Three levels of Product Cost Reduction

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Three levels of Product Cost Reduction

Issue 1

12-October-2014

 

 Cost Benefit Analysis Concept with Target Pin Marker

Preface

In today’s market, the success of every company depends on their continuous ability to leverage profits. Investors and analysts are unforgiving towards poor results in the P&L.

Even when the company achieves positive results the market is looking for improvement trends in the following quarters. The market is becoming more and more competitive and to survive almost every company needs to release new updated products periodically and face ongoing product cost reduction.

Cost Reduction Levels

Higher cost reduction levels provide greater saving opportunities

 

 Cost reduction involves different levels. The deeper the level, the greater the saving.The following strategy describes electronic product case but seamlessly fits any multidisciplinary strategy as well.First level – the obvious one – is procurement. Components are purchased from cheaper sources. Hard negotiations provide better agreements resulting in lower components and product cost. These savings do not require high technical understanding (may assist but not a must) of the components or the products’, but requires good strategic purchasing skills and skilled negotiation practices. Since the replacements are done at component level the assignment can be easily outsourced.The second and third levels of product cost reduction provide greater saving opportunities. These levels include re-design activities offering cheaper component combination for same product functionality.Second level of cost reduction offers re-design of peripheral circuits. This re-design must keep functionality, but can change the circuit implementation. The replacement must be cheaper than the original one and deliver the same functionality. Peripherals could be sensors, input/output processing circuits, power supplies. An example – expensive amplifiers could be replaced by inexpensive ones while maintaining the required performance – mechanical sensors could be replaced by optical ones.Such re-design requires detailed technical understanding of product’s operation and application. Every design change must not compromise performance or reliability of the product. This re-design level can be done either by the company’s R&D staff or by a third party.Third level of product – cost reduction the most complicated one; offers re-design of product core technology. Such process may include replacement of core processors, memories or other circuits, and usually is done by the company’s R&D staff that developed the original product technology.

The Obstacles

R&D is uncomfortable if re-design proposed by others (in-house and outsourced)

 

 

 

Management incentive – reduce cost,

R&D incentive – don’t touch a working product

 

 During the process of cost reduction the company may encounter obstacles implementing re-design when the product is at a mass production stage.
Partial list of the obstacles:

  • “Why try to fix something that works?”
    The management is very interested to reduce costs but R&D staff have low incentive for change.
  • Revised design requires approval, qualification and sometimes regulatory certification.
  • Revised design requires changes in PCB layout, molding, assembly instructions and in some cases changes in testing equipment on production line.
  • If the re-design is offered by a third party, this act is usually uncomfortable and unwelcomed by company staff. Designers are generally not happy when revised circuits are proposed by external engineers. Similar resistance emerge continuously even though the changes are proposed by other engineers in the company.
  • For external engineers it is harder to understand the existing design.

The Opportunities

In product development stage most crucial factor is time to market, while cost-design optimization is in second priority

 Along with the obstacles there are opportunities to achieve substantial savings – greater than what can be saved by procurement only.

  • Many times the product in mass production stage is a result of evolutionary, rather than optimized solution. In most companies during development process the pressure for time to market is crucial – the design is frozen in the moment it works and can be manufactured.
    Cost reduction requires time, trial and error, optimization to choose cheaper solution without compromising performance and reliability.
  • Third party designers are not biased by current, evolutionary design, and can provide different and innovative solutions.
  • The solution is optimized, tested and qualified by outsourced unbiased staff.
  • Third parties provide experienced engineers in their relevant fields.

Summary

Upcoming Issue

Some more insights on Cost reduction and real case studies

 

 So what do we have?Product cost reduction is essential in today’s competitive market.There is a continuous conflict of interest between management and R&D staff. Two functions are evaluated based on different parameters.Conclusion – cost reduction process in re-design needs courage and vision for the best of the company.Some more insights on product cost reduction in the upcoming issue.

SBS Professional services
 logo Stottland Business Solutions (SBS) has developed a unique business model to provide cost reductions at first and second levels. We deliver revised solutions approved by SBS engineers and fit product’s performance and reliability.The process is offered by the best in field experts in electronics, mechanics, materials and production technologies.With over 30 years in multidisciplinary projects and products, SBS will carry out the cost reduction process achieving substantial real time savings for your company.Email: yaacov@stottland.co.il           www.stottland.co

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