In today’s competitive environment, the systematic optimization of product costs is a decisive success factor. Despite its obvious importance, cost optimization is often neglected in day-to-day business or comes into conflict with other objectives.
The core cost approach: The heart of product cost optimization
The TARGUS approach to product cost optimization (PCO) is based on the determination of a hard cost minimum – the so-called core costs. This methodology comprises the following steps:
- Consistent subdivision: Allocation of the product into functions and assemblies
- Critically questioning: Identifying which features are necessary to fulfill core functions
- Identification of expensive features: Limiting low customer benefit through a value analysis approach
By calculating the manufacturing costs, identifying the cost drivers and consistently separating core functionality and additional benefits, the minimum costs required to fulfill the required function are determined. A key element here is achieving complete transparency regarding prices, quantities, manufacturing costs and production costs of suppliers.
Fact-based decisions instead of emotional opinions
The core cost analysis provides a comprehensible and transparent basis for making sensible business decisions:
- What additional benefits justify the extra costs?
- Does standardization pay off?
The decisive advantage: the decision is based on hard facts and not on emotional opinions.
Important to note: The cheapest product is not always the best. Additional benefits such as a longer service life or greater flexibility of use are evaluated in terms of cost and converted into a price list. Optimization should be performed towards maximizing customer perceived value for money.
The three-phase project approach to cost optimization
The TARGUS approach to product cost optimization is divided into three phases:
- Transparency
- Product optimization
- Implementation
In all phases, the appropriate tools from the TARGUS PCM method kit are used for each individual product and customer.
Success factors for product cost optimization
In addition to the methodical approach, two decisive factors are crucial for the success of a PCO project:
- Setting a goal: Everyone from management to working level is committed
- Processing by an interdisciplinary team consisting of:
- Procurement
- Development
- Product management
- Production
- Ideally supplemented by quality and sales
The combination of these three aspects – a methodical approach, challenging goals and an interdisciplinary team – creates the ideal conditions for a successful project to develop the best possible solution in terms of cost and value.
Would you like to find out more about product cost optimization and other approaches to product cost management? In our brochure “Product cost management as a driver of competitiveness” you will find detailed information on the methods and their application in practice.
In the upcoming article we will continue our series with Product structure management. Stay tuned!
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