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How to compete on price without sacrificing profits, or
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 inventory costs.

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 products.

Thus, averaging 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.

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 products.

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 Manufacturability.


REFERENCE ARTICLES

7 Reasons Why Cost Reduction After Design Doesn’t Work

Counter-productive policies that raise prices and lower profits

How Vendor-Partnerships Can Save More Money Than Low-Bidding

Standardization improves Order Fulfillment while simplifying supply chains, and enables Platform Development

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: http://www.design4manufacturability.com/steel-reduction-workshop.htm,  which shows many generic examples of low-cost machine frame replacements.

Copyright © 2018 by David M. Anderson

Call Dr. Anderson at 1-805-924-0100 (Pacific Time Zone) to discuss implementing these techniques or e-mail him at anderson@build-to-order-consulting.com with your name, title, company, phone, types of products, and needs/opportunities.

             or fill out the form at the bottom of www.design4manufacturability.com/implementation.htm

Contact Dr. David M. Anderson, fASME, P.E., CMC
HalfCostProducts.com
www.design4manufacturability.com
phone: 1-805-924-0100
fax: 1-805-924-0200
e-mail: anderson@build-to-order-consulting.com