Many manufacturing and service companies succumb to competitive pressure by embarking on misguided cost-reduction efforts, failing to take a holistic approach. To be clear, lean is the way to be; lean is not the same as cost reduction. Successful cost-reduction efforts consider the entire enterprise, the entire product life cycle, and, most importantly, the effects that changes will make on customers.
Considering the entire enterprise means that shifting responsibility for a process to a different group so that your department can claim a cost reduction is an incomplete effort. [A certain accountant I once knew would call that a cost avoidance.] Unless the process can be performed more efficiently in the new department, lowering total cost, justification of the move is unlikely.
Consider an example that illustrates how bizarre these activities can become. A product’s contoured housing results in an irregular shape. Highly stylized decals are applied to the housing to enhance the product’s aesthetic appeal. Decal application, however, is more complicated than it may first appear; it creates a bottleneck on the final assembly line.
So… where might we find experts to relieve this pain? The shipping department, of course! They apply labels to every package, every pallet, every shipment, all day, every day. They must know what they’re doing! You can probably see where this is going, but let’s review anyway.
Without the proper equipment to fixture the product and position the decal, quality rejects increase while the production rate plummets. As a bonus, on-time delivery performance of all products steadily drops as resources are shifted to these new responsibilities. If this example seems absurd, it is. Nonetheless, things like this happen all the time.
A common alternative to the shifting responsibility strategy is to use overtime to compensate for undercapacity. This often requires creating an offline station to allow product queuing, increasing inventory, transportation, handling, and motion waste. Many times, this is done to avoid the expense of new or upgraded equipment, training, or hiring additional employees.
If you need a machine and don't buy it, then you will ultimately find you have paid for it but don't have it." – Henry Ford
As I pointed out in Avoid the Spiral into Oblivion, using overtime to compensate for deficiencies in staffing should only be considered as a short-term solution.
Consideration of the entire product life cycle is increasingly critical to successful cost-reduction efforts. Whether driven by regulatory requirements (RoHS or the EU’s ELV Directive, for example) or internal sustainability goals, material choices are becoming more restricted. The benefits of a material that is less expensive to acquire, process, and ship may be completely offset by increased disposal cost, adverse health effects of constituent chemicals, and complex recovery and recycling processes. Material requirements will continue to become more stringent and challenging to fulfill a product’s requirements at all stages of its life cycle.
A recent report, published on AVweb and elsewhere, describes a partnership between Boeing and ELG Carbon Fibre formed to monetize the composite scrap generated from aircraft manufacturing operations. Carbon fiber is increasingly specified in aerospace applications as the benefits of its high strength-to-weight ratio exceed its cost.
For the recycling partnership to pay off, Boeing and ELG must carefully manage the process to ensure that collection, transport, and emissions controls costs, among others, do not exceed the value of the end product. At all stages of the product life cycle, tradeoffs must be carefully examined and appropriate measures taken.
Ultimately, the customer decides what costs are reasonable and justified. If cost-reduction efforts change the customer experience significantly, serious backlash could result. Lower cost packaging may be difficult to open or provide inadequate protection of the product. Printing instructions in miniscule font (How would you like to read 2 pages of this?) – or eliminating them altogether! – to save paper and printing costs may anger some customers. Removal of features without a thorough investigation of customers' expectations (the product’s value proposition), ease of maintenance, or other factors is a truly perilous endeavor.
In some cases, the customer may bring this on themselves. Using up-front cost as the sole selection criterion, “failing to take the quality of the services into consideration, they all too often do not receive the value they expect.” This, of course, applies equally to products and services.
Some businesses seek to overcome the quality vs. cost conundrum by growing ever larger. Immensity alone – achieving economies of scale and scope – will not, however, solve this problem. The Economist explains:
“The larger an organization…, the more complex it has to be to manage and run such scale. This complexity incurs a cost…”
The article also quotes T. Boone Pickens: “It’s unusual to find a large corporation that’s efficient.” Large corporations have more departments between which they can shift expenses and more people to develop creative ways to mask what has been done. Thus, the cycle continues.
Replacing this inwardly-focused shell game with a holistic approach to cost management will yield much better results for the business and its customers. As James Lawther declares in his blog on “The Squawk Point,” “[i]t is far better to focus on the cost to the customer.” This requires adopting an outward-looking point of view. What does the customer find value in? What are they paying for that they would rather not? The answers to these and similar probing questions will help you direct your cost-reduction efforts and, more importantly, improve your value proposition.
As Lawther so eloquently states, “…the cheapest you can be is when you give the customer exactly what they want, when they want it. Nothing more and nothing less.”
If you would like help changing your company’s perspective in order to achieve real cost reductions and increased customer value, contact JayWink Solutions. We can help you focus on what’s important to your customers and to your business.
[Link] Compliance FAQs: RoHS (NIST)
[Link] Directive 2000/53/EC - the "ELV Directive"
[Link] “Boeing Enters Composite Recycling Partnership.” AVweb; December 6, 2018
[Link] “Boeing, ELG Carbon Fibre to recycle aerospace materials.” Recycling Today; December 5, 2018.
[Link] “Gaining value when using external engineering support services.” Kelly Services; 2017.
[Link] “Economies of scale and scope.” The Economist; October 20, 2008.
[Link] “Penny Wise Pound Foolish.” SquawkPoint, November 2016.
[Link] “Are You Cheap Or Nasty.” SquawkPoint, February 2010.
Jody W. Phelps, MSc, PMP®, MBA
JayWink Solutions, LLC
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