COLLABORATIVE APPROACH TO COST-REDUCTION STRATEGIES
How Designers and Engineers Can Reduce Costs by Collaborating More Closely with Manufacturing and Procurement
As more and more manufacturers struggle to survive, this white paper reviews the challenges of competing on price while maintaining acceptable profit margins, and explores the benefits of active collaboration between engineering, manufacturing, and procurement.
A challenging time for manufacturers
Deteriorating economic conditions coupled with low-cost competition from global manufacturers and soaring energy prices have made North American manufacturers painfully aware that the widening productivity gap between them and overseas competitors can no longer be ignored.
Not surprisingly, this situation has led to massive layoffs in the manufacturing industry. From 2004 to 2008 alone, more than one in seven manufacturing jobs, nearly 322,000, disappeared in Canada. Similarly, over the last 10 years, the United States has lost almost 6 million manufacturing jobs. In the meantime, China has become the world centre of manufacturing employment. In fact, the number of workers in manufacturing in China was estimated at 109 million in 2002, which represents more than double the combined total (53 million) in all of the G-7 member countries.
Sadly, these massive layoffs may not be enough, as simply cutting prices and sacrificing margins to compete with low-cost competitors is a dangerous strategy. As someone once said, “no matter how much you cut your prices, there will always be someone willing to go out of business faster than you.”
A winning strategy
An alternative—and more interesting—approach consists of finding ways to streamline the product development, manufacturing and procurement processes, thereby allowing manufacturers to increase productivity and reduce internal costs without sacrificing profit margins.
This quest is actually not new. Back in 1985, the American Motors Corporation (AMC) was essentially looking for a way to speed up its product development process, and created a new process now known as Product Life Management (PLM).
The first part in this effort led to computer-aided design (CAD), which allowed engineers to drastically increase their productivity. The second part led to the creation of a new communication system that enabled engineers to build a continuous feedback loop by collecting in a central database all the information that affects a product, such as engineering changes as well as design and manufacturing improvements.
The result? Chrysler, which had purchased AMC and expanded PLM throughout the enterprise, became the auto industry’s lowest cost producer, recording development costs that where half of the industry average by the mid 1990s.
The changing role of engineers
While PLM may not be the right answer for all, the approach at the very least illustrates that design is an interactive process and that manufacturing, assembly cycle times, and inventory levels are largely driven by a product’s design. Naturally, this all reflects on costs, which is why by the time a product has been designed, it is estimated that the design has determined 80% of the cost of the product.
The role of the engineers (or designers, depending on the firm) is therefore not only to identify and minimize design flaws at the prototype stage, but also to continuously optimize their design by incorporating the feedback of the production and procurement departments.
In addition, engineers can count on their suppliers to help them further reduce costs, but this implies working with suppliers that are willing to actively participate in solving design flaws and not just “low-cost-bidders”. This may be well worth the effort, as research suggests that integrating suppliers early in the design process can yield an additional 3 to 15 percent in cost reduction.
Naturally, all this is only possible if systems are in place to foster collaboration between engineering, production, procurement and suppliers; and if management supports the initiative by encouraging continuous improvement and cost reduction initiatives from initial conception to finished product.
The benefits of active collaboration
Improved collaboration provides numerous benefits, such as faster time to market, enhanced product quality, and lower inventory costs, to name a few.
For example, engineers may work with the purchasing and quality assurance departments to establish a list of preferred vendors. Without such a list, the purchasing department will likely select suppliers purely based on price, not realizing that suppliers with faster turnaround times on materials and parts will probably save the company more than the initial price difference, simply because quick turnaround times contribute to reducing inventory costs and achieving faster time to market.
To facilitate collaboration, engineers may use an Engineering Change Notice (ECN). Designed to not only record what changes need to be made but also the reason for the change, these documents provide a history of problem solving and cost-cutting measures, which is particularly useful to avoid potential problems with future product development.
This approach is also particularly effective to ease the financial burden of unused or outdated parts in inventory. Here again, ECNs can be used to document what current inventory of materials and parts can still be used prior to implementing any design revisions. Purchasing and the selected suppliers can then ensure that the new design changes coincide with future inventory replenishment dates, so that nobody is left with parts they can’t use.
This continuous feedback loop and documentation are invaluable for new product development, and contribute to eliminating issues in manufacturing and assembly, while also taking into account the impact of design changes on inventory levels. Other benefits include quicker development times, lower manufacturing costs, reduced downtime and most importantly improved cohesiveness and responsiveness among all departments.
Times are tough for manufacturers, so it is quite understandable that procurement would be tempted to select the supplier with the lowest price. This, however, is rarely a wise decision.
First, because this may only allow manufacturers to temporarily compete on price—what will happen next time prices drop again?—and second, because this type of strategy can actually increase manufacturing and inventory costs, therefore eroding the manufacturer’s profit margins even more. It is not just about price. Quality, service, technical ability, and overall responsiveness of the supplier are factors that should be equally weighted, and for that, procurement needs the engineers’ help.
On the other hand, when engineers actively participate in cost-reduction strategies by enlisting suppliers, manufacturing and procurement into a concurrent process of early interactions, their collaborative efforts often result in producing better products more quickly and more cost effectively.
Ultimately, it is this type of cost-reduction strategy that will lead to a more sustainable competitive advantage than price cuts alone.
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