From cost to value
From cost to value, the way to sustainable growth ...
Igor LE PIVERT
President and founder, Cost House USA
Introduction
I believe that challenging times are the best opportunity to stand out and prepare a strong and bright future.
We are facing a very serious crisis of the financial market. It is time to re-focus on a fundamental: the value our products and services can bring customers. Good news is that many Customers are beginning to place increased value on “Green”, “Lean” and “Sleek” designs. Using a “Design –to-Value” approach it is possible to increase “Value” and also “Reduce” the cost of a product or service
Now more than ever is it time to implement a “design to value” approach, 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.
Design to value
The design to value approach focuses on the following key elements: a team effort to understand cost structure, internal and external manufacturing constraints, competition’s strengths and weaknesses and, of course, customer’s expectations. These elements must prevail in the design of your product. Let us work together so that engineers know what the end customers really want and how technical choices impact not just cost but end-value.
Indeed, 5 key elements must be considered when designing to value:
- 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
Understand your costs
It’s not because your ERP gives you a detailed cost breakdown with 10 digits after the point that 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, 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 coworkers. How many times have you been promised you would save x amount of dollars thanks to a better manufacturability 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
- gives you a clear map of the costs that will be impacted by their work and how
Understand 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, 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, you should 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; it can save you hundreds of hours in design and bring millions in sales. This is also a very efficient way to make sure R&D is in phase with sales/marketing.
Know your competition
You can gain extensive knowledge of your competition on the web, on brochures or at tradeshows for instance. I am not talking about stealing secret information here, just using plain public knowledge readily available on the market. Find out how they perform on similar functions, how they impact your customers’ TCO. Never forget that competition is anyone who can provide the key functions your customer expects: if you make tractors, for instance, your competition is not only other tractor brands but horses, cows or men with plows in certain countries.
Such information will prove very useful to orient the new design, to challenge sacred cows internally, but also for future sales and product placement.
Involve internal operations and suppliers early
Once you have defined the right levels of performance and functions, design should focus on feasibility. Now, there is no magic recipe when it comes to feasibility.
You have probably heard of DFMA (design for manufacturing and assembly) or similar techniques, which help you estimate the manufacturability of a design based on basic steps required.
While this is a reasonable approach, my experience shows 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.
In other words, you need to work with your manufacturing team and with selected suppliers from the very beginning to find out what makes sense for them.
Know where you are going
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, performance … And that means numbers.
Most of the times your team will explain they do not know and do not want to commit; insisting on getting even estimates is the secret to quick, efficient decision making, and to controlled timely new product introduction.
Go for it
This may sound like common sense to most of you; yet, experience shows that getting a cross-functional team together requires a strong involvement of top management. Making team members positively challenge each other proves even more difficult. And when you think you have it all under control with great improvement ideas, you still have to actually implement the changes and make sure improvements will materialize in a timely manner. For these reasons, bringing someone with a new vision and experience on this kind of projects usually proves very wise and effective.