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Cost Reduction Tips - Reducing Manufacturing Cost.

Cost Reduction Tips - Reducing Manufacturing Cost.
Cost reduction can result in significant product cost saving, manufacturing cost saving, and life cycle cost saving when companies interested in cutting cost implement all 8 the elements of the following cost reduction strategy:
New article on recession strategies that improve cost, profits, and flexibility for immediate results with little capital cost.
1. Cost Reduction by Design
Cost Reduction Opportunities:
* Product development determines 80% of product cost. The concept/architecture phase alone determines 60% of cost! See how Design Determines Cost
* Cost is very hard to remove later after products are designed
The Results:
* Significant cost reductions by design for parts, labor, material overhead, quality, and product development; designing for lean production can maximize lean savings (See # 2 Lean Production Cost Reduction below).
How to Reduce Product Cost by Design:
* Practice Concurrent Engineering with early and active participation of manufacturing, purchasing, vendors, etc.
* Implement Design for Manufacturability ( DFM ), Design for Lean, and Design for Quality
* For dramatic cost reduction - half cost to order-of-magnitude - optimize the concept/architecture phase
* To convert ideas, research, or prototypes into viable products, use commercialization techniques to ensure success.
Activities Supportive to Low Cost Product Development:
* Co-locating Engineering with Manufacturing ensures the best teamwork; avoid distant outsourcing and offshoring
* If outsourcing, choose local vendors which ensures early and active vendor participation in product development teams
* Pre-select Vendor/Partners who will help develop products; avoid low-bidding
* so that vendors will help with designImplement standardization and good product portfolio planning for the best focus
* Total cost measurements (#8) to quantify all costs affected by design
* Correcting Counterproductive Policies. New ventures and startups will be able to implement these principles right away. Established companies may have to first correct counterproductive policies, by prioritizing portfolio planning, scrutinizing high-overhead sales, emphasizing thorough up-front work, quantifying all costs, and avoiding time-draining attempts to reduce cost after design, going for the low-bidder, or moving production offshore. See full article on counterproductive policies.
2. Lean Production Cost Reduction
Cost Reduction Opportunities:
* Lean production benefits include doubling labor productivity, cutting production throughput times by 90 percent, reducing inventories by 90 percent, cutting errors and scrap in half errors
The Results:
* Significant cost reduction possible by raising labor productivity and eliminating waste
* Even greater returns when lean is extended to a Build-to-Order business model (See # 3 Overhead Cost Reduction below)
How to Reduce Manufacturing Cost:
* Implement Lean Production
Activities Supportive to Lean Production:
* Design product families for lean production
* Concurrently Engineer flexible processes
* Implement standardization (#4) to enable dock-to-line distribution
* Rationalize products (#5) to eliminate the most unusual products with the most unusual parts and processes
* Total cost measurements (#8) to quantify all costs related to manufacturing
* Keep control of manufacturing in-house or with vendor/partners; avoid outsourcing for cost; avoid long and distant supply chains
3. Overhead Cost Reduction
Cost Reduction Opportunities:
* Standard products can be build to-order without forecasts or inventory and specials can be mass-customized on-demand; see articles on Build-to-Order and Mass Customization
The Results:
* Inventory carrying costs can be eliminated
* Procurement costs can be reduced with automatic, on-demand resupply
* Better responsiveness leads to more sales
How to Reduce Overhead Cost:
* Implement Build-to-Order and Mass Customization to build products on-demand without forecasts or inventory
Activities Supportive to Build-to-Order & Mass Customization:
* Implement lean production (#2)
* Rationalize products (#5)
* Total cost measurements (#8) to quantify overhead costs
* Keep control of manufacturing in-house or with vendor/partners; avoid outsourcing for cost; avoid long and distant supply chains; avoid off shore manufacturing
4. Standardization Cost Reduction
Cost Reduction Opportunities:
* Standard part lists can be 50 times less than proliferated lists; see Standardization Results
* Standard parts are easier to get and fewer types need to be purchased; see Standardization Benefits
The Results:
* Economies of scale result from larger purchases
* Material overhead of the standard parts can be one-tenth that of proliferated lists
How to Reduce Cost with Standardization:
* Implement Standardization with a practical procedure has been developed to standardize part and materials for new designs
Activities Supportive to Standardization:
* Rationalize products (#5) to eliminate or outsource the most unusual products that have the most unusual parts and materials
* Total cost measurements (#8) to justify standardization efforts and encourage picking standard parts
* Donít merge acquired products into the same plant or build othersí products; see article on Negative Effects of Mergers and Acquisitions
5. Product Line Rationalization Cost Reduction
Cost Reduction Opportunities:
* Focus on the most profitable products; see How Rationalization can Triple Profits!
The Results:
* Eliminate the "loser tax" on cash-cows to subsidize low-margin products
* Identify and remove products that are losing money on a total cost basis
* Reduce overhead demands and costs for hard-to-build "loser" products
* Free up valuable resources to work on cost saving efforts in engineering (#1), operations (#2 and #3), and supply chain management (#6)
How to Reduce Cost with Product Line Rationalization:
* Implement Product Line Rationalization to eliminate or outsource low-profit products that have high overhead demands and are not compatible with cost reduction strategies
Activities Supportive to Product Line Rationalization:
* Product Portfolio Planning focuses new product development
* Total cost measurements (#8) to identify opportunities and supports rationalization decisions
6. Supply Chain Management Cost Reduction
Cost Reduction Opportunities:
* Supply Chain Simplification can greatly simplify Supply Chain Management
* Spontaneous supply chains can pull parts into production on-demand without forecasts or inventory
The Results:
* Material overhead can be reduced by a factor of 10 for standard parts and materials
* Purchasing leverage results from high quantities of standard parts
* Automatic resupply eliminates forecasts, purchase orders, inventory, and expediting costs
How to Reduce Cost in Supply Chain Management:
* Design products around standard parts to simplify Supply Chain Management
* Standardize parts to focus Supply Chain Management on high-volume, easy to get parts
* Rationalize away the most unusual products which have the most usual, hardest-to-get parts
* Establish Vendor/Partnerships, which saves more money than low-bidding
Activities Supportive to Supply Chain Cost Reduction:
* Total cost measurements (#8) to encourage and justify standardization and rationalization
* Donít merge acquired products into the same plant or build othersí products; see article on Negative Effects of Mergers and Acquisitions
7. Quality Cost Reduction
Cost Reduction Opportunities:
* The Cost of Quality can be 15% to 40% of revenue;
The Results:
* Quality costs can be greatly reduced; in some cases reducing quality costs can double profits
How to Reduce the Cost of Quality:
* Eliminating quality costs starts with designing in quality
* Quality costs in manufacturing can be eliminated with Six-Sigma programs
* Rationalizing away unusual products raises net factory quality and avoids wasting quality resources on inherently lower quality products
Activities Supportive to Quality Cost Reduction:
* Total cost measurements (#8) to quantify the Cost of Quality
8. Total Cost Measurement to Support All Cost Reduction Activities
Cost Reduction Opportunities:
* Total cost measurements are imperative to encourage and support the above activities to reduce all cost categories
The Results:
* All the above cost reduction activities are encouraged and supported; the results are quantified, thus encouraging more total cost reductions.
How to Reduce Cost with Total Cost Measurements:
* Implement total cost measurement with the easy-to-implement cost driver approach
Activities Supportive to Total Cost Measurements:
* Until total cost can be quantified, everyone must make decisions based on total cost thinking
* Senior management understands the importance of quantifying total cost, implements total cost measurements, and encourages all cost decisions to be made on basis of total cost
How Not to Lower Cost; Short-sighted attempts prevent real cost reduction
Don't try to remove cost after the product is designed because cost is designed into the product and hard to remove later; see article on How Not to Lower Cost
Don't use low-bidding, which only appears to save one category of cost, but can substantially raise many less-obvious costs and compromise other important goals like quality, delivery, and missing out on the major contributions that vendor/partners can make when they help product development teams design products; see article on Low-Bidding.
Don't outsource or offshore manufacturing for cost, which will not result in a net cost savings because of hidden overhead costs and because it inhibits, compromises, or thwarts 6 out of the 8 cost reduction strategies (presented on the home page) due to the following reasons:
Outsourcing or offshoring manufacturing separates manufacturing from engineering and thus thwarts Concurrent Engineering and compromises the 80% of the cost determined by the design. Further, transferring, supporting, and dealing with quality and delivery problems of remote manufacturing absorbs many resources in engineering (in one case, 75%), manufacturing, and purchasing whose time would be better spent developing low-cost products. See Cost Reduction by Design summary and the article Design for Manufacturability
Outsourcing or offshoring manufacturing to distant contract manufacturers increases the delivery time, which makes it hard to pull parts just-in-time and makes build-to-order impossible. Further, parts may be batched for shipping, which is opposed to the one piece flow aspects of Lean Production. Finally, outsourcing or offshoring manufacturing removes production from the control of the OEM manufacturer. All of these effects conspire to:
* Compromise Lean Production; see Lean Production Cost Reduction summary and the article on Lean Manufacturing
* Make if impossible to implement Build-to-Order and Mass Customization; see Overhead Cost Reduction summary and the Build-to-Order article and Mass Customization article.
* Make it hard to implement standardization because contract manufacturers' preferred parts probably won't correspond to your standard parts, so, in order to realize the production benefits of standardization, part numbers may have to be changed, which may increase a company's part proliferation.
* Make it hard to optimize supply chains; see Supply Chain Management Cost Reduction summary and details in the articles on outsourcing and offshoring.
* Make if hard to maximize quality and implement Six Sigma without data and control over manufacturing; see Quality Cost Reduction summary and the article Designing in Quality.
If all 8 cost reduction strategies are implemented, the cost savings will be much greater than appeared possible through outsourcing or offshoring.
Correcting counterproductive policies may be a prerequisite to designing Half-Cost Products.
Don't try to save cost with unethical business practices.
For more information call or e-mail:
Call Dr. Anderson at 1-805-924-0100 to discuss implementing these techniques or e-mail him at anderson@build-to-order-consulting.com with your name, title, company, phone, types of products, and needs/opportunities.
Copyright 2010 by David M. Anderson
Dr. David M. Anderson, P.E., fASME, CMC
phone: 1-805-924-0100
fax: 1-805-924-0200
e-mail: anderson@build-to-order-consulting.com