4 Proven Ways to Shift from Cost Reduction to Value Creation in Manufacturing

Key Takeaways:

• Manufacturers addressing cost holistically are well-positioned to uncover value across departments – using cost management to foster long-term value and continuous improvement
• Additionally, companies that use cross-functional teams in early-stage product development can launch products faster with higher margins

The Full Article:

Can paying 4% more to manufacture a product actually increase your company’s overall bottom line? Surprisingly, the answer might be “yes,” depending on the circumstances. For example, producing a part in-house instead of using a discounted supplier would generate revenue for another business unit. And selecting a manufacturing region with a high overhead could be a prudent way to avoid hefty tariffs and minimize risk.

Business leaders who take a holistic approach to value creation across the entire organization are well-positioned to achieve lasting savings and growth. By contrast, cost-cutting mandates at the department level (e.g., 8% cuts across each department) don’t typically capture systemic inefficiencies across departments or processes. This department-level approach could partially explain why cost savings often erode and can negatively impact growth, according to a BCG survey of C-level executives.

Figure 1. Misaligned cost management initiatives can have limited results and a negative impact (courtesy of BCG).

Without clear goals, there’s no overarching directive to drive the meaningful change required to transform operational cost models. To address this challenge, manufacturers are embedding a corporate “cost culture” using the following techniques:

1. Adopt a “Shift Left” Mindset for Cost Reduction
2. Empower Product Designers to Optimize for Profitability
3. Establish a Holistic View of Manufacturing Costs
4. Include Risk and Sustainability in Your Methodology

1) Adopt a “Shift Left” Mindset for Cost Reduction

Because up to 80% of product cost is set during the design phase, more manufacturers are addressing cost, manufacturability (DFM), sustainability, and risk earlier in the product development process. By “shifting left” and identifying potential issues earlier, manufacturers can mitigate costly and expensive late-stage redesigns

In addition to design and cost engineers, manufacturers are giving procurement, sustainability, and manufacturing operations teams a seat at the table to address potential issues early in the design phase. Using collaboration such as aP Workspace, cross-functional teams can use automated insights to identify problems in real time and streamline their workflows. This could include exponential increases in specific material costs, skyrocketing overhead costs in select countries, or the requirement to source high-quality components.

Figure 2. Manufacturers often miss cost and launch targets due to late-stage problems.

Figure 2 illustrates how and where new product development (NPD) projects typically miss their cost and launch targets. The gray cost curve fluctuates significantly and often increases when procurement, then manufacturing engineering becomes engaged in the project.

For example, a procurement team may report that raw material costs for this product line have increased significantly since the last design update. Additionally, a DFM problem identified in the proof of concept (POC)/prototyping phase may require design changes that increase costs.

Issues uncovered during pilot production (production trial run) can also require time-consuming changes – including inconsistent production quality, assembly challenges due to tight tolerances (tolerance stack up), and more. Time and cost challenges impact manufacturers across industry segments. Consulting firm BCG reports that U.S. automakers lose approximately $6,000 on each electric vehicle (EV) sold above $50,000.

Adopt a Clean-sheet Mindset for Design and Cost Optimization

Using the “shift left” concept, cross-functional teams gain early-stage visibility into the product development life cycle to address potential problems quickly. This shift-left approach also encourages cross-functional teams to adopt a new way of thinking to achieve transformational savings instead of incremental reductions.

Rather than using similar existing products as a baseline for new initiatives, teams look at designs and associated costs from a fresh perspective. Using this model, teams have the opportunity to reimagine their organizations from scratch using a clean-sheet design methodology.

From a strictly cost perspective, this model is known as a bottom-up approach or zero-based budgeting. It focuses on company-wide opportunities to increase efficiency, expand capabilities, and contain costs. Executives can apply this methodology to justify every cost at the beginning of each budget cycle to encourage a thorough review of all expenses.

Impact Example:  Supply chain disruptions (bottlenecks) and inflation caused an electronics manufacturer to involve its cross-functional product development team earlier in the design process. The sourcing team identified components in an early design that were becoming scarce. The product design team revised the 3D CAD model to include readily available components that only had a marginal impact on cost and size. By addressing the bill of materials (BOM) early in the design cycle, the company released the product on time – while avoiding costly late-stage design changes and quality control problems.

2) Empower Product Designers to Optimize for Profitability

“The design engineer has the biggest impact on everything that happens downstream,” said David Van Och, a Senior Solution Consultant at PTC. During his interview for aPriori’s podcast he also noted: “When design engineers are using 3D CAD tools, they have the biggest influence on cost as well as manufacturability, how to assemble it, how to test it, and even sustainability. There’s a whole range of DFM capabilities that design engineers need to consider.”*

A big driver of the “shift left” product development method is for product designers to tackle cost. The ratio of product designers to cost engineers can be 25:1 (or more). One way to support this effort is to provide product designers with automated cost and DFM guidance to eliminate relatively low-level cost. In this scenario, cost engineers will have a smaller volume of issues to address, enabling them to focus on critical product cost challenges and broader strategic initiatives.

Product manufacturing simulation software provides designers of all skill levels with insight into the cost, DFM, and sustainability of a specific design and manufacturing option. Product designers can simulate multiple scenarios, and then evaluate the trade-offs to determine the most effective path forward.

To conduct a comprehensive cost analysis, design engineers can use manufacturing simulation solutions from aPriori to evaluate an extensive range of potential cost drivers accurately. Design engineers can use these insights to understand how one design change, for example, can impact manufacturing, sustainability, and other considerations. This includes:

• Design specifications: A product design team may modify an older, existing part to meet specifications for a new product (e.g., adapt the housing of a current HVAC system to accelerate the design of a new version). However, the older product may have been overengineered or designed for a specific manufacturing process that won’t be used to produce the new product. So, there could be an opportunity to adjust tolerances or other “legacy” product parameters for the new design without impacting product quality.
• Material selection: Procurement decisions regarding raw material and component selection can affect product weight, performance, and manufacturing requirements.
• Manufacturability: Requirements for a secondary manufacturing process (such as turning or milling), manual assembly, cooling times, facility availability, and equipment costs can have a significant impact on cost and time to market.
• Carbon footprint: Manufacturers are increasingly including carbon “costs” in new product designs to help evaluate cost and CO₂e trade-offs effectively. This can be especially important for companies working to achieve their net-zero goals.

Managing this level of complexity requires an organizational commitment to integrating cost management into the product engineering culture and investing in solutions for manufacturing cost estimation.

Impact Example:  A power tools brand for automotive and industrial markets was redesigning its flagship product line to counter increasing competition and address component obsolescence. By analyzing field performance data from the Internet of Things (IoT)-enabled products, the development team saw that users didn’t come close to reaching the product’s peak torque.

Using this information, the redesign significantly reduced overall cost and part count. In addition to reducing product weight, the product’s motion control enhancements also reduced vibration to improve ease of use. Today, the company is enjoying higher sales and larger profit margins thanks to lower product costs.

3) Establish a Holistic View of Manufacturing Costs

Bain estimates that at least 60% of a cost-cutting program’s value involves operational changes and coordination among departments and with partners (i.e., preferred suppliers). Companies that connect design engineering and sourcing tend to have a greater advantage than their peers because they have the insights to address shifts in cost and risk quickly.

Executives can use manufacturing simulation insights to evaluate and compare complex scenarios to:

• Determine build vs. buy (outsourcing) options
• Compare product design options across cost vs. carbon vs. DFM trade-offs
• Assess alternative materials or bill of materials (BOMs)
• Evaluate manufacturing/production processes
• Compare manufacturing costs across regions**

**Include direct and indirect costs such as operating costs, direct labor costs, and energy costs.

Impact Example:  When the industrial products division of a global manufacturer was quoting production costs, it identified a supplier that was 4% cheaper than the company’s in-house production capabilities. From the division’s perspective, the 4% cost savings is significant but did not address broader company-wide considerations such as:

• The opportunity cost of the in-house manufacturing facility struggling with downtime/excess capacity instead of adding revenue by producing products for the industrial division
• Cost savings from shipping and logistics that would have been realized using the company’s in-house factory
• Lower risk using the company’s in-house factory (shorter transportation distance, less geopolitical risk)
• Reduced carbon impact (the in-house factory uses a higher mix of renewable energy and consumes less energy due to faster, more efficient manufacturing processes)

Leaders from the industrial products division collaborated with other departments to capitalize on the “shared value” of producing the product via the in-house factory.

4) Include Risk and Sustainability in Your Methodology

What’s the cost of product delays to your organization – including a reduction in cash flow? While there is no standard guide, Accenture reports that supply chain disruptions affected revenue growth between 7%-11%. The report also notes that manufacturers may be willing to pay a 3-5% premium for significantly higher supply chain reliability and resilience. Depending on the size of the sales opportunity and other factors, speed to market can more than offset added supply chain costs.

Trade tariffs, “carbon taxes,” transportation costs, and other variables can impact a product’s total unit cost (TUC). For example, the European Union’s “carbon tax” – the Carbon Border Adjustment Mechanism (CBAM) – could increase the material costs of imports from carbon-intensive countries by 15%-30%. (Learn more about the CBAM’s impact on manufacturers.)

Additionally, a company’s sustainability achievements and progress toward reaching its net-zero goals are increasingly important to customers across industries and geographies. To set a financial value of CO₂e during product design, manufacturers are using Internal Carbon Pricing (ICP) to quantify the value of carbon reduction.

By setting a cost per ton of carbon, manufacturers have an “apples-to-apples” comparison to help make effective business and investment decisions, incentivize departments and suppliers effectively, and support low-carbon innovation. Solutions like aPriori can use a manufacturer’s ICP to report on production and carbon “costs” and review how changes to design scenarios can impact cost and carbon.

Use Cost Transformation for Long-term Value Creation

Cost reduction is the number-one priority this year, according to a BCG global survey of C-level executives. To achieve this goal, a holistic, company-wide approach to cost transformation provides the foundation to establish long-term value creation.

By moving beyond departmental silos and embracing a “shift left” mindset, companies can address cost and manufacturability issues early in the product development process, thereby avoiding costly late-stage redesigns and improving overall efficiency. Often overlooked in this process is the opportunity for design engineers to apply automated insights to address cost, carbon footprint, and performance as part of the design optimization process.

Establishing shared incentives across business units is critical to executing effective cost-reduction strategies. Shifting from cost to value also requires manufacturing executives to assign a dollar value to critical business issues such as risk and sustainability – and consider/assess all potential cost variables during product development.

By integrating these strategies, manufacturing companies not only reduce costs but also drive growth and innovation, ultimately leading to a stronger market position and increased profitability.

*The interview was edited for brevity.