The Secrets of Meeting Cost Targets
In my last post, I discussed how important product cost management is and why it is difficult. Now I would like to discuss the best ways to overcome those challenges. We will next look at what companies can do to meet their product cost targets.
To identify the practices that work best, we first identified the top 20% most successful companies. The criteria used to define them as well as the performance achieved compared to competitors is as follows:
- 42% times more likely to meet product cost targets
- 45% times more likely to achieve launch dates
- 44% times more likely to bring in expected revenue targets
- 21% times more likely to attain their quality targets
- Realize a 13% increase in profit margins over the last 2 years
By looking at the practices Best-in-Class companies adopt, especially those things they are more likely to adopt than performing companies, we can identify the things that really help them achieve their success. Figure 1 shows top strategies adopted by the Best-in-Class to manage product cost. These strategies are key to helping them meet product cost targets.
As discussed in my last post, missing product cost targets was one of the top factors that had a negative impact on product success. We also saw that product cost is most impacted by the decisions made during development. With this in mind, Best-in-Class companies are 16% times more likely than their lesser performing competitors to incorporate cost assessment during design. With this strategy, engineering can make better decisions from the beginning to optimize profitability.
The Best-in-Class are also 37% times more likely to increase visibility to cost drivers even beyond engineering. This creates a culture of cost awareness that enables each role to consider cost implications when making decisions.
Figure 2 shows capabilities that help the Best-in-Class execute these strategies.
To support the strategy to increase visibility to cost drivers beyond engineering, the Best-in-Class are 43% times more likely to have a workflow that goes across departments to manage product cost. This workflow encourages collaboration and ensures that everyone across the company is taking advantage of cost information to make better decisions. Consequently, multiple sources of cost that impact decisions made in each role can be considered and everyone is aware of the target they need to work toward.
To support cost assessment as part of the development process, the Best-in-Class are 21% times more likely to define a target cost for each component. By breaking it down to the component level each engineer knows exactly what they need to work toward in terms of cost. This provides a much more tangible goal than if the target is only set for the entire product.
As the Best-in-Class work toward meeting cost targets, they also need ways to optimize cost to meet those targets (Figure 3).
First, the Best-in-Class have the ability to identify their cost drivers. By knowing what adds to the cost, they can make better decisions to minimize the impact of the cost drivers. This is further supported by assessing different design alternatives and analyzing tradeoffs to arrive at the most cost effective design, while still meeting quality targets and customer’s needs. The Best-in-Class also have access to the manufacturing cost of the design. Visibility to manufacturing cost means that as they look at different design alternatives, they can arrive at a design that not only meets requirements, but also is optimized for manufacturing costs. For example, sometimes something as simple as a hole location can avoid a tool changeover which would mean both time and cost savings.
By taking these steps, the Best-in-Class are better positioned to meet cost targets with the first version of their product, improving their overall profitability.