EDITOR’S NOTE: This post is the third in a three-part series that explores the topic of cost reduction. We hope you enjoy these posts and find them useful.
Welcome back! In thefirst post of this series, we identified six kinds of costs: piece price, quality requirements, non-recurring engineering (NRE), conflicts in goals, transaction and speed.
We also discussed piece price and quality requirements in detail. Our second post in the series focused on NRE and conflicts in goals. Here, in our final post of this series, we’ll explore how transaction and speed play a part in impacting a project’s cost. Let’s get started by looking at transaction as a cost driver.
Transaction costs are the expenses a customer incurs when setting up a new supplier internally. Let’s suppose a customer needs a single-time buy of something that costs $1,000. An existing supplier might be able to do the job just fine. But what if the customer wants to shop around and/or find a new supplier?
Before that can happen, the customer might need 3-4 of its people to audit the prospective new supplier and confirm them as qualified. The audit and confirmation process itself might cost $3,000 (or more). That additional figure is the transaction cost, and overlooking it can lead to some unpleasant surprises.
Additionally, be aware that in regulated environments, annual supplier audits and supplier maintenance can increase costs with each new supplier a customer adds.
Speed becomes a driver of cost when the demand for something causes a disruption. Let’s say a customer needs a supplier to produce 50 of something. It’s well received in the market and sells out immediately – and now everybody wants one. The customer comes back to the supplier and says it needs 1,000 more within two weeks because that’s what the market is demanding.
This scenario requires the supplier to realign all of its resources in order to satisfy the customer’s demand – the supplier might need people to come into work over a weekend or stay late for several evenings. Either way, the customer will have to pay a premium for the disruption that the demand creates on the supplier’s end. Obviously, this kind of scenario is not sustainable over the long term, which drives home the importance of planning.
Charging a one-time expediting fee is always preferable to adjusting the piece price. An expediting fee also sets expectations, because the customer understands that if they don’t put the burden of urgent requirements on the supplier, then they can expect a predictable piece price.
Luckily, it’s possible to mitigate many speed cost factor situations with a little planning and some well-timed conversations. Let’s say a customer places an order for 50 of something that’s a consumable part. We can set up Kanban systems or min/max scenarios to ensure the customer is never left with an emergency. We might deliver that 50-count order with a package of 40 items ready to go and a separate package of 10 items. When the customer has sold the first 40 items and opens the 10-count package, they know it’s a reorder point.
Alternatively, we can have an agreement where we hold a “reserve” quantity on our end as inventory, in case a customer unexpectedly runs low on something and needs more in a hurry.
What can we help you do?
Your supplier should always focus on your company’s interests and concerns – and that includes identifying and addressing all of the factors that can affect cost. Choosing the right supply partner will do much more than just fill a need or provide a service: it will help you save money, make more informed buying decisions, and build a better business. That’s a lot of bang for your buck.
Ready to learn more about what CST Precision can help you accomplish? Please contact us at email@example.com or 864-879-8165. We’d love to work with you, from concept to prototype, print to part, prototype to production, and production to supply chain fulfillment!
We also discussed the first two – piece price and quality requirements – in detail. Today’s post picks up where we left off. Let’s take a closer look at NRE and then talk about conflicts in goals. What are they, and how can addressing them (or not) affect your bottom line?
NRE As its name implies, NRE is the one-time cost of researching, designing, developing, and testing manufacturing processes and/or features. Although a customer will pay for NRE early in a product’s lifecycle, this cost can have a direct impact on the product’s profitability. That’s because the product will need to have a certain volume of sales in order to justify and provide a good return on the initial investment in NRE.
NRE can also be experienced as volumes increase (e.g., a custom machine) or as the need for different materials arises. As we mentioned in the first post in this series, it’s important to recall that quality requirements can have a direct impact on NRE costs. For instance, sometimes you just can’t get away from having a lot of critical things on a component, because of how much it needs to interact with other components. In this scenario, you must invest more time and effort into designing a robust process for repeatability. Making your first 1, 10, or 100 of these special components – and ensuring that the process is repeatable and satisfies all of your quality constraints and requirements – will likely drive up NRE expense.
Having frank and thorough conversations about NRE is crucial to reducing costs and ensuring success. When we’re considering NRE, it’s equally essential to discuss how well the customer thinks a proposed new product will actually sell. In a perfect scenario, that means getting all of a customer’s key players and decision-makers together and helping them talk with each other as soon as possible – which brings us to our next factor of cost.
Conflicts in Goals Conflicts often arise among a customer’s production engineers, product development, and purchasing departments. An engineering group’s top priority, for example, might be setting up the repeatable and robust processes and procedures that ensure a successful product launch. The product development people, meanwhile, are focused on coming up with a concept and design that ensures the product does what it’s supposed to do. And the purchasing department wants to get all of it done at the lowest overall expense.
When these three groups aren’t in alignment, it can be costly. Let’s imagine a company where the production engineering group decides on everything it needs and then submits its detailed purchase request. The purchasing department goes out and secures the lowest-cost supplier, who ends up delivering something that compromises the functional requirements that production engineering established. The company may have initially saved money by going with the lowest-cost option, but the result is a product that can’t be sold because it doesn’t do what it’s supposed to do or break/wears out earlier. The result is a lot of wasted time, money, and opportunity – and an expensive trip back to square one.
Or how about this scenario: the product development engineering department isn’t as concerned about the piece price – because they just want to get the product made and satisfy proof of concept. So they neglect having any kind of conversation about long-range planning and economies of scale. Over the course of the following year, the volume of the product being made goes from extremely low to very high, with no corresponding price change or plan for transitioning to increased production.
The way to avoid these scenarios and their financial implications is to engage in an exploratory discussion that then becomes an ongoing dialogue. A skilled supplier can make this happen by helping all three departments work together and focus on the company’s collective goals. The supplier can point out that while it’s O.K. for all departments to want what they want, they might not necessarily all get what they want at the same time. This process also helps to identify where a customer might be spending more money than it needs to. Additionally, a good supplier will establish and conduct quarterly business reviews with a client to monitor the progress toward current goals and identify future milestones. These steps eliminate miscommunication and reduce expensive oversights or mistakes. Everyone wins.
Coming up in the final part of this series In the third and final post for this series, we’ll look at transaction and speed – and their impact on a project’s cost. In the meantime, if you’d like to learn more about what CST Precision can help you accomplish, please contact us at firstname.lastname@example.org or 864-879-8165. We’d love to work with you, from concept to prototype, print to part, prototype to production, and production to supply chain fulfillment!
EDITOR’S NOTE: This post is the first in a three-part series that explores the topic of cost reduction. We hope you enjoy these posts and find them useful.
As the coronavirus (COVID-19) pandemic continues to impact the world, it feels as if just about everything has been affected, from countries’ economies to our very social fabric. Despite this, businesses are still grappling with pre-COVID issues, including the constant need to reduce costs. In fact, you could argue that this subject is one of the very few things COVID hasn’t changed.
When we talk about “factors” at CST Precision, we break them down into the following sub-categories:
All of the factors listed above affect our customers’ bottom line in one way or another, and they are all related. The key to reducing costs always rests with asking questions and having conversations. Let’s take a closer look at the first two items on our list: piece price and quality requirements.
Piece Price One of the most important objectives for a supply partner is to design a process for customers that achieves the lowest piece price for the life of a product. In order for that to happen, we need to think about volume, because as volume goes up, the piece price typically comes down. A customer might immediately need to produce 100 objects to fulfill an important order for a key account, but it’s also essential to think about the future and look at the bigger picture early in the process. That means asking questions like, “What about two months from now? Do you think you might need 200 more of these items? 400 more? How about six or eight months from now?”
Having the answers to these questions early on – before engineering work even begins – means we can factor volume into the engineering and production process development. If we have a better idea of the customer’s volume scale-up schedule (or at least a pretty accurate estimate), then we can build a process that best satisfies particular volumes. And that means the products will be made at a lower price with accounting for volume changes.
But there’s an added benefit to achieving lower piece prices. Considering and planning for economies of scale helps a customer determine a fair, competitive, and profitable selling price for the products it’s manufacturing. Small quantities may not be profitable for a manufacturer, but if you plan ahead for volume, then profitability and an accurate market price will naturally follow.
Quality Requirements Quality requirements are another cost driver to keep in mind. Identifying critical quality requirements becomes a lot easier when you know what your absolute functional requirements and design constraints are. And this is where another important conversation should take place. Often, we’ll get requests for quotes or invitations to bid on a project based on customer-provided specifications. And although we can easily provide quotes and bids according to those specs, our customers are better served when we can help them determine what’s actually critical for them.
For example, design engineers will often have a default setting in their design software that gives everything three decimal places. This implies that a component needs to be made to an extremely tight tolerance, which typically requires more processing, more time, and more scrutiny – all of which drive up costs. But what if that three-decimal-place default setting isn’t actually necessary? By having a conversation with the customer, we might find out that kind of tight tolerance isn’t required for the project at hand. And we might learn that we can purchase rough stock that is almost to size or satisfies a specific design constraint requirement. We could create just one single feature that meets an absolutely critical tolerance instead of many – and more costly – ones.
This kind of “pre-work” can reduce a project’s cost by half or even more, depending on the circumstances. But if we never have that conservation, we miss a valuable opportunity to save customers money, add value, and impact their long-term success. (Incidentally, the conversations and pre-work that we’re referring to are key components of our discovery process. You can learn more about that process by reading this post.)
Coming up in the second part of this series Quality requirements can have a direct impact on NRE costs and that’s where we’ll pick up in part two of this series. In the meantime, if you’d like to learn more about what CST Precision can help you accomplish, please contact us at email@example.com or (864) 879-8165. We’d love to work with you, from concept to prototype, print to part, prototype to production, and production to supply chain fulfillment!