Within moments of giving birth to your new product, you were told by senior management to begin reducing its cost.

So, your team shifts into a cost-reduction mode and begins sorting the product’s sub-assemblies by their material cost, attacking those at the top of the list. This is a great way to shrink the bill of material, but it doesn’t guarantee that the results will make it to the bottom line.

The best time to focus on hitting new product cost goals is during the design phase. Get this right, and you can avoid cost reduction programs altogether. However, if you do find yourself off target on an existing product, you must construct your cost reduction effort to make sure that it will result in improved profitability.

Better to Prevent High Costs Than to Reduce Them

Product architecture and design decisions can easily determine more than eighty percent of the final, product cost for capital equipment. If that seems a little high, try to recall the last time your organization took more than twenty percent of the cost out of an existing product without a redesign effort. A model for contributors to capital equipment product costs is shown below.

Capital Equipment Cost Contributors
Capital equipment cost contributors

Your architecture selection can lock in more than half of your product’s cost structure. At this stage, you are selecting fundamental technologies and building blocks that will remain with the product over its lifetime. Design implementation, which includes things like material selection, tolerances, and make-versus-buy decisions, can bring the total design contribution cost up to eighty percent. In comparison, production execution on things like yield, fixturing, and supplier selection is only responsible for a small fraction of your total cost.

The bottom line is that decreasing or removing costs is very difficult once products are designed. Therefore, you must make a design-to-cost framework a cornerstone of your development process. Design-to-cost is a discipline that treats target costs as an independent design target to be achieved during product development. Critical design-to-cost tenets include the following:

How to Cost Reduce an Existing Product

If this section applies to you, it means that your design-to-cost efforts didn’t go as planned. As discussed already, a product’s cost is very difficult to reduce once the product is designed, but that doesn’t mean that if you have a cost problem, you should give up before trying. Here are some guidelines to help improve your likelihood of success.

Make sure that you’ll get a return on your investment.

Usually, cost reduction on existing products involves some level of design change coupled with improvements in supply chain and manufacturing efficiencies. Make sure that the cost of developing and implementing the change will be paid back by the cost savings within the expected life of the product.

Also, watch out for unintended consequences. Sometimes one change can force a cascade of other design changes. As a result, the design effort and associated costs can snowball.

Never just reduce cost.

In the capital equipment world, performance benchmarks are always rising. Competitive advantages can evaporate if you don’t keep investing in performance improvement. Consequently, you will fall behind if you only focus on cost reduction.

Let’s say you spend a year stripping cost out of your flagship product. At the same time, your competitor works on advancing performance. At the end of that year, your value relative to your competition will be diminished. This means that everything you gained in cost reduction could potentially be given back in price as a result of a weakened position.

Cost-reduction-only strategies are a lot like treading water. You exert a lot of energy, but you don’t get anywhere.

Merge cost reduction with performance improvement efforts.

Instead of driving cost reduction efforts based on just a bill-of-material sort, merge cost reduction with performance improvement initiatives. Do this by tackling cost reduction as a requirement for every performance improvement project. This is design-for-cost at a   continuing engineering or project-by-project level. This way cost reduction comes along for the ride as you advance the product’s competitiveness.

Another benefit of this approach is that it’s not necessary to launch individual cost-reduction programs. This reduces both management overhead and resource conflicts.

Synchronize cost reduction and performance improvement releases to the market.

Not only is it best to combine performance and cost improvement efforts, it’s also imperative that the results be released to market simultaneously. If you make a noticeable change to your product that can only be justified to a customer as a cost reduction for you, your cost reduction will quickly become a price reduction, and your gross margins will suffer.

Instead, bundle cost reduction with performance improvements. That way, you will lower costs and set up an opportunity to increase prices.

Cost Reduction Case Study

In this example, the company manufactures and sells high-vacuum semiconductor process equipment. The current-generation product has been shipping for about a year and is installed at most of the company’s key customers. So far, the product has been very successful.

Then came the pressure to reduce its costs.

In response, the company’s engineers figured out how to eliminate one of the two vacuum pumps. This change saved more than ten thousand dollars on each system shipped. Furthermore, extensive testing demonstrated that system performance did not degrade. However, the change did not produce any performance improvement. Since the only goal for the program was cost reduction, the project was dubbed a success. So, the company cut the change into the standard bill of materials.

Customers began ordering follow-on systems at about the same time that the new, low-cost configuration was released. They immediately noticed that their new systems had one less pump. Since the company couldn’t articulate a customer-focused reason for the change, nearly every customer insisted that the missing pump be added, or the price be lowered.

The result was that very few systems were sold with the projected gross margins. The company realized that the cost-reduction project was destined to be a loser if the company didn’t do something differently.

The project team brainstormed ideas for recovering the situation. One engineer pointed out that vacuum-chamber-pump–down time was the throughput bottleneck in the system. By making a small change, they could reduce this time and therefore raise the throughput specification. The team also confirmed that the higher throughput could be achieved with the lower-cost, single-pump configuration. This idea allowed the cost reduction to be bundled with a throughput performance improvement. Customers not only accepted the cost-reduced configuration but, in many cases, paid a premium over their previous purchases.