Manufacturers across industries use a product cost down (PCD) approach as a lever to drive value. The logic of cutting the costs of making a product to increase profitability is clear, but executing PCD effectively can be less straightforward. With factors from rising material costs to supply chain challenges amping up pressure on manufacturers, an advanced approach to PCD is required.

A multidimensional approach to product cost down

Unlike previous cost-cutting efforts that examined costs narrowly, PCD takes a multidimensional approach to lowering costs and creating value across the product lifecycle. Effective PCD targets platforms or product lines instead of discrete parts to achieve transformative impacts, and is applicable to all manufacturing companies with a portfolio of engineered products.

Existing approaches, however, can have limited or short-term impact. Traditionally, companies have taken either a functional or cross-functional approach to PCD. With functional PCD, each department in a company evaluates a product separately, and the cost issues that are identified are addressed individually, often at the expense of other functions in the company. Cross-functional PCD splits a product into its main modules or systems, which are then analyzed by cross-functional teams. This siloed method, however, fails to consider cross-product implications.

A potential pitfall of either method is failing to strike the right balance between controlling costs and making an appealing product. If PCD results in a product without the look and feel customers like, revenue might take a hit. Identifying the threshold of diminishing returns is key to successful PCD execution.

Introducing PCD 2.0 — a holistic solution

Oliver Wyman’s advanced approach — call it PCD 2.0 — takes a holistic view. This topic-led, agile approach overcomes the limits of previous product cost reduction approaches to generate higher impact. PCD 2.0 uses a comprehensive set of levers and methods that address costs from short term to long term to align with a company’s targeted savings timeframe.

This next-generation approach leverages teams that work together in an agile process to cut costs at their roots, allowing companies to close the gap toward achieving ambitious saving goals.

The three pillars of advanced product cost down

Previous PCD approaches focused on a project evaluated separately by each function, rather than a company-wide view that does not put supplier relationships at risk or require frequent renegotiation.

Oliver Wyman’s advanced PCD approach is characterized by three pillars that work together for increased savings and streamlined processes that lead to sustainable savings.

A holistic approach for value creation

PCD 2.0 is a collaborative and holistic approach that brings together empowered teams with a shared cost target objective. Key steps to collaboration include:

• Create an interdisciplinary working group, encompassing all the functions involved in the product life cycle, which is collectively responsible for results
• Build a cross-functional project team that is a mix of technical specialists and individuals with generalists' skills
• Involve any stakeholder in the product definition, design, manufacturing, and delivery processes that has an impact or is affected by the product costs
• Define team value by its collective ability to understand the drivers of product costs and challenge the current solution
• Integrate suppliers including subcontractors, customers, and external partners to extend the impact of savings opportunities

Deploy agile processes that create long-term cost savings

PCD 2.0 uses a series of sprints for effective collaboration, ensuring broad coverage of all relevant topics and functional areas in a compressed timeframe. Rapid sprints can be categorized in six steps:

Ignite — Identifying and planning for major cost issues. Identify major cost issues, layout project plan and select analysis, agree on data collection and analysis to ensure a structured approach to tackling cost challenges.

Innovate — conducting workshops and deep dives. Perform cost-innovation workshops, set up root cause analysis as well as potential supplier deep dives.

Solve — developing and prioritizing solutions. Work out solutions for root causes and perform cost-innovation supplier workshops. The next step is to prioritize levers and measures that will have significant impact on reducing costs.

Specify — detailing and planning with suppliers. Specify levers and measures with suppliers and detail business case as well as risk. An implementation plan is then set up to ensure that all steps are clearly defined and actionable.

Validate — final validation and approval. Perform final validation, approve implementation, confirm implementation and confirm that all necessary preparations are in place.

Implement — executing the plan. Kick off implementation and ensure that all teams are aligned and ready to execute the plan.

Eliminate the root causes of costs — PCD 2.0

PCD 2.0 uncovers the origins of any decision in the product and process solution to reveal costs that might be avoided.

By addressing the root causes of unnecessary costs, they can be eliminated once and for all. Key tasks include:

• Identify and systematically eliminate the root cause for cost for maximum impact of lever, rather than non-sustainable suppression of symptoms in a single case
  
• Adopt a function-based cost down focus in product development considering impacts in production and product life
  
• Differentiate value-add cost and non-value add cost
  
• Apply deep technical methods and tools, such as cost function model, technical design evaluation, and quality analytic

Optimizing manufacturing costs for enhanced profitability

Keeping costs as low as possible when making any product is essential to a manufacturer’s profitability. Companies have relied on product cost down — a method that evaluates all the costs involved in manufacturing — to reduce costs and drive value. Despite PCD’s benefits, traditional approaches need to evolve to keep pace with a changing and often challenging market.

To address these limits, we have developed an advanced, holistic approach that combines collaboration, agile processes, and vigorous cost evaluation that can lead to significant and sustainable growth for manufacturers across industries.