On average, direct product costs amount for two-thirds of manufacturing companies’ total costs. Reducing these costs is therefore the most important component of any effort to significantly improve a company's total cost base. The Oliver Wyman product cost reduction approach is based on deep industry expertise and contains a mixture of methods that are tailored to the specific requirements of the client. It encompasses strategic approaches like product portfolio management or modularization as well as operational levers like the optimization of direct and indirect material purchasing or the lowering of costs through modifications of the product or changes in the supply chain. Experience has shown that the highest savings can be realized when the steps taken are framed and executed in a multifunctional project that incorporates purchasing, quality control, R&D, engineering, production, and sales.
The Industrial Products team at Oliver Wyman has a long and proven track record in optimization of product costs and in sourcing:
- Product cost reduction: Many different technological and commercial approaches can be used to reduce product costs. Ours is marked by its holistic nature – it is based on a deep technological, process-based, and commercial understanding of each specific product - which allows the application of the most efficient combination of cost-reduction levers. The range of relevant approaches includes strategic methods and tools like product strategy and product portfolio, modularization and standardization or the management of variants, as well as operational approaches for optimization. Multifunctional teams in managed workshops use operational methodologies like the “product-cost-down approach” to generate ideas based on custom-tailored analyses, such as specification analyses or cost-driver analyses. Savings of 5-15% can be realized within 24 months using this comprehensive approach as well as systematically involving suppliers. Implementation execution is crucial to ensuring that the measures result in the expected P&L impact.
- Sourcing Optimization: Based on an analysis of the current situation, the direct and indirect materials with the largest potential savings are identified by the Purchasing department and other relevant departments. After deciding on a strategy and a targeted supplier structure, we identify the best suppliers around the world, obtain quotes for the materials needed, and support the negotiations of the purchases with old and new suppliers. As a result, the portfolio of suppliers can be streamlined, supplier risk can be addressed from the start, and supplier relationships can be optimized. We offer analytic support in preparation for price negotiation with current suppliers, as well for identifying alternative possibilities of in- and outsourcing.
Oliver Wyman has worked on a wide range of product cost reduction projects in manufacturing companies. Our unique contribution comprises the specific industry knowledge and the transfer of best practices from other cost-intensive industries:
- Specific understanding of the manufacturing and supplier markets
- Use of a multifunctional, comprehensive, and pragmatic approaches to reduce product costs
- Consideration of technological, process-based, and commercial measures in the creation of a complementary overall approach