Value and Cost Engineering
Cost transformation from premium to volume provider
Mass manufacturers who expand their product portfolio into higher price segments are not uncommon. A premium manufacturer of refrigeration appliances, on the other hand, takes the opposite approach. What seems banal from a technological point of view is an enormous challenge from a cost perspective. ROI-EFESO accompanied the company in this demanding transformation project.
A manufacturer of refrigeration appliances is very successful with its products in the premium segment. The problem: over 90% of the business with refrigerator-freezers ("bottom-freezers") - the company's main product - is achieved in the mid-price segment. And the trend is rising. With a new product line at competitive prices, the company aims to significantly increase its market share in this growing market segment.
A successful premium supplier of refrigeration appliances wants to launch a new product line for the medium price segment within only two years. The problem: The development and production processes are not geared to the cost requirements there.MORE
With a combined approach of value & cost engineering and classic purchasing optimization, the project team first creates comprehensive cost transparency down to the bill of materials level and then uses effective levers to reduce costs.MORE
The lack of the premium manufacturer proved to be a central challenge in the cost transformation. With the help of a comprehensive functional cost analysis and a comparison with competing devices, a change in the mindset was achieved.MORE
From the S Class to the Golf Class
For the company, this step meant a radical paradigm shift: whereas product development and product management had previously been primarily geared towards innovation and technological leadership, the task now was to maintain a certain target price or target costs while at the same time satisfying customer needs that differed greatly from the market segment addressed so far. In addition, there was little cost transparency or cost awareness in the company due to the previous orientation. In this difficult situation ROI-EFESO took over the mandate and accompanied the company from the early development phase to the start of serial production.
In two years to the start of production
In order to meet the demanding development time of only two years until the start of mass production, suitable instruments first had to be identified with which rapid cost reductions could be achieved while at the same time adapting the range of functions. To this end, the project team first examined the current situation in a three-week analysis phase and then determined the possible savings potential. On the basis of these results, a comprehensive Value & Cost Engineering (VCE) approach was selected, combined with measures for purchasing optimization, such as renegotiation, localization and bundling of purchasing positions and suppliers.
Comprehensive cost transparency for each bill of material item
The aim of the VCE approach is to achieve a high value in the addressed market segment through an optimal ratio of manufacturing costs and expected customer benefit. A prerequisite for this is comprehensive cost transparency at the level of the individual product functions. To achieve this, the project team first carried out a comprehensive functional cost analysis, in which the exact manufacturing costs and cost elements were determined for each item of the material BOM (bill of material). For this purpose, the ROI experts considered all influencing factors, such as wage levels, machine hours and batch size technologies as well as processing and set-up times.
30% overcome cost delta
By combining this data with the findings from the functional analysis, the project team was able to determine exactly how much individual components were allowed to cost. Comparing these target costs with classic bottom-up costing models resulted in a gap of 30% between the target and actual costs. For these, it was necessary to find suitable ways to save costs in the further course of the project without limiting the functionality or quality of the product.
To achieve this, the VCE experts at ROI-EFESO used a combination of different instruments to reduce costs:
- Teardown workshops & technical concept comparisons:
Within the scope of technical concept comparisons, the VCE experts analyzed individual components and assemblies of competitor devices to derive the ideal functional scope and identify possible cost reduction potentials in design or production costs.
- Should costing analyses:
In order to determine a suitable make-or-buy strategy, the project team used powerful models to calculate the expected costs for house and purchased parts in various scenarios and taking into account the different cost types. On the one hand, this served to review the company's own value-added activities and, on the other, provided an objective basis for discussions with suppliers.
- Supplier integration:
Through close integration and joint workshops with all A-suppliers, potential savings in the product development process and synergy effects in the joint value-added activities were also identified.
In a parallel stream of measures, ROI-EFESO also supported the customer in optimizing its purchasing processes for the new product line. This included market analyses, standardised requests for quotations (RfP), supplier audits and technical readiness reviews.
Cultural change as a central challenge
In view of the large number of measures and the tight time schedule until the introduction of the new product line, the customer decided after setting up the package of measures to implement them also in cooperation with ROI-EFESO. A correct decision, as it turned out. On the one hand, the professional project management ensured effective interaction between all partners involved, both inside and outside the company. On the other hand, change management turned out to be the central challenge and essential success factor in the project. Especially in the area of product development, an awareness of cost levels and price sensitivity first had to be developed. A process that would not have been feasible in this short time without external impulses.
Lower manufacturing costs - faster to market
The focus on rapid cost-cutting measures and intensive support during the implementation phase have resulted in the ambitious transformation from a pure premium manufacturer to a provider of competitive products for the volume market being achieved within just two years. Not only was the time-to-market halved in this time, but manufacturing costs were also reduced by more than 30% with an effect on EBIT. This is an essential prerequisite for successful entry into the new market segment.