The Nuts and Bolts of a Manufacturing Cost Reduction Strategy
Traditionally, manufacturing cost reduction strategies have been performed by cost engineering experts, or by Value Analysis/Value Engineering (VAVE) team members who specialize in cost reduction and support core business functions. These resources typically have strong manufacturing backgrounds. Their expertise is unique and their domain knowledge builds over time, but it is extremely difficult to duplicate and scale across all products developed by a large organization.
Many people and departments within an organization impact product cost including:
Engineering – decides on a specific design, but there are multiple design alternatives that meet the same form, fit, and functional requirements. Each alternative dictates a different cost.
Sourcing – pays to produce a specific design, but there are multiple potential costs for manufacturing the design. Manufacturing costs are often negotiable and depend on plant cost structure, capabilities, and process control.
Manufacturing – selects one way to produce a specific design and estimates a ballpark cost, but there may be multiple ways to manufacture the same design that are potentially more cost effective.
An effective cost reduction strategy requires a set of systematic activities, processes, and tools for use throughout the enterprise, which enables manufacturing organizations to attack cost at the point of origin and yield the greatest impact.
In this article, we take a deep dive into why you should implement a manufacturing cost reduction strategy into your organization and provide instructions on how to do it.
Cost Reduction Across the Enterprise
Organizations that are leading the way in manufacturing cost reduction have made the process a normal course of responsibility and decision making across their enterprise. Cost management is performed at multiple milestones by R&D and Engineering during both New Product Introductions and current product re-design cycles including early concept evaluation and detailed design – where 70% of costs are determined.
In later phases of the product development lifecycle, Engineering, Sourcing, and Manufacturing perform their own cost management activities beginning with their initial cost estimates and refining it based on knowledge of strategic suppliers or the status of internal manufacturing facilities. These refined cost estimates serve to benchmark and control actual costs during manufacturing planning and quote validation. In all cases, cost information is dynamic and easily shared in a usable format with everyone that impacts product cost.
It’s not uncommon for engineering teams to worry about product cost reduction activities slowing them down. Implemented properly, most cost management activities fit naturally into existing engineering and sourcing activities/processes and can drive time efficiencies for these teams.
The proper tools also complement the tools being used in most engineering and sourcing groups today. These teams often see time efficiency gains because they don’t wait as long for cost estimates to come from suppliers or from over-burdened cost engineers. Sourcing teams also become much more efficient because of their ability to negotiate more effectively through fact-based discussions with suppliers.
Implementing Product Cost Management in Your Organization
Cost management can have a significant and immediate impact across your organization – increasing profitability, accelerating time-to-market and growing revenues. As such, it’s appropriate to think big and aggressively about how to use it with a vision for what is best for your organization. But it’s also best to start small and build your success from there. Taking the right implementation approach is the key to effectively starting and building the foundation to expand your cost management initiative.
Assemble a Core Implementation Team
You can’t drive an effective cost management initiative alone. It’s also difficult to implement from the bottom up, no matter how well-intentioned an individual contributor may be. Assembling the proper team and building support for cost management within the organization are essential. Having these roles in place will ensure the program is properly supported. Key roles in deploying a product cost management program include:
Executive Sponsor – Someone committed to implementing a cost management program and that recognizes the organizational factors to be considered to make your project goals a reality. He or she can assist by:
- Assessing his or her organization’s own cost culture and how it naturally fits into their development environment
- Fostering awareness of the problems cost management can solve
- Mandating the change and communicating the high priority of the product cost management initiative so that teams appreciate the urgency to support and adopt the new system
- Identifying champions in key business functions to spearhead focused initiatives in their own functional areas
- Committing support to sustain implementation resources and activities
- Funding the initiative properly so it has a strong opportunity to succeed
Champion – Champions work with the Cost Management Manager to adjust/refine the cost management processes and activities so they work within their teams. They are also responsible for evangelizing and enforcing the use of cost management in their groups. These individuals are often incented on cost reduction or profitability goals tied to the cost management initiative, and in turn, will incent their teams.
- NPI Engineering
- Current Product Engineering / VAVE
- Manufacturing Engineering
- Cost Engineers to support Sourcing
Cost Management Manager – As the momentum from early pilot projects builds, assigning a dedicated program leader that has a clear understanding of cost management activities and how they apply to the organization overall will be critical. This individual also works closely with the Executive Sponsor and Champions to rollout cost management tools and activities to the business teams and is ultimately responsible for guiding the teams in initial project selection and process implementation. The Cost Management Manager should be supported by a technical team on the implementation of a cost management system. And, as above, they are often incented on cost reduction or profitability goals tied to the cost management initiative. Finally, the Cost Management Manager is responsible for documenting results of the deployment, and publicizing successes and lessons learned so awareness grows across the company, and the culture evolves to a higher level of cost management skill.
Cost Reduction Processes
For a successful cost management implementation, it is important to identify at which points costs can be effectively impacted. This might involve:
- Assessing current cost management process and key cost control points (if they exist)
- Mapping out your current product development process
- Identifying new cost control points to introduce into the development process and establishing the cost estimate characteristics required to support each cost control point.
Cost control points are measurable, managed checkpoints that dictate where and when people should perform the core cost reduction activities. The output and results of these activities continue to build on each other throughout the product development lifecycle.
For example, during the introduction of a new product, there are typically design review meetings at regular intervals to ensure that the new product is meeting form, fit, and functional requirements. This is a perfect opportunity to have a discussion about the financial implications of different design alternatives that are being evaluated. An effective product cost management system would include mandatory cost evaluation as part of each design review milestone.
Identify Cost Reduction Opportunities
Identifying cost is a complex analytical problem: virtually every aspect of a product’s cost structure is closely related to key characteristics like form, fit, and function—in addition to process requirements for manufacturing, sourcing, and distribution.
The following are a handful of activities that can greatly impact product cost:
- Study the cost tradeoffs of different concept designs in the R&D stage
- Evaluate multiple design alternatives for lowest cost during NPI
- Evaluate the cost of proposed solutions to an engineering change order
- Evaluate multiple manufacturing and tooling alternatives for lowest cost, including make vs. buy analysis
- Generate a detailed “should cost” to validate supplier quotes and ensure lowest pricing
- Batch analyzing current prices of entire commodity groups to find over-cost outliers
- Evaluate multiple cost down ideas on current products in real-time to identify the highest potential reduction in the shortest amount of time
Key Factors to Consider in Cost Reduction Tools
The process of getting started with cost control points is made infinitely easier if the right cost reduction tool is selected to support the process of generating accurate cost assessments. A tool that is quick and easy to use by everyone minimizes the possibility that team members can complain that generating a cost assessment is slowing them down from their primary responsibilities.
Features of these tools might include:
- Product cost estimation systems that can quickly and consistently generate and manage accurate cost estimates without requiring specialized manufacturing or cost knowledge
- Reporting systems for documenting and tracking cost management results and KPI’s over time
- Analytics systems to search large volumes of data and identify cost outliers and trends
- BOM cost tracking systems to roll-up costs at any point in a product’s life cycle
Without defining the core activities, processes, and tools, manufacturing cost reduction remains a highly manual and decentralized function – of value only to manufacturing or cost engineering experts. It can only be performed one or two times per NPI cycle, severely limiting the windows of opportunity to identify and operationalize product cost savings. It also leads to inconsistent estimation methods with static information that is difficult to update, manage and share.
To truly impact product costs so it drives down the Cost of Goods Sold (COGS) by entire percentage points, manufacturers must look to deploy product cost management further upstream in the development process and across all departments and levels – not just inside manufacturing or cost engineering.
Getting Your Implementation Started
Once you’ve determined which manufacturing cost reduction software tool you will use to complement your strategy, focus on one core activity and business group. Assemble a small core implementation team, select a specific time-bound project (4-6 weeks), and build early successes. This is the best way to show value (i.e. dollars or time saved) and make incremental adjustments, which will ease the rollout of the program to other groups.
You may choose to initially focus on either:
- One product with multiple functional groups performing cost management activities over the product’s lifecycle
- One functional group performing their function’s cost management activities over a number of products
Initial Implementation Recommendations
1. Define clearly measurable goals for implementing cost management; e.g.; reduce cost of the chassis assembly by 2%, increase speed of generating a detailed cost estimate from by 3 days to 3 hours, etc.
2. Identify the core cost management activities that will support your goals:
Identify initial projects, people, and timeframe. Specific selection criteria depend on your organization’s short-term goals and cost management solution.
Executive Sponsor and Champions identify projects/groups that could generate results quickly. The Cost Management Manager will facilitate the selection.
Implementation team reaches out to the key manager(s) in the group(s) to get buy-in.
Timeframe for an initial evaluation will be dependent on the scope of the project selected, but can usually be completed in 1-2 weeks if you are well organized. Longer term pilots typically produce “drift” where participants lose interest and return to their primary responsibilities.
3. Identify relevant process changes for the initial groups:
- Cost Management Manager outlines initial plan that defines the cost management activities and cost control points.
- Cost Management Manager works with the Executive Sponsor and/or Champions to reinforce process adherence and refine the process details.
- The implementation team discusses the plan with the business group selected, including an open discussion of concerns or competing priorities; e.g., allocating time to explore design alternatives for cost reduction
- Establish the type and characteristics of the cost estimates required to support the projects and work with the cost management solution provider on how to configure the system to achieve these estimates.
- Train the business group on the cost management processes and tools implemented to support the process
- Complete the project, with weekly check-ins with the business group.
- Review and publish results with the implementation team and discuss process refinements.
Once the starter projects are complete, select another set of projects and manage them in a similar fashion to the first. It is important to manage these first initial projects carefully in order to build momentum for continued expansion of your product cost management initiative.
Critical Success Factors for an Effective Manufacturing Cost Reduction Strategy
The following are critical to the success of your initiative:
- Find a dedicated Executive Sponsor who can mandate change and build urgency around cost reduction needs within your organization and consistently reinforce the importance of staying the course with the program over time. He/she should also be looking at the high-level results on a regular basis.
- Don’t take on the most complicated project on Day 1. Start with something manageable where your likelihood of success is high, then move on to more complex projects.
- Define and insist on a formal system for capturing project metrics. Publish these results far and wide across the enterprise.
- Partner with an experienced technology solution provider that can provide you with practical advice based on a well-established track record of producing positive results for its customers.
Results Tracking and Monitoring Mechanisms
Measure. Report. Repeat. Here are some tips:
- Identify metrics to collect at the key cost control points; e.g., percentage of parts in a BOM with cost estimates, the number of design alternatives explored, savings identified, etc.
- Create a process for measuring and recording results; e.g., at first functional design milestone, first prototype milestone, and final design milestone submitting costs to ERP or PLM system
- Create a process for monitoring and reviewing results; e.g., every design review includes presentation of anticipated product costs and data
- Create an incentive system for managers to reinforce these behaviors and activities; e.g., emphasizing that product cost is a priority equal to product launch schedule, quality and functionality.
The key to a robust manufacturing cost reduction approach is recognizing and evaluating the complex relationships between all these cost drivers. A culture shift toward a cost-conscious product engineering culture and a willingness to re-think a product from the ground-up is an essential element for generating the most impactful strategy.
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