Top 5 Mistakes When Trying to Reduce Product Costs

By Craig Theisen

Top 5 mistakes companies make when trying to reduce product cost

A company’s actual product cost may be much higher than the best-possible cost. Here are five mistakes company’s make that result in higher product cost than is achievable:

1. Not optimizing cost during design – This is the biggest mistake. The design phase is the best time to optimize product cost. Once equipment, tooling and the supply chain are established, removing cost is difficult. Companies may have millions of dollars of excess cost in their products and value stream after production begins, much of which cannot be removed.

2. Not designing with the full value stream in mind – The high-impact value stream includes the company itself, tier 1 and tier 2 suppliers, and delivering products to customers. The product design can greatly impact the cost incurred in the high-impact value stream. Designing a product considering efficiency throughout the high-impact value stream can be costly.

3. Not leveraging purchasing enough during product design and development – Material costs can be more than 50% of the total product cost. There are inherent material costs designed into products resulting from the material type and quantity of that material specified. Often this information is passed onto purchasing and the buyer works to procure parts with the specified material type and quantity. If the buyer was involved in the design activity, they may be able to provide input to the designs to enable suppliers to produce parts at lower cost.

4. Not innovating enough in materials, processes, equipment, and tooling – A company’s ability to continually lower product cost in the future depends on how much they, and their supply chain, innovate in the inputs and incorporate this innovation into new product designs and the means to make them.

5. Not having a system to optimize product cost – A system is required to achieve the best product cost. This system should involve product development team members, department managers, and process experts in optimizing costs during the design phase. It should also track product costs and savings during the design phase against cost and cost saving goals. It should set expectations and measure results from cost-focused innovation. It should have leaders responsible for the system with monthly performance reviewed as part of company operating reviews.