cost reduction

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Millicents

January 15, 2013 in Uncategorized | No comments

The first thing I learned eighteen years ago, when the technology startup at which I was an senior manager was acquired by a mid-sized EMS company, was how to move the decimal place to the right in Excel.  Specifically in BOMs where component costs can be driven down to tiny fractions of cents.    For one BOM (Bill of Materials) for a big customer that I had been chasing at that time we had put resistors in at a penny each.  Never in my life have I been so wrong–SMT resistor costs in high volumes are measured in millicents–five zeros after the dollar sign.  Oops.

The second thing I learned was how to multiply the BOM cost times the annual volumes to see if it was a big number or not.  Because to get to millicents you do need big numbers.  But regardless of volumes, regardless how fat or thin the product margins are, for new designs and for cost reduction redesigns, it always pays to worry about cost.  And often this is worrying about the millicents.

Do the math: a million units a year times 100 items on the BOM times 100 millicents savings each is $100,000. Ten such products in the product line and it’s a million bucks.  Yes, a tiny fraction of the total cost, and the ROI for worrying about this needs to be weighed in.  But, as they say, a million dollars here and a million dollars there and it starts to add up.

Chuck

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It’s not all about cost

November 16, 2011 in Uncategorized | 1 comment

In this dreary economy it’s natural for companies large and small to look for every way possible to cut costs. Organizational fat gets slashed, bill of materials (BOM) costs are scoured, vendors are beat up or replaced, and off-shoring is investigated.  Products can be redesigned to save costs; designs and process can be optimized for manufacturability (shameless plug: Zebulon Solutions offers such redesign and DFx services). And at one level, as long as one is looking at holistic cost of ownership with ROI or IRR factored in and appropriately adjusted for risk, these are good steps.

But it’s not all about cost.  At the product level its also about functionality, branding, reliability, performance–really the right metric is, pardon the cliche, bang for the buck. A poorly designed, cheap product will not sell just as surely as a good, overpriced product.

The right approach is that cost should be a factor in every decision, but not the only factor.  We’re working with a company right now whose 3rd party design house choose a cheap clone of a high performance IC for their new design.  The product functions, but it’s power dissipation, a key spec for this class of product, is way above marketing’s target. It may be solvable, with enough engineering thrown at it, but that also has a cost from an ROI / IRR perspective.  Or it may be that there is indeed a trade-off here of product cost vs a performance spec, in which case management will need to make a tough, yet informed decision of how to resolve.,  Maybe cost will win, but then again maybe not.

Cost is one element, a key one, but it’s not the only element.  Just as the days of cost is no object design are long since past, the days of low cost no matter the result are also numbered.

Chuck

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What businesses worry about on Main Street

October 25, 2011 in Uncategorized | 3 comments

Contrary to the caliphony of competing messages coming from Wall Street and the Capitol rotunda, most of us business folk don’t lie awake at night worrying about taxes or regulations or whether or not we are going to win the Stimulus lottery.  We worry about three things: finding customers, raising money, and indirectly or directly, we worry about China.

I run a small business (shameless plug: Zebulon Solutions–we help turn R&D projects into manufacturing ready products); most of our customers and prospective customers and vendors and friends also run small to midsized businesses.   While there are times we’ll all sit around and grouse about politics or whinge about our own taxes, these are not the real roadblocks to growing businesses and creating jobs.  Nor are most of us betting on some type of government bailout or stimulus.  We just want more customers; we and our customers need capital; and we fret about China.

Customers are number one. I can’t think of a business that wouldn’t hire more people if they had more customers.  It’s demand that drives supply growth these days.  If businesses see a way to increase demand for their products or services, they’ll hit the Grow button.  And most business are working like crazy to find ways to goose demand (assuming they have the capital to pay for that marketing and sales effort, see below).

Capital is number two.  It’s shocking the number of small businesses that don’t have enough capital to do what they know needs to get done: goose their marketing, perfect their offerings, cost reduce their products, optimize their supply chains, and / or ramp production when demand does perk up.  Personal savings are depleted, home equity and credit cards are tapped out, and banks only lend to those who don’t need it.  And venture capital and even angel investments are in a deep coma save for a few hot niches (social gaming anyone?).

And finally there is the specter of China lurking behind every door in one form or the other.  It’s competition from Chinese companies who do have access to capital and to cheap labor; it’s  competition from domestic competitors who manufacture in China; it’s expectations of customer to only pay the China price.  And this ties back to demand and capital in a weird way, because it actually takes both to be able to go to China: to get China pricing one needs China volumes (demand) and in practice it takes a big investment in terms of bring up a China supply chain and funding all that inventory on the water.

Which should and maybe will eventually stimulate domestic supply chain development, but then the China expectation kicks us in the tush, the expectation of pricing low enough to compete, to win customers, to raise capital. And the easy answer–just wrap a flag around it and buy local–is rarely that easy: we’ve seen business plans implode from overpriced domestic supply chains that stymie demand and poison fund raising efforts. Building a cost competitive domestic supply chain also takes a lot of work, and that takes capital too.

I have no easy answers to this.  But I would like to see the dialog switch away from political issues that don’t matter as much to business issues that really do impact our businesses. Let’s get a national dialog going about building domestic supply chains, about freeing up capital for small and mid sized businesses, about opening up export markets and driving new demand. Let’s get those R&D projects out of the CAD system and into production.  Let’s get those cost reduction ideas off of the white board and into the supply chain.

Back to work,

Chuck

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V1.5: Redesign, the bastard cousin of product design

October 11, 2011 in Uncategorized | 1 comment

V1.5s–product redesigns typically aimed at cost reduction, bug fixes, supply chain optimization, and / or manufacturabilty improvements–have none of the glamour of their high-bred cousin, the V1.0 new product design, or even their favored step-sibling the much touted Widget2.  Often a V1.5 redesign is transparent to the end user, or changes are downplayed rather than hyped.  While the most common driver for doing a V1.5 redesign is cost reduction, plain and simple, there can be other drivers, including better optimization of the supply chain–either proactively or reactively (e.g. EOL components); optimizing for manufacturing / assembly / yield / test; and bug fixes, or attempts to turn lemons into lemonade.

Occasionally a V1.5 can also provide a marketing or a pricing upside as well, although this is rare.  Years ago I led a V1.5 redesign of the then best selling Palm III pda.  In the end we were not only able to achieve a substantial cost down, but we added a feature twist that actually allowed for a new, higher price point in what became the Palm IIIe/x family. Of course this was not at all publicized, for obvious reasons, but  a brown bag is the lunch of choice for us productization types in general

But most of the time redesigning is below the radar, digging for savings often to the right of the decimal place.  Designing out boutique components and designing in no-name equivalents. Optimizing assembly, spending money on fixtures design optimization and automation instead of labor. Improving test coverage and lowering test time. Simplifying what is too complex and spending the extra effort to do the tough engineering for that which is too simple.  Many world class design teams actually lager their V1.5 hit list even during the V1.0 design, whether for risk avoidance or time-to-market, and pull these back out to capture the costs savings before the true volumes hit with a quick V1.5 spin. Its also a great time to pull out the DFMEA  (Design Failure Mode Effects Analysis) that hopefully was done way back when and double check for fixes that were postponed or deprioritized during the rush to V1.0 release.

Another V1.5 driver can be lessons learned from the design post mortem and from the V1.0 production ramp results.  Despite best engineering efforts up front, its rare that a design is perfect.  This is where its crucial to get feedback from out side of the design world: listen to what the production engineers have to say, discuss yield with a  test engineer, go over failure reports with the reliability and sales teams, and listen to what the customer service and field technicians have learned.

And redesign is often not just a one shot deal–there can be V1.1, V1.2, V1.3, depending of course on product life.  Cost reduction should be an ongoing effort, and  its no something that should just be left to the factory and the supply chain managers. But working in conjunction with these groups is crucial.

Companies who actively enagge in design based redesigns can also realize substantial benefits from their existing vendors.  Many classes of components are sold based on the idea of  sole source design wins, which allows s for clout in sustaining high prices.  I once had a high level product marketing executive for a leading boutique analog IC company, famed for their design support and high prices, come to me and told me that his team had just realized that my design group was were redesigning them out on product after product .  I answered truthfully that it was because they weren’t listening when our buyers asked for price breaks and favored allocations based on rapidly increasing volumes.  He laughed and said, “We’re listening now.” And for a while at least they did listen, and we stopped designing them out.

Cost reduction needs to be holistic–understanding true cradle to grave costs–and also needs to be in tune with business subtleties.  A purchasing manager may be already buying a  component at below its standard cost (resulting in a favorable PPV, or Purchase Price Variance) or cash flow constraints may in fact favor paying more in return for favorable terms.  And both risk and ROI analysis are essential to make sure that the effort to do the redesign will be repaid, even when risk is factored in

Chuck

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