4 Steps to Driving Down Product Cost

By Bob Wray, Project Manager, Georgia Manufacturing Extension Partnership (GaMEP) at Georgia Tech

It is likely that your firm has a number of “cost reduction” projects active at any given time. In most cases, these projects are created as opportunities arise. They enter the development process harmlessly, requiring relatively little resources or capital investment compared to larger programs. If your company is like many others, these projects are handled on a first-come, first-served basis and are not subjected to prioritization based on value or resource utilization. Although these projects tend to have small impacts when viewed individually, as a whole they can provide significant savings to a company’s bottom line. However if they are not managed correctly, they take up more time and resources than originally planned, thus driving up costs. If they can be managed proactively, as a portfolio of cost improvement projects, the bottom line savings can be greatly enhanced. This can be done by formalizing a process and assigning a team leader. Here are four steps to get your program started in the right direction.

Step 1: Proactively create a large list of opportunities.

Having more proposed projects than resources will allow you to make choices and increase your annual savings. Start by putting together a list of currently known opportunities, including those already being developed. Next, begin identifying new opportunities. This is best done by holding special events such as competitive analyses and value engineering. During these initial sessions, concentrate on your highest volume and least complex products to gain quick wins and build excitement. Study your products, looking carefully for design and process opportunities. Invite management and employees from all departments, along with trusted vendors and customers, to be part of the process. Using a cross-functional team for these events will increase the volume and quality of opportunities and bring all critical functions into the process.

Step 2: Prioritize the list.

While the team is assembled and your list of new opportunities is fresh, it is important to get them prioritized. Initially, a simple pareto analysis (the 80:20 rule) can be used to bring the most valuable opportunities to the top. A more detailed ranking of the top 10-15 opportunities can then be performed. It is easier to gain consensus by using a numbered ranking system in an open forum. Although this will still be subjective, it will create synergy within the group and avoid having “pet” projects given priority.

Step 3: Assign the top projects.

It is important at this point to be realistic and only assign projects where sufficient resources are available. It is tempting to overload the system, but far more productive to have a few projects on the fast track. Remember, savings can only be generated when projects are completed and in production.

Step 4: Maintain the process.

This is the most important part. It helps to ensure longevity of the entire program and is the reason you must assign an individual to oversee it. Hold regular monthly meetings to track progress, assign new projects as resources are available, and schedule opportunity generation events as needed. An important output from this meeting will be to communicate success to upper management. A list of completed projects and annual impact should be tracked and used as a tool to further manage the program and justify additional resources.

By strategically managing your development process, you can create significant opportunities for your company, while keeping your product costs low and improving margins without adding resources. For smaller organizations, learning and implementing a few new process tools can be the difference between barely surviving and being profitable in the years to come.

This is part of a series of articles for manufacturing improvement. Download a pdf of 4 Steps to Driving Down Product Cost.