Aug 2 2019
Most engineering design and product development teams understand that the success of their product — and the happiness of their stakeholders — relies greatly on an effective cost management process. It’s so important that many teams use cost management software and even hire cost engineers.
Product cost management helps teams estimate and monitor product development costs from the original planning phase all the way to production. Managing all of these product costs helps organizations stay on budget, make design decisions, determine pricing structure, and estimate market share.
There are many considerations that go into product cost management, but there are a few key methods for approaching the process as a whole.
Traditionally, after a new product goes through initial development stages, organizations get cost estimates from manufacturers. If at this stage the projected materials and manufacturing costs are too high, organizations will either try to build these costs into the price or send the product back to development. If it’s the latter, engineers will be tasked with changing aspects of the design (removing unnecessary parts, reducing the complexity of features, finding alternative materials, etc.) to make the product cheaper to produce. Once the product design attributes meet the desired cost, it will be sent on to production.
The main alternatives to traditional product costing are target costing, design-to-cost, and design-to-value methods.
Target costing and design-to-cost are cost management methods focused on establishing cost requirements from the get-go. These requirements will serve as a baseline for making decisions in the product development process. This cost-focused approach enables product development teams to save time and reduce costs in the design phase by avoiding rework down the road. Target costing and design-to-cost require a level of foresight and skill to understand how a product can be manufactured at low cost while maintaining quality.
Target costing and design-to-cost are so similar that they are sometimes used interchangeably. However, there are a few key differences to be aware of, especially if you’re an engineer.
In contrast with design-to-cost is the design-to-value method. While design-to-cost creates value for product development teams and manufacturers, the design-to-value methodology seeks to create the most value for customers. This means designing products to have the highest quality and functionality with little regard to product costs. Design-to-value is also focused on during the design phase of the process, like design-to-cost.
To sum it up, the goal of design-to-cost is to compete on price, while design-to-value products compete on quality.
The right product cost management method to use depends on your organization’s needs. Traditional product costing can easily become inefficient, so at the very least, it’s worth evaluating if design-to-cost or design-to-value could be more beneficial.
If your customers are willing to pay a higher price, then taking a design-to-value approach could result in higher returns for your business. However, as in many scenarios, it’s easier to add than to take away. It can be a challenge to strip away features if the costs end up prohibitively high.
For many organizations, design-to-cost can provide a significant savings advantage. As mentioned previously, traditional product costing leaves cost decisions until the production stage of product development. At that point, only about 10-15% of total costs can be manipulated for wiggle room. Meaning, over 80% of product costs are committed during the design and development phases. This presents a huge opportunity for engineering design teams to make an impact on time and cost savings by optimizing their designs.
Your design team can save time and resources with an alternative product cost management strategy.
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