COST REDUCTION STRATEGY

PREPARED BY R VETTRIVIZHI RESEARCH AND DEVELOPMENT UNIT I

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DOCUMENT STATUS: FINAL

DOCUMENT PUBLICATION HISTORY

Versio n 1.1 1.0

Date 03-11-2009 29-10-2009

Author(s) R VETTRIVIZHI R VETTRIVIZHI

Remarks Hyperlink removed ON COST REDUCTION STRATEGY

DOCUMENT DISTRIBUTION LIST Free/Restricted Global Purpose Knowledge

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TABLE OF CONTENTS DOCUMENT STATUS: FINAL DOCUMENT PUBLICATION HISTORY DOCUMENT DISTRIBUTION LIST 2 2 2

1. Introduction 2. Eight Elements of cost reductions 3. Cost reduction strategy 4. Inference

4 5 5 10

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Introduction:
In order to survive and grow in the current global recession scenario the most important challenge for every company is to reduce cost by maintaining a balance with quality. Incidentally for the past decade quality issues has been well addressed by our Indian Organization, and most of the companies implemented Quality Management. Now all are marching towards a goal of Cost Management. However in order to have a substantial cost reduction, right strategies should be followed. The eight powerful cost reduction technique is abstracted, to address the comprehensive cost management solution in the quickest possible way with an attitude aiming to enhance production , minimizing cost and thus generating more revenues.

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Cost Reduction Strategy :

Cost Reduction can result in significant product cost saving, manufacturing cost saving and life cycle cost saving. When companies interested in cutting cost, the following 8 elements can be implemented.

1.Cost Reduction by DESIGN

Cost reduction opportunities:

Product development determines 80% of product cost. The concept alone determines 60% of cost saving. Cost is very hard to remove later, after products are developed.

The Result : Significant cost reduction by design for parts, labour material over head,quality and product development, designing for lean production can maximize lean saving.

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How to reduce Product Cost by Design: Practice concurrent engineering with early and active participation of manufacturing, purchasing vendors etc. Implement Design for Manufacturing, Design for Lean & Design for Quality. For dramatic cost reduction, half cost to order-of-magnitude optimize concept phase. To convert ideas,research or prototype into viable products use commercialization technique to ensure success.

Activities Supportive to Low Cost Product development:

Co-locating Engineering with manufacturing ensures best Team work,avoid distant outsourcing and off shoring. If outsourcing , choose local vendors which ensures early and active vendor participation in product development team. Pre-select vendors who will help develop products,avoid low-bidding so that vendors will help with design. Implement standardization and good product portfolio planning for the best focus. Total cost measurements to quantify all costs effected by design. Correcting Counter Productive Policies. New ventures & start up will be able to implement these principles right way. Established companies may have to first correct Counter Productive Policies by prioritizing portfolio planning,scrutinizing high over head sales,emphasizing thorough-up-front work,quantifying all cost,avoid time draining attempts to reduce cost after design,going for the low bidder or moving production offshore.

2. LEAN Production Cost Reduction:

Cost reduction opportunities:

Lean production benefits include doubling labour productivity, cutting times by throughput times by 90%, cutting errors & scrap in half errors.

The Result:

Significant cost reduction possible by labour productivity and eliminating waste. Even greater returns when lean is extended to a Built -to- Order business model.

How to reduce Manufacturing cost:

Implement Lean Production.

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Activities supportive to Lean Production:

Design product families for lean production. Concurrently Engineer flexible process Implement standardization to enable dock- to-line distribution. Rationalize products to eliminate most unusual products with most unusual parts & process. Total cost measurements to quantify all costs related to manufacturing. Keep control of manufacturing in house or with vendors/partners, avoid out sourcing of cost,avoid long & distant supply chains.

3. OVER HEAD Cost Reduction:

Cost Reduction Opportunities :

Standard products can be build to order without forecast or inventory and special can be mass customized on demand,

The Result :

Inventory carrying cost can be eliminated Procurement cost can be reduced with automatic, on demand resupply. Better responsiveness lead to more sales.

How to reduce Over Head Cost :

Implement Built- to -Order and Mass Customization to build product without forecasts or inventory.

Activities Supportive to Built to Order and Mass Customization :

Implement less production Rationalize products Total cost measurements to quantify overhead costs. Keep control of manufacturing in house or with vendors avoid out sourcing of cost,avoid long distant supply chains, & avoid offshore manufacturing.

4. STANDARDIZATION of Cost Reduction:

Cost Reduction opportunities :

Standard parts list can be 50 times less than the proliferated lists. Standard parts are easier to get and fewer types need to be purchased.

The Result :

Economies of sales result from larger purchase.

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Material overhead of the standard parts can be one- tenth that of proliferated list.

How to reduce cost with Standardization : Implement standardization with a practical procedure has been developed to standardize part and material for new design. Activities supportive to Standardization :

Rationalize products Total cost measurements Don't merge acquired products into the same plant or build others product.

5. Product Line RATIONALIZATION Cost Reduction :

Cost Reduction opportunities :

Focus on most profitable products.

The Result :

Eliminate the loser tax on cashcows to subsidize low-margin products. Identify and remove products that are losing money on a total cost basis. Reduce overhead demands and cost for hard to build loser ' products. Free up valuable resources to work on cost saving efforts in engineering, operation and supply chain management.

How to reduce cost by Product Line Rationalization : Implement product line Rationalization to eliminate or out source low profit products that have high overhead demands and not compatible with cost reduction strategies. Activities supportive to Product Line rationalization :

Product portfolio planning focus new product development. Total cost measurements to identify opportunities and supports rationalizations decision

6.

SUPPLY CHAIN MANAGEMENT Cost Reduction :

Cost reduction opportunities :

Supply chain simplification can greatly simply Supply Chain Management. -8-

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Spontaneous supply chain can pull parts into production on demand without forecasts or inventory.

The Result :

Material overhead can be reduced by a factor of 10 for standard part and material. Purchasing leverage results from high quantities of standard parts. Automatic resupply eliminates forecasts, purchase order,inventory & expediting costs.

How to reduce cost in Supply Chain Management :

Design products around standard parts to simply Supply Chain Management. Standardized parts to focus supply management on high volume, to get parts easily. Rationalize away the most unusual products. Establish vendor/partnership which saves more money then bidding.

Activities supportive to Supply Chain Cost Reduction :

Total cost measurement to encourage and justify standardization and rationalization. Don't merge acquired products into the same plant or build others products.

7. QUALITY Cost Reduction:

Cost Reduction opportunities :

The cost of quality can be 15 to 40% of revenue.

The Result : Quality cost can be greatly reduced ,in some cases reducing quality cost can double the profit. How to reduce the cost of quality :

Eliminating of quality cost starts with designing in quality. Quality cost in manufacturing can be eliminated by Six Sigma programmes. 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 measurement to quantify the cost of Quality. Lakshmi Machine Works Ltd., Coimbatore. -9-

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 categories.

The Result :

All the above cost reduction activities are encouraged and supported, the result are quantified thus encouraging total cost reduction.

How to Reduce Cost by Total Cost Measurements :

Implement total cost measurement.

Activities Supportive to Total cost Measurements:

Unit total cost can be quantified, everyone must take decision 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.

Inference:

If all 8 cost reduction strategies are implemented, the cost saving will be much greater than appeared possible.

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 product and hard to remove. Don't use low bidding which only appears to save one category of cost Don't outsource or offshore manufacturing for cost, which will not result in net cost saving. Don't take prototype into production without commercialization. GOOD ETHICS IS GOOD BUSINES

Reference: Dr. David M. Anderson, P.E., fASME, CMC www..HalfCostProducts..com

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