What is the importance of metrics driven product cost optimization for manufacturers?

Pratistha Suhasini December 1, 2016

Connected_Manufacturing.jpg"What gets measured gets improved." -Peter Drucker

The current global manufacturing scene is a volatile and challenging web of various intertwined and dynamic ecosystems. While the industry has stumbled and survived the financial crisis in over the last decade, the imprints of loss and the aftermath are still clearly visible. Economic, political and regulatory upheavals across multiple geographies are making companies even more cautionary in their approach to investment and spending.

Austerity measures are being followed to improve utilization of resources and increase savings. Manufacturers are rapidly evolving from implementing short term cost cutting measures to long term cost optimization strategies. In this blog, we discuss why a metrics driven approach is more sustainable in product cost optimization for manufacturers and also promises higher savings.

cost_reduction-9.jpgA quick recap on product cost optimization

A company's profits and revenue growth are highly dependent on product pricing, which in turn is determined by the total product cost. This cost is impacted by the productivity and efficiency of engineering and manufacturing phase. That depends on design decisions taken during the early phase of the product. Hence, smart management and estimation of costs during this phase is crucial to keep overall costs low.

Product cost optimization is one such holistic strategy which identifies the cost elements that have the highest impact on the overall cost and implements sustainable techniques to reduce product cost profitably. Like any other strategy, it is imperative for manufacturers to understand that a metric driven approach is essential to realize the fullest potential of the optimization effort and thereafter justifying the same.

Lets discuss further why metrics driven product cost optimization is crucial for the initiative. We can understand this better by studying the impact of these metrics on the optimization efforts.

Why Metrics for Product Cost Optimization_Blog Image 3.png

  • Agility:

    • Time_to_market_Man_running.pngWhen the PCO strategy is clearly aligned towards business goals and the efforts are measured against key metrics, the product teams are driven to self assessment and high performance. In order to achieve higher metrics, these teams flex their efforts towards the organization's goals.
    • Also, there is tremendous pressure from sales and marketing to deliver more product variety to serve customization requests. Hence, the product teams constantly strive to find innovate ways for continuous improvement and faster adaptability to the changing needs of the market. This drives greater agility in the team and enhances flexibility to handle spikes and ad-hoc requirements. 

  • Quality:

    • Asset 7.pngEvaluation of a product team on PCO metrics means measuring their ability to eliminate cost elements that contribute to wastage. Enhanced collaboration and optimization pushes the focus on arresting defects, reducing reworks and improving predictability across the system. This collectively contributes to the entire product management efforts embracing a culture of quality.

  • Accountability:

    • Revenue_Growth.pngPerformance data is more meaningful when analyzed to drive results that can establish the effort and utilization rate. Performance driven by metrics focuses on the the need for establishing higher credibility and justification of actual costs and hence drives higher accountability. Effort and cost can be rightfully justified through the data on returns on investments and margins. All of these drive both individual and organizational accountability.

  • Priority:

    • Choice.pngAlignment to metrics provides the team a direction that prioritizes value added from non-value added tasks. The non-value added tasks are consciously identified and eliminated to keep the overheads low.
    • Prioritization also allows the team with financial bandwidth for taking conscious investment decisions. Cost optimization need not mean pulling the plug on investment for innovation and new technology. Instead, it acts as a leverage for opening channels of sustainable revenue that can be utilized else where.

  • Sustainability:

    • Asset 9.pngAn adherence to PCO metrics and a strong focus on achieving set goals can result in higher financial gains that are tangible. The intent to identify and curb any unnecessary overheads at origin pushes product teams to take cost decisions very carefully. No questions, successful PCO initiatives boast of reduced bottom line costs and improved revenue growth. This ability to track costs and take agile corrective measures enhances predictability of the process and gradually builds sustainability of the revenue channels.

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Topics Product Cost Optimization Product Development Solutions