Rethinking Economic Challenges: Focus on Cost Versus Value
Challenging times can be the best opportunity to change your company philosophy regarding cost versus value. Make the right choices and you could come out stronger.
Web Exclusive/Feb 09
Now more than ever, it is time to talk about total cost of ownership (TCO) and efficiency. Reducing cost alone is not enough anymore. Products and services must now be redesigned so that resources and expenses are allocated where the customer is willing to pay. The margins you will find between cost and value will allow you to outsell competitors and increase earnings.
The design to value approach focuses on some key elements: a team effort to understand cost structure; internal and external manufacturing constraints; the competition's strengths and weaknesses; and, of course, the customer's expectations. These elements must prevail in the design of your product or service. Among the more specific steps:
• Make sure you understand your costs before you set your goals.
• Take time to characterize what your customers want and what they can afford.
• Analyze your competition thoroughly.
• Work with operations and suppliers.
• Always calculate how ideas contribute to your goals.
Understanding Your Costs
Your enterprise resources planning gives you a detailed cost breakdown with 10 digits after the decimal point, but that does not mean you can say your costs are under control. Show a product cost breakdown to your process engineer, your buyer, your industrial engineer and your accountant, and I am positive at least one of them will adjust one or more lines. I am just as positive at least one will disagree with his or her coworkers. How many times have you been promised you would save a certain amount of money and did not see any changes at the end of the year because the time saved was not picked up by another product?
Believe me, detailed cost analysis and review is the most underrated and most overlooked contributor to efficient leadership. Make sure your project team:
• reviews the product cost breakdown (overheads, indirect material, indirect labor, direct material, direct labor);
• understands how it is calculated; and
• gives you a clear map of the costs that will be impacted by their work.
Understanding Your Customers
More often than not, your customers will be more than happy to answer your questions if they feel like it's going to benefit them in the end. List and rank your product's main functions as you see them, and ask your customers to do the same. Measure the performance achieved on these functions and ask your customers what level they need. If your product is part of a client's larger system, evaluate the share your product represents in the system and how it impacts the cost of the rest of the system. Also, take this opportunity to consider sustainability indicators, such as carbon footprint, which are now very popular.
This kind of investigation will give you valuable directions to follow, possibly saving you hundreds of hours in design and bring millions in sales. This is also a very efficient way to make sure research and development is in sync with sales and marketing.
Understanding Your Competition
There are a multitude of ways you can gain extensive knowledge of your competition - their website(s), their printed promotional materials, and tradeshows, just to name a few. I am not talking about stealing secret information here, just using public information readily available on the open market. Find out how they perform on similar functions and how they impact your customers' total cost of operation. Never forget that competition is anyone who can provide the key functions your customer expects. For example, if you make tractors, your competition is not only other tractor brands but horses, cows, or men with plows in certain countries.
Such information will prove very useful not only to orient the new design - to challenge "sacred cows" internally - but also for future sales and product placement.
Once you have defined the right levels of performance and functions, design should focus on feasibility. You have probably heard of design for manufacturing and assembly (DFMA) or similar techniques that help you estimate the manufacturability of a design based on basic steps required. While this is a reasonable approach, my experience is that you will not necessarily find a breakthrough, simply because no tool can recognize the specifics of your suppliers or your internal manufacturing process.
Process cost is a tradeoff between hourly cost, process time, and scrap rate, all of which vary drastically from one place to another. You need to work with your manufacturing team and with selected suppliers from the very beginning to find out what makes sense for them.
Understanding What's Ahead
The steps described above are necessary guidelines to make sure your creative resources concentrate on what your customers want and not just on technical wonders. Even with these elements in mind, a key to success is to always assess the impact of your team's ideas as they arise. Always ask how new ideas and new design will impact processing time, material cost, assembly cost, quality, and performance. And that means using numbers to quantify that impact. Insist on getting some numbers, even estimates, from your team. This leads to quick, efficient decision making and to controlled timely new product introduction.
While some of these steps may seem like common sense, experience shows that getting the most out of a cross-functional team requires the strong involvement of top management. Making team members positively challenge each other can be difficult. And sometimes, the best solution may be to bring someone on board with a new vision and experience.
Igor Le Pivert is the president and founder of Cost House, LLC, a global business consulting firm specializing in cost efficiency. He has an operational background in the manufacturing of electronics in the United States and Europe. Mr. Le Pivert can be reached at (678) 420-3421 or firstname.lastname@example.org; visit the company's website at www.cost-house.com.
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