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20th February 2019

8 Considerations for product cost reduction

Are you looking to make Product Cost Reductions?

Are you in markets where competitive pressure means similar products can only achieve a certain price? A cost reduction strategy can increase product margins and profits. This in turn can lead to further product and service development funded from the increase. A cost reduction exercise isn’t appropriate for every product. The product needs enough sales volume for the investment in the exercise to be repaid within a sufficiently short period of time. The benefits are only realised after the cost reduction project costs have been repaid.

The Elements of a Product’s Costs

The landed, manufactured cost of a product is made up of several elements, including:

  1. Bill of materials – The individual items that make up a product from screws and resistors to antenna and microprocessor ICs.
  2. Purchasing – The costs associated with buying and stocking items in advance of a manufacturing run.
  3. Manufacturing and Assembly – How many distinct processes  are used? Depending upon the product being made, this may include:
    1. printed circuit board fabrication
    2. surface mount component population
    3. through hole component placement and soldering
    4. cable harness manufacture, and
    5. unit wiring.
  4. Setup, Calibration and Test – The product may need adjustments and testing after manufacturing. This is to trim out component tolerances and to confirm the manufacturing steps have been performed correctly.
  5. Production yield – Manufacturers often charge for completed, working units and factor in an assumption for non-working, defective units. If your defect rate is lower than was assumed during pricing negotiations, you will be paying more than needed. If however your defect rate is higher than assumed you are likely to be charged an additional premium to reflect the costs associated with this.
  6. Packaging and Shipping – Costs associated with the product weight, whether it contains batteries, is considered as dangerous goods, and the size of the product have an impact here.
  7. Returns – Product returns have a number of associated costs. From the cost to replace, investigation and rectification costs and damage to the company and its brand. Where products are returned because users can’t operate them, this highlights an opportunity to improve the usability of the product and consider simplification of its operation.

The costs to a product therefore aren’t just the component costs. Any cost reduction exercise is most effectively performed by looking at the product as a whole.

How do Customers Use your Product?

Consider how key customer groups use the product. Are you asking tough questions about how the product is used? This can help focus where product costs may be able to be cut. During development of early product version functions may have been included just in case the customer wanted them. This can drive the design down a more expensive implementation route than necessary. It’s worthwhile developing a keen understanding of which functions are essential, which are nice to have, and which are seldom used.

Can the Manufacturer help reduce costs?

It is often useful to review the product manufacturing with the people making it. Every second wasted from uncertainty, incorrect assembly, product re-test and difficult to repeat manual tasks can all have an impact on the product cost and its quality. Where the electronics have been changed for the cost reduction project, it is likely there could be re-approvals costs for FCC, CE (or UKCA) including Electromagnetic Compliance for conducted and radiated emissions and immunity.

Is your Product a Good Fit for a Cost Reduction exercise?

The checklist below gives the key considerations when understanding if your product is a good fit for a cost reduction exercise. Let’s start with an assumption that you have annual sales volume at least 1000 units per year, so that the costs of a cost reduction exercise aren’t excessive per unit. How many of these do you answer YES to?

  • Is the product lifecycle expected to continue beyond the cost reduction and project payback period?
  • Has your product got established or emerging competition giving pricing comparison and pressure?
  • Have product volumes increased beyond the capacity envisaged during initial production setup?
  • Has the manufacturer raised concerns about manufacturing yields?
  • Does your product include several printed circuit boards that have grown organically over the product’s life?
  • Are there are several cable assemblies and connectors?
  • Is the product enclosure bought off the shelf and then customised with holes, slots, labels and stickers?
  • Are product returns higher than acceptable in your industry?
  • Has over 18 months passed since first product release? Improved integration may remove the need for some components and newer components are often more cost effective than older components towards the end of their manufacturing cycle.
  • Is your annual production forecast reasonably accurate?

If you’re saying yes to more than one, you should seriously consider looking at your costs.

8 Considerations for product cost reduction

  1. Before jumping into a technical product re-design talk to your supply chain. Committing to annual production volumes with regular call offs can help get volume based discounts in smaller batch sizes. Regular communication with key suppliers can help pull forward or push back component demand. It is likely however that there will be a level of inventory commitment required here, component demand can’t be pushed back forever.
  2. Understand how your product costs are built up and then focus on key items in the highest cost areas for maximum returns on the project.
  3. Capital expenditure on equipment and tooling can rapidly reduce the cost of product enclosures by injection moulding or speed up the time to test products with parallel test fixtures.
  4. Identify drop in replacements for high ticket items. Having multiple sources for items such as power supplies, connectors and displays makes the product supply chain stronger and introduces competition which can bring pricing improvements.
  5. Remove unnecessary functionality to chop out the costs associated with the components, their purchase and placement from the product.
  6. Reduce or simplify product cabling and interconnections by combining printed circuit boards or by rejigging internal wiring through the use of serial busses.
  7. Make the product easier to assembly. The Japanese approach of poka-yoka tries to help operates avoid mistakes by making it impossible to assembly incorrectly or to make errors obvious.
  8. Reduce power consumption for battery powered products. This can help with the battery costs as well as the shipping costs through reduced weight.