1. ensure that all costs relating to the product and the organization are known and correctly allocated.
First of all, it is essential to check the existing controlling data and question it if necessary:
- What costs are incurred by the organization?
- How are these allocated?
- How up-to-date is this data and where does it come from?
Allocations are often simply carried over from previous years and adjusted. However, if turnover has changed in the meantime, for example, the data is outdated and no longer relevant. It is also important to scrutinize the absolute amount and actual allocation of allocations and compare them in the benchmark. If the costs deviate too much from the benchmark values, there is a need for action, which usually affects the organization as a whole. The specific areas for action can often be quickly identified at this point.
2. Create cost transparency for your products.
After the allocations or overheads have been checked and analyzed, an interesting question arises: What about cost transparency at product level? A detailed product cost calculation - possibly carried out by an external service provider - is usually a good way of recording cost transparency at product level, which also allows a comparison with the main competitors or comparisons with other production countries. Accuracy at component level is not important here, but at least at module level the costs should be known - as well as which allocations affect the product and to what extent they do so.
This allows savings potential and therefore areas of action to be quickly identified based on a few central products of a company, which can be derived for the entire product portfolio. At the very least, the classic surcharge calculation should be transparent. This enables a later analysis of the material and assembly costs as well as the allocations and costs relevant to the product for development, testing, quality or rework. Finally, the comparison with the target costs at module level is of course also interesting. The question that arises in the event of deviations is: Have the deviations been recognized so far? And how were they dealt with? Or is there no target cost process at module level in your company at all?
3. Identify the main cost drivers of your products.
Is it clear which components and functions drive up the fixed costs of your product and where they come from? In most cases, this information is already available in the company and is known in the areas and departments involved, such as design, purchasing, assembly or quality assurance. They then only need to be collected and compiled in a structured manner. If you have not yet identified all cost drivers, it is worth taking a look at design or sales specifications. Here you will very often find factors that make up a significant proportion of the fixed costs and expenses, but are implemented by the design department and suppliers without being questioned.
4. Select only those of your customers' requirements that you really need.
A central question in product cost optimization is always:
- Do I know the requirements of my customers exactly?
- And how are these implemented constructively in the products compared to the competition?
Especially with products that advance earlier versions or are based on variants, constructive features tend to creep in that cost money but have no advantage because the customer does not experience them. There is often talk of modular approaches here, but in reality they are not. After all, the attempt was only made to include as many basic functions as possible in a basic variant. However, this is precisely the wrong approach, which increases the costs of this basic variant.
5. Implement function-based development.
To ensure that cost-optimized product development is possible, the modules should be considered according to their functions, their implementation and the added value for the customer. The previously mentioned target cost process should now also be considered.
A simple example: How much can the "Housing" function cost? And what should it contain? The largest parts of the functional amount of an enclosure are certainly stability and the protection of internal components. If the design is also relevant, this aspect is of course added. Now it is important to determine from a sales perspective in the target cost process: How much is the customer willing to pay for the enclosure? This must then be the cost target within which the design department must find a suitable solution.
This procedure must be implemented for all modules of the product, whereby another question must be considered: Which features does the customer need ("must have")? And which are merely an addition ("nice to have")? The nice-to-have features or functions should then be eliminated or - think of buying a car - marketed as optional extras for good money.
In practice, it will of course not be possible to evaluate the target costs from the customer's perspective for all modules of a product. A pragmatic way must then be found together with the areas of sales, design and controlling in order to allocate the costs and track them later. Target costs without target cost controlling are unfortunately ineffective.
6. Check for further cost savings in the design phase.
As is well known, the course for the costs of a product is set in the design phase. As described above, it is very important to clearly determine what is to be developed and at what cost. For example, if the sales department wants an elegant lettering, this will be implemented accordingly. The higher costs cannot then be blamed on the design. It is therefore very important to specify the target costs for the desired module - or rather: the desired function.
In addition to the cost specifications, other issues in the area of product cost optimization must be considered. These include:
- How are technical optimizations developed and are the cost drivers known?
- How professional is the design? What should be sensibly purchased externally?
- What are the strengths and weaknesses of the technology?
- How well are new innovations tracked and used in development?
- How well is cost awareness developed in the design department?
- To what extent is supplier expertise integrated into the development phase?
7. Set up a target cost process.
In addition to cost transparency and an understanding of the cost composition, the basis of any cost optimization is a suitable target cost process in the company. Target costs should always be derived from a sales perspective, taking into account the company's targets with regard to the desired profit. Compliance with the target costs must then be constantly monitored using a suitable process within the company. If deviations occur, their causes must be identified and suitable countermeasures derived.
It is important to really put all company allocations on the table and compare them with standard market rates when setting up target cost monitoring for the first time: In the event of deviations, the allocations should be questioned and, if necessary, optimizations and further savings potentials derived.
8. Professionalize purchasing.
It is well known that purchasing is assigned a central role in any cost optimization. And this is true - provided that the framework conditions mentioned above have been analyzed and clarified. Purchasing can only implement in the best possible way what it is given by the design department. Involvement in product development is very important here: the purchaser should not support development, but should coordinate important information on suppliers and their technical capabilities with the developer.
It may also be necessary to change suppliers if they are unable to meet the technical requirements. Or the technology must be given limits within which it can set its technical requirements. At the end of the day, there must be harmony between the design and the supplier. Then there are the two most important issues that directly affect purchasing: creating cost transparency towards suppliers and establishing suitable supplier management.
Creating cost transparency towards suppliers
Cost transparency also represents the central basis of any savings for purchasing. There must be suitable and sufficient transparency of expenditure for the purchased parts and services and this must be recorded in the negotiations for subsequent framework agreements or orders. Even with small quantities and high variance, it is possible to create basic transparency. In any case, a contract should never be awarded without a detailed cost breakdown, especially as this always serves as a basis for subsequent changes.
Ideally, the employees in the development department should also be involved in this process: On the one hand, to provide them with the data for a cost-optimized technical design, and on the other, to also use them to check the plausibility of costs and expenses. The purchasers must be supported by appropriate training or external support: The buyer must be able to shape the negotiation by explaining to the supplier or provider where the offer deviates from the costs they have determined. At the very least, the buyer must be able to deduce why the offer is not plausible from their point of view. The statement "Three percent or five percent always works in negotiations" should be eliminated from the mindset. Suppliers and providers always include this as negotiating leeway in quotations anyway. This is not a real saving, but just an appetizer for the buyer.
Setting up suitable supplier management
Suitable supplier management is important in order to give buyers the necessary time for negotiations and plausibility checks on costs and expenditure. Often, the task of the buyer is to be a kind of "hunter" because the framework conditions for the timely procurement of parts are not in place. At this point, I can therefore only advise you to make supplier management a top priority:
Every buyer should know their supplier, so
- have been on site at least once,
- all the primary points about procurement such as replenishment times, Risk assessment and production process and
- to recognize the need for action by means of a suitable supplier evaluation and to agree measures with the supplier if necessary.
A simple audit by employees from the quality assurance department is not sufficient for this purpose.
Conclude framework agreement
The most important findings from the creation of cost transparency and supplier management should result in a comprehensive framework agreement. This will serve as the basis for optimizing the ordering process, partial availability and, of course, costs in the future.
9. Use the findings to optimize your processes and organization.
After you have identified the areas for action both product-related and across the board based on a few key products in your company, you should use these findings to initiate optimizations company-wide. First of all, it is very important to recognize barriers between departments and different areas. This is because the interactions at the interfaces are usually decisive for the success of an optimization.
In addition, you should make sure that optimizations that are actually aimed at the organization as a whole are not just related to individual interfaces or areas. A singular approach would neither optimize costs nor exploit savings potential. This is why the approach of "We're doing a purchasing project to significantly reduce costs" is, in most cases, misguided, as described above.
