Cost_Reduction
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7 REASONS WHY “COST REDUCTION” AFTER DESIGN DOESN’T WORK
 

New section below on What to Do About Existing Products that Cost Too Much.

Cost reduction article:

Except for truly low-hanging-fruit, trying to “cost reduction” after the product is designed won’t work because:

1. Cost is designed into the product; 80% of cost is committed by design and by the time it gets to manufacturing, only 5% is left as shown in this graph, first published in Dr. David Anderson first DFM book in 1990:

2. Cost is hard to remove later because so much is cast in concrete and boxed into many corners by arbitrary decisions that are not undone easily.

3. The changes will cost money, which exponentially increases with development time, so it may not be paid back within the life of the product.

4. The changes will eat up calendar time, especially if requalifications are required, which may delay the real time-to-market.

5. The changes will consume valuable resources whose efforts could be reaping more rewards by developing low-cost products in the first place.

6. Changes induce more problems, thus needing yet more corrective changes, thus expending more hours, calendar time, and money to do the subsequent changes which may compromise functionality, quality, and reliability. The 2006 book, “The Toyota Product Development System,” shows Toyota’s preference for front-loading and the consequences of late changes:


“Because front-loading solves problems at a root cause level early in the process, it nearly eliminates the traditional product development problem of late design changes, which are expensive, suboptimal, and always degrade both product and process performance.”

7. Studies show that cost reduction doesn’t work. Mercer Management Consulting analyzed 800 companies over five years. They identified 120 of these companies as “cost cutters.” Of those cost-cutting companies, “68% did not go on to achieve profitable revenue during the next five years.”

CONSEQUENCES OF TRYING “COST REDUCTION BY CHANGE ORDER”

• Committing valuable resources to do cost reduction after design takes them away from other more-effective efforts in product development, designing in quality,  designing for Lean production (see http://www.halfcostproducts.com/lean.htm ) and reducing inventory (see: http://www.build-to-order-consulting.com/inventory_reduction.htm ).

• If too many resources are committed to trying to reduce cost later, then:

a) There will not be enough available for real cost reduction through new product development. If this continues over time, the result will be little, if any, real reduction in cost, while such a drain of resources will impede new product development innovation.

b) It will prevent the transition from back-loaded efforts to the more-effective front-loaded methodology that uses complete multifunctional teams to design low-cost products right the first time. See primitive vs advanced time-lines at . http://www.design4manufacturability.com/half-the-time.htm

c) The company will be lured into thinking it is doing all it can to lower cost, when, in fact, costs are not really being reduced, on a total cost basis, and opportunities for real cost reduction are not being pursued.  See article "How Not to Lower Cost" at: http://www.halfcostproducts.com/how_not_to_lower_cost.htm
 

Finally, “cost reduction” failures, may discourage innovative ways to lower cost, maybe even thwarting promising future attempts.  Two break-through cost reduction techniques, that could not be done by change order, are presented for electronics and large  structures at the article Designing Low-Cost Products.

 

HOW TO STOP THE “COST REDUCTION” RESOURCE DRAINS

• Shift “cost reduction goals” away from yearly “cost down” efforts on existing designs (which doesn’t work for the above reasons) to designing products with the least total cost.  See article on quantifying total cost with cost drivers at: http://www.halfcostproducts.com/total_cost.htm

• Stop trying desperate measures to reduce cost just after a development project misses its “cost targets,” which then reverts to cost reduction after design, by utilizing the following policy on a case-by-case basis that may only need to be done once to discourage this on subsequent projects. This could apply to a product just designed or a legacy product.  (see section below on Target Costing)


Paying the cost of “cost reduction”

Whoever initiates such a cost reduction effort after design should have to create a budget or fund to which all cost-reduction costs would be charged. This would also include the burdened monetary cost of all the resource-hours expended and all other costs. Granted, until a good total cost system is in place, a case would have to be computed manually (looking up and compiling, or estimating, all costs.  After this is done once, it could become the estimation basis for subsequent cost reduction considerations. Even compiling data and anecdotal conclusions may be enough to discourage future unsuccessful attempts.

If such data, or even estimates, of a case look like it will exceed projected “savings,” then attempting such changes should not be approved and valuable resources saved should be applied to designing low cost products, as recommended by most of the articles on this site.

Target Costing

The traditional way to determine a product’s price is to add the expected profit to the cost. Target costing starts with the price that the market will bear and then subtracts the profit to arrive at the “target” cost for design teams to meet. This appears to be a logical way to sell products at the right price.  In the Aerospace/Defense world, target cost goals are incorporated into Design-to-Cost efforts

However, the trouble with cost "targets" is that if people do not know how to design low-cost products, they may start doing the same things and "trying harder" only to find, too late, that costs are above the targets.

Then starts frantic "cost reduction" after design, which is so hard to do that it usually results in serious counterproductive affects. Usually this results in a focus on cheapening parts (especially if that is all that is measured), which will drive up quality costs, introduce new variables into the product development process (which increases product development costs and slows it down), raises other overhead costs, and possibly damage a company’s reputation.

Cost Targets should determine strategy

Cost goals should determine the approach,
not exert pressures to “do the same thing, but better.”


Key cost "goals" should be expressed as the percent improvement compared to previous or similar projects to determine the design approach.   For instance, a 5% goal might be achieved with better diligence. A 20% to 30% goal would need some serious application of all DFM principles presented in DFM seminars and books. Above 50% would need breakthrough concept innovation, since that is where 60% of cost is determined. In highly constrained and competitive markets, breakthroughs may be needed for a competitive advantage. Two examples of breakthroughs are presented at the article: Designing Low-Cost Products. 
http://www.design4manufacturability.com/half_cost_consulting.htm#design-studies
 

What to Do About Existing Products that Cost Too Much

Here is what can be done about current or legacy products that cost too much, starting with prioritization:

Choosing and Prioritizing Cost Reduction Opportunities

Prioritize cost reduction opportunities by the ratio of the total payback divided by the total cost of the effort. Develop indicators that will identify cost reduction opportunities, such as the costs of: rework, scrap, excessively long flow times, high overhead costs, and so forth. Note that suppliers may not report rework and scrap costs (often hiding them in mysteriously high bids and prices), but they need to be quantified enough to indicate cost reduction opportunities.

Total cost data must be used to compute all the costs involved in making any changes.

Use realistic cost data for computing the gain and the costs. Use the latest actual costs and labor times, not “labor standard” estimates or other theoretical costs. Labor hours by prototype technicians may differ from product environment times.

Drop cost-reduction proposals for money-losing changes that will not pay themselves off during the expected life of product. Scrutinize any cost reduction that is below the current return threshold for internal investments. This criteria would not apply for changes for quality, safety, or for regulatory compliance.

∙ Look for the low-hanging-fruit first, such as “no-brainer” opportunities.

Look for potential process improvements on the existing design.

Look for parts and processing with too much waste, such as excessive setup, waiting, inventory, excessive moving, inspections, rework, scrap, and so forth. Specifically look for parts, machines, cells, lines, or plants with:

∙ low machine tool utilization
∙ high inventory levels
∙ excessive adjustments or calibrations
∙ high quality costs
∙ excessive rework
∙ long throughput times
∙ high change order activity
∙ a high ration of setup time to batch size

Identify all potential impacts of changes with respect to all forms of risk, certifications, requalifications, and the possibility that any given change will, intentionally or unintentionally, create the need for other changes, which, in turn, would have to be evaluated for all their impacts. Quantify all the expected costs of all of these impacts.

Supplier Cost Reduction Steps

∙ Don’t just beat up suppliers for lower cost. If they really don’t know how to reduce cost, they will either cut corners or take it out of their profits, which weakens them and sours the relationship.

∙ Discuss manufacturability issues with suppliers or internal workers to investigate and understand all the current challenges, problems, and opportunities. It would be highly desirable to discuss these in person with all workers involved while viewing the parts, tooling, inspection procedures, rework methods, and scrap pile.

∙ Document all supplier cost issues to help justify vendor/partnerships on new designs.

Process Cost Reduction Steps

∙ Eliminate wasteful, non-value-added activities, such as excessive setup, waiting, inventory, excessive moving, inspections, rework, scrap, and so forth (see Setup Reduction section below).

∙ Minimize batch size and inventory to save inventory carrying costs, minimize setup costs, maximize machine tool utilization, avoid repetitive defects, reduce floor space, and decrease throughput times.

∙ Automate or mechanize costly, error-prone, or time-consuming manual processing steps like riveting.

Standardization/Consolidation

∙ Standardize parts, materials, tools, and processing, with equivalent or “better than” substitutions on existing designs (see standardization article).

∙ Consolidate many different inflexible parts into very versatile parts with widespread use, for instance for: raw castings, forgings, moldings, extrusions, and bare printed circuit boards. Any perceived “extra” cost would saved many timed over by increased purchasing leverage and lower material overhead costs.

Tolerance reviews

∙ Optimize tolerances, selectively widening excessive tight tolerances to save fabrication cost and selectively tightening excessively loose tolerances that may have been causing assembly and quality problems. Excessively tight tolerances also invite interpretation and verbal wavers; they also distort make/buy decisions.

∙ Convert to designs/processing that can hold needed tolerances at lower costs, for instance machining all critical dimensions in the same fixture in one setup, on one machine tool (Guideline P14).


Redesign Product for Manufacturability
.

If a current or legacy product looks like it will sill keep selling, but costs too much to build. Add up all the costs, not just the usual parts cost and labor, but all the total costs of the following

• Manufacturability shortcomings.
Some products may not have been designed for manufacturability very well in the first place and will always be hard to build, drain resources from more worthy endeavors, cost too much, and, because of the above reasons, “cost-down” cost-reduction attempts will not work, and worse, may have counterproductive effects, such as:

• Cost of Quality. If the original design did not specify high-quality parts ”to save money,” or worse, previous cost-down efforts substituted cheap parts, the result will be a significant cost of quality risk, probably exceeding any hoped-for savings. Plus, the changes will introduce many more variables, which, as shown in Figure 1.2 of the 2014 DFM book, will delay ramps, delay introductions, and complicate product development, in general, for instance, when the prototype works but the product doesn’t after all those part changes. Similar problems will arise from going with, or changing to a low bid vendor instead of utilizing vendor/partnerships.

Indirect Labor costs, including all forms of fire-fighting or dealing with the above issues.

Setup costs, not just machine tool setup, but also finding and understanding documents and dealing with their shortcomings.

Tribal Lore. Older legacy products that never had good documentation may have always depended on the skill and judgement of people who may be “maxed out” on similar demands on other products or they may even be gone.

Supply chain problems. Older products, and even new ones, may depend on parts that are obsolete, have long lead-times, or are just hard to get., which incur extra costs to find them and expedite their delivery. Or if they can’t be found, implement change-orders to substitute parts that are more available

• Inventory costs. Infrequently built products or products not designed around readily available standard parts will incur significant inventory carrying costs* if companies try stock all of them or have to a new batch that has tooling or setup changes that must be amortized over a large batch that must then be inventoried.  For article on inventory costs and how to reduce them see: http://www.build-to-order-consulting.com/inventory_reduction.htm

* Inventory carrying costs average 1/4 of inventory value per year! That means for every $4 million of inventory value, it will cost you $1 million per year to pay for all its carrying costs.  For inventory carrying costs since 1961 see Figure 2-1 in Dr. Anderson's Build-to-Order & Mass Customization book

So, if the product has a future at the right price, redesign it for manufacturability, which may be easier to justify if it is combined with others as a platform, or at least, a family of synergistic products (next).
 

Redesign Printed Circuit Boards to incorporate more available components, facilitate more manufacturable layouts, higher percentage of auto-placement and auto-soldering, higher levels of silicon integration (VLSI, ASICs), eliminate cuts and jumpers, and combine circuit boards, possibly to the extent where card cages can be eliminated.

Incorporate costly products into a Family of products or its own Platform.

If a redesign for a product can not be justified alone, it might be possible to redesign several similar products as a family or incorporate them into an upcoming platform.

A Product Family would be a group of products that potentially had enough synergies in standard parts, sub-assemblies, and flexible operations to justify the venture on a total cost basis.

A product Platform would be structured to according to the all of the following criteria:

1) customer/marketing feasibility, with the focus on profitability over completeness
 
2) operational flexibility, so any variation can be built without delays, onerous setup costs, or inventory carrying costs, ideally built on-demand
 
3) supply chain responsiveness, so family variations will not have to wait for parts and materials to be delivered, and distributed, and
 
 4) design versatility to enable the above

These four criteria are the opening paragraph and half of the abstract in Dr. Anderson’s “how to” chapter he wrote in the book: “Product Family and Product Platform Design.” These principles are summarized at http://www.design4manufacturability.com/product_families.htm

Redesign a backward-compatible sub-assembly or module.
If an otherwise promising products has a subassembly or module that is way too expensive, then it could be redesigned as a backward-compatible “drop-in” replacement for the target product and hopefully other that could use this exact module or mass customized variations for similar products. For example, Dr. Anderson’s Steel & Cost Reduction Workshop shows how to replace expensive welded machine frames and commercial vehicles chasses with much less costly assemblies of CNC-machined parts that can be bolted together precisely and rigidly by various DFM techniques. See: http://www.design4manufacturability.com/steel-reduction-workshop.htm  )

Rationalize away hopeless products. If “cost-down” cost reduction attempts don’t work because of the seven reasons cited in the beginning of this article and neither do the redesign approaches cited above, then rationalize away those products, based on the sum of their all costs and resource drains trying to build them. Product Line Rationalization in included in both Dr. Anderson’s current books: in Appendix A in Dr. Anderson’s 2014 DFM book and Chapter 3 in his 2008 book on Build-to-Order & Mass Customization.

For an on-line summary of Rationalization see:
http://www.build-to-order-consulting.com/rationalization.htm  .

Conclusions

Instead of attempting retroactive "cost reduction," proactively develop low cost products using Design for Manufacturability learned through DFM seminars or DFM books.  Ambitious cost goals can be achieved by Dr  Anderson's workshops  and design studies, described at http://www.design4manufacturability.com/half_cost_consulting.htm#design-studies
 

These are the general principles. Pass around this article or URL to educate and stimulate interest

In customized seminars and webinars, these principles are presented in the context of your company amongst designers implementers, and managers, who can all discuss feasibility and, at least, explore possible implementation steps

In customized workshops, brainstorming sessions apply these methodologies to your most relevant products, operations, and supply chains.

Call or email about how these principles can apply to your company:

  Dr. David M. Anderson, P.E., CMC
fellow, American Society of Mechanical Engineers
www.design4manufacturability.com
phone: 1-805-924-0100
fax: 1-805-924-0200
e-mail:
anderson@build-to-order-consulting.com

copyright © 2018 by David M. Anderson

Book-length web-site on Half Cost Products: www.HalfCostProducts.com

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