7 REASONS WHY “COST REDUCTION” ATTEMPTS 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
the original 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 will probably 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,” Toyota summarized the cost and severe
consequences or 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
attempts don’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 try 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 low-design design 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
YEARLY "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
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 just the available 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 then 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. The latest fad, called 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
(as taught herein),
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
Identify the most costly products;
Then, don’t take those orders !
Rationalization can save
money from mow on ! See Ap. A in book
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 ratio 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,
either of 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 piles.
∙ 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 be saved many
times 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 still 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.
• 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.
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 inter-board wiring operations can be eliminated.
Incorporate related 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 )
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
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.
The very first step may be to start with a
few hours of the DFM thought-leader to help formulate strategies and
implementation planning. See his consulting page: http://design4manufacturability.com/Consulting.htm
To start an email discussion Realities about Cost
Reduction fill out this form:
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 ©
2021 by
David M. Anderson
Book-length web-site on Half Cost Products:
www.HalfCostProducts.com
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