subsequent changes which may compromise functionality, quality, and reliability. The 2006 book, “The Toyota Product Development System,” shows Toyota’s preference for front-loading and the consequences of late changes:


“Because front-loading solves problems at a root cause level early in the process, it nearly eliminates the traditional product development problem of late design changes, which are expensive, suboptimal, and always degrade both product and process performance.”

7. Studies show that cost reduction doesn’t work. Mercer Management Consulting analyzed 800 companies over five years. 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.”

 

CONSEQUENCES OF TRYING “COST REDUCTION BY CHANGE ORDER”



• Committing valuable resources to do cost reduction after design takes them away from other more-effective efforts in product development, designing in quality,  designing for Lean production (see http://www.halfcostproducts.com/lean.htm ) and reducing inventory (see: http://www.build-to-order-consulting.com/inventory_reduction.htm ).

• If too many resources are committed to trying to reduce cost later, then:
 

a) There will not be enough available for real cost reduction through new product development. If this continues over time, the result will be little, if any, real reduction in cost, while such a drain of resources will impede new product development innovation.

b) It will prevent the transition from back-loaded efforts to the more-effective front-loaded methodology that uses complete multifunctional teams to design low-cost products right the first time. See primitive vs advanced time-lines at . http://www.design4manufacturability.com/half-the-time.htm

c) The company will be lured into thinking it is doing all it can to lower cost, when, in fact, costs are not really being reduced, on a total cost basis, and opportunities for real cost reduction are not being pursued.  See article "How Not to Lower Cost" at: http://www.halfcostproducts.com/how_not_to_lower_cost.htm
 

Finally, “cost reduction” failures, may discourage innovative ways to lower cost, maybe even thwarting promising future attempts.  Two break-through cost reduction tecniques, that could not be done by change order, are presented for electronics and large  structures at the article Designing Low-Cost Products.

 

HOW TO STOP THE “COST REDUCTION” RESOURCE DRAINS

 

• Shift “cost reduction goals” away from yearly “cost down” efforts on existing designs (which doesn’t work for the above reasons) to designing products with the least total cost.  See article on quantifying total cost with cost drivers at: http://www.halfcostproducts.com/total_cost.htm

• Stop trying desperate measures to reduce cost just after a development project misses its “cost targets,” which then reverts to cost reduction after design, by utilizing the following policy on a case-by-case basis that may only need to be done once to discourage this on subsequent projects. This could apply to a product just designed or a legacy product.  (see section below on Target Costing)


Paying the cost of “cost reduction”

Whoever initiates such a cost reduction effort after design should have to create a budget or fund to which all cost-reduction costs would be charged. This would also include the burdened monetary cost of all the resource-hours expended and all other costs. Granted, until a good total cost system is in place, a case would have to be computed manually (looking up and compiling, or estimating, all costs.  After this is done once, it could become the estimation basis for subsequent cost reduction considerations. Even compiling data and anecdotal conclusions may be enough to discourage future unsuccessful attempts.

If such data, or even estimates, of a case look like it will exceed projected “savings,” then attempting such changes should not be approved and valuable resources saved should be applied to designing low cost products, as recommended by most of the articles on this site.

Target Costing

The traditional way to determine a product’s price is to add the expected profit to the cost. Target costing starts with the price that the market will bear and then subtracts the profit to arrive at the “target” cost for design teams to meet. This appears to be a logical way to sell products at the right price.  In the Aerospace/Defense world, target cost goals are incorporated into Design-to-Cost efforts

However, the trouble with cost "targets" is that if people do not know how to design low-cost products, they may start doing the same things and "trying harder" only to find, too late, that costs are above the targets.

Then starts frantic "cost reduction" after design, which is so hard to do that it usually results in serious counterproductive affects. Usually this results in a focus on cheapening parts (especially if that is all that is measured), which will drive up quality costs, introduce new variables into the product development process (which increases product development costs and slows it down), raises other overhead costs, and possibly damage a company’s reputation.

Cost Targets should determine strategy

 

Cost goals should determine the approach,
not exert pressures to “do the same thing, but better.”
 


Key cost "goals" should be expressed as the percent improvement compared to previous or slimilar projects to determine the design approach.   For instance, a 5% goal might be achieved with better diligence. A 20% to 30% goal would need some serious application of all DFM principles presented in DFM seminars and books. Above 50% would need breakthrough concept innovation, since that is where 60% of cost is determined. In highly constrained and competitive markets, breakthroughs may be needed for a competitive advantage. Two examples of breakthroughs are presented at the article: Designing Low-Cost Products. 
http://www.design4manufacturability.com/half_cost_consulting.htm#design-studies

Conclusion
develop
Instead of attempting retroactive "cost reduction," proactively develop low cost products using Design for Manufacturability learned through DFM seminars or DFM books.  Ambitious cost goals can be achieved by Dr  Anderson's workshops  and design studies, described athttp://www.design4manufacturability.com/half_cost_consulting.htm#design-studies
 

These are the general principles. Pass around this article or URL to educate and stimulate interest

In customized seminars and webinars, these principles are presented in the context of your company amongst designers implementers, and managers, who can all discuss feasibility and, at least, explore possible implementation steps

In customized workshops, brainstorming sessions apply these methodologies to your most relevant products, operations, and supply chains.

Call or email about how these principles can apply to your company:

  Dr. David M. Anderson, P.E., CMC
fellow, American Society of Mechanical Engineers
www.design4manufacturability.com
phone: 1-805-924-0100
fax: 1-805-924-0200
e-mail:
anderson@build-to-order-consulting.com

copyright © 2016 by David M. Anderson

Book-length web-site on Half Cost Products: www.HalfCostProducts.com

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