[Case Study] Structured Approach to Product Cost Optimization

Murugan Krishnaswamy February 19, 2015

Product_Cost_Optimization_ApproachIn our recent case study, “Structured Approach to Product Cost Optimization,” we detail how B-WI was able to assess and reduce product cost for a European manufacturing partner in the rotary equipment industry.

With various cost reduction solutions and carefully plotted cost structure, we were able to help the company overcome its unique challenges and regain lost profitability and market standing.

The Problem

The company in this study had been faced with ongoing profitability decrease, and poor sales performance within their marketplace. Lacking solutions and a proper cost structure, the company needed to identify (and later put in place) various practices to reduce the cost of engineering, and compensate for the following poor sales figures:

  • Decrease in net sales of over 7.5% in a single year
  • Significantly lowered operating profit, from -9% to -14.7% in the same year as above (this is a 25% drop in one year)
  • Gross profitability decrease from 18.5% to 15%

With worrisome numbers like these, the company had more than enough reason to pursue various product cost optimization (PCO) initiatives to increase profitability by reducing the costs of manufacturing.

The Approach

To tackle these cost challenges, the company approached Barry-Wehmiller International for an in-depth analysis of their engineering process, in relation to ongoing industry trends. B-WI, in reviewing the company’s cost and manufacturing structure, identified the following three opportunities as potential areas for PCO:

  • Products currently produced most directly responsible for high manufacturing cost, and means to reduce those costs through various PCO practices (part standardization, strategic sourcing, etc.)
  • Expanding revenue potential with new product development (NPD) programs
  • Enhancements and variants for existing, high potential product lines

B-WI assessed the companies 10 product lines to identify the most suitable lines for PCO, as well as products which could be phased out of production due to poor sales and margins. To determine which products were ideal for PCO initiatives, B-WI further broke down the cost of goods sold (CoGS) for each line, taking into account the following various components:

  • Manufacturing redesign tasks and the costs associated with reworking products
  • Change order implementation and material scrap
  • Manufacturing team collaboration
  • Change orders, review and sign-off processes
  • Supplier interaction

Structuring cost in this way, B-WI was able to identify precise areas for PCO within each of the company’s 10 product lines.

The Solutions

By working alongside B-WI and implementing specifically targeted PCO efforts to control various cost elements, the company in question was able to see significant savings in material cost, development efficiency and labour requirements. These initiatives essentially reversed the poor sales figures mentioned above, and helped the company reacquire marketplace strength despite ongoing challenges.

To learn exactly how much the company was able to limit costs and expand profitability through various PCO practices, access our video and free case study, “Structured Approach to Product Cost Optimization.” The comprehensive study builds on this article, and details how the cost solutions featured here can benefit your business.

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Topics Product Cost Optimization Product Development Solutions