How to compete on price
without sacrificing profits.
THE ASSURED WAY: Do everything on this site to
develop 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 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.
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 a 30% price
price disadvantage from a "taking all orders."
Neither the
engineers or managers could 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.
The proactive
solution is Product
Line Raization , which is
presented in Appendix A in all additions
of the DFM book.
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.
Achieve major cost reductions with
just a few resources with Backward-Comparable
“Drop-in” Replacements, e.g for sub-assemblies like
hard-to-build frames and
structures This can save a lot of
money now replacing hard-to-build, high-skill versions, both on
existing products and then become the foundation of new generation
product developmentsSee:
https://www.design4manufacturability.com/steel-reduction-workshop.htm
New:
The Most Advanced Product Development Course
by the author of all 50 DFM
article in this site
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 © 2022
by David M. Anderson
All of these
principles on DFM can be included in
your customized
class and workshop on DFM
or
the Most Effective Product Development class
Start an email discussion on Competing on Price by
phone ot e-mail, fill out this form:
|
