How to compete on price without sacrificing
raise profits without having to raise prices
THE ASSURED WAY: Do everything on this site to lower all
costs, which includes developing low-cost products, concurrent engineering
of flexible processes, build-to-order of product families and flexible
processes, and shortening order fulfillment times while reducing inventory
costs. If this is not forthcoming, read on:
THE ASSURED WAY FOR NEAR-TERM GAIN: The
fastest way to lower significant cost without a complete redesign would be to selectively
redesign modules or subassemblies that can be backward-compatible
“drop-in” replacements on current products that then become the
foundation for subsequent products. Two examples of this approach are presented
in the cost reduction article which are usually
ripe for this strategy: electronics and frames and structures (next):
There is usually a lot of money that could be saved quickly
by replacing hard-to-build frames with assemblies of CNC-machined parts that
are assembled rigidly and precisely by various DFM techniques. Weldments
offer a large opportunity to save cost, reduce skill demands, improve
quality, remove bottlenecks, and avoid outsourcing. This process is
described in detail on the Cost
and Steel Reduction Workshop page, which shows many generic machine
frame examples The client page on this
site indicates clients who have had this workshop with blue hyperlinks
to the previous link.
If you have weldments in your
products, this can save a lot of money soon.
THE HARD WAY THAT MAY NOT WORK: This page shows the problems encountered by trying
common counter-productive cost reduction that worsens both price and
profits while draining resources just to try.
The foundation for lowering prices while improving profits is
quantifying all costs.
Not doing that leads to following consequences if “cost” is predominantly
part cost, which encourages cheap parts and
low-bid vendors, which raise overhead costs because:
- Cheap parts and low bid vendors
raise quality costs and delay the introduction.
Changing parts costs money to try and
introducers risks to the exponent of the number of changes.
- non-standard parts are hard to get, complicates supply chain,
delay order fulfillment, and raise
And all this raises the selling
prices of “cost reduced” products.
If overhead costs are not broken down, they will rain down on
all products and
thus raise the selling prices of your cash cows and
even well-products designed for low cost to pay for
counter-productive cost reduction attempts (above) and
continuing to sell hard-to-build
overhead costs raises prices of your best products
EASY WAYS TO START REDUCING PRICES ON GOOD PRODUCTS
Prioritization: A quick and easy way to lower overhead
costs without any change orders is to stop selling high-overhead products and
customizations so that their excess overhead costs will no
longer be taxing the well-designed products. Eliminating the "loser
tax" by eliminating hard-to-build products is the goal of
Product Line Rationalization.
That article shows how focusing on the 20% of your products that
generate 80% of sales (Pareto's Law) can
immediately triple profits! -- Just by dropping the worst
20% of your sales, which will be replaced when the rest of your products can
sell for less and when the resources that were wasted on fire-drill products
will be able to focus on designing low-cost products.
Case Study: An industrial products company had
30% price price disadvantage from "taking all orders."
Neither the engineers or managers could not figure out why a
competitor's product sold for thirty percent less until they realized
that the competitor built only its newest, best product whereas
this company was still “taking all orders” and selling all its legacy
Material Overhead: Another way to immediately
lower prices of your best products without change-orders
is to assign standard parts a lower material overhead, which reflects real
costs and also encouraged more standardization.
In all of Dr. Anderson’s classes, the Procurement manager surveyed said
that standard parts take an average of 1/10 of Procurement resources.
Therefore, the material overhead charge for standard parts should be 1/10 of
the hard-to-get products. Since well-designed products, by definition, use
more standard parts, their overhead costs will be reduced by this simple
computational change. See the third paragraph in Chapter 5
(Standardization) in the book, Design for
7 Reasons Why Cost Reduction After Design Doesn’t
Counter-productive policies that raise prices
and lower profits
How Vendor-Partnerships Can Save More
Money Than Low-Bidding
Order Fulfillment while
supply chains, and enables Platform
Prioritized Resources will focus on
the highest profit resources instead of “taking all orders” that raise overhead
costs and waste valuable resources
Easy ways to Impalement
Total Cost which as the opening paragraph above says is the foundation
for lowering prices while improving profits
Cost reduction on existing products, without the above risks,
are possible to greatly reduce cost, skill demands, and lead times:
backward-compatible drop-in replacement that offer short-term cost savings on
the current product and then become the foundation for subsequent products.
One example is Dr. Anderson's Steel and Cost workshop, for
frames and strictures for machinery and large vehicles is described at:
which shows many generic examples of low-cost machine frame replacements.
Copyright © 2018
by David M. Anderson