A common problem which a lot of businesses face, especially with long term projects, is occurrences of cost overruns. When cost increases impact businesses – there is usually a clamour to return to the budgeted position resulting in a cost reduction requirement. All too often this requirement gets passed straight to procurement to solve – this often results in taking the problem to suppliers requesting further discounts and possible fluctuation to a settled supply chain.
For many senior executives this is often seen as the easy route to cost reduction. By simply running a Pareto analysis across your procured parts – prioritizing, then negotiating with your suppliers it’s probable that some reduction can be achieved.
However before placing the task purely at the door of supply chain, organizations should consider how the cost base has been constructed in the first instance. Whilst procurement are often tasked with obtaining savings they are really at the end of the food chain – the cost itself start with the original design and specification – procurement are to a large extent merely reacting to the business need.
Tackling design to cost and alleviating specification?
Value Engineering / Design to cost
When considering cost reduction programs Value engineering and design for cost can have an important part to play in driving down spend. Workshops with cross functional engagement, reviewing high cost items should be convened to carry out detailed analysis of the design and requirement. Considerations into materials, manufacturing methods, complexities, tolerances should all be included as agenda items. Where the item includes high cost parts are there alternatives (often made from different materials) that could be utilized?
Stakeholder engagement
When facilitating any design to cost review – it’s important to get a wide diversity of stakeholders – and its important to challenge the current thinking – Avoid the “we’ve always made it like that approach” – Does the organization have a “gold” specification when “bronze” would do?
Due consideration should be applied to the impact of redesign? What is the influence on the product lifecycle? What about impact to the customer?
Design to cost is not the easy path for certain – however it should be viewed as a partner for supplier activity. Organizations that focus only on the supplier side of cost reduction will see the well run dry at eventually – and company’s must realize that supply chain are only reacting to business requirement.