Strategic Direction

Successful cost reduction methodologies: World leading manufactures highlight tools and techniques for achieving
major cost reduction
Article information:
To cite this document:
, (2004),"Successful cost reduction methodologies", Strategic Direction, Vol. 20 Iss 4 pp. 31 - 33
Permanent link to this document:
http://dx.doi.org/10.1108/02580540410527520
Downloaded on: 03 September 2016, At: 21:31 (PT)
References: this document contains references to 0 other documents.
To copy this document: permissions@emeraldinsight.com
The fulltext of this document has been downloaded 2892 times since 2006*
Users who downloaded this article also downloaded:
(2004),"Cost-reduction location strategies", Journal of Corporate Real Estate, Vol. 6 Iss 1 pp. 30-38 http://
dx.doi.org/10.1108/14630010410812225
Downloaded by University of Sri Jayewardenepura At 21:31 03 September 2016 (PT)

(1994),"Cost Reduction", Journal of Business Strategy, Vol. 15 Iss 3 pp. 36-45 http://dx.doi.org/10.1108/eb039635
(2013),"Profitable customer management: reducing costs by influencing customer behaviour", European Journal of Marketing, Vol. 47 Iss
5/6 pp. 857-876 http://dx.doi.org/10.1108/03090561311306912

Access to this document was granted through an Emerald subscription provided by emerald-srm:216788 []
For Authors
If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service information about
how to choose which publication to write for and submission guidelines are available for all. Please visit www.emeraldinsight.com/
authors for more information.
About Emerald www.emeraldinsight.com
Emerald is a global publisher linking research and practice to the benefit of society. The company manages a portfolio of more than
290 journals and over 2,350 books and book series volumes, as well as providing an extensive range of online products and additional
customer resources and services.
Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee on Publication Ethics (COPE)
and also works with Portico and the LOCKSS initiative for digital archive preservation.

*Related content and download information correct at time of download.

 Innovations

Successful cost reduction methodologies

World leading manufactures highlight tools and techniques for achieving
major cost reduction

A
s more manufactures struggle with global markets, competition from ``low cost''
countries, and faltering home economies, the attention of many manufacturers has
Downloaded by University of Sri Jayewardenepura At 21:31 03 September 2016 (PT)

naturally turned to cost and waste reduction. Yet, while major quality and productivity
bene®ts are being generated in many companies through the adoption of ``lean'' and Six Sigma
practices, even when successful these can only be a part of the solution.
Manufacturing reality is that around 70 percent of the cost of any product is dictated by
decisions made during the design and early manufacturing process development phases.
Therefore, by far the most effective way to gain the levels of cost and quality performances
sought by most companies, is too speci®cally look at a product's design and its production from
a cost and quality viewpoint ± preferably as early in the development process as possible.
One approach that offers the ability to do just this is design for manufacture and assembly
(DFMA). But, while this tool has been available for well over a decade, and has helped many
manufacturers achieve signi®cant savings, the tendency is still for it to be used as a stand alone
approach, and often only applied to one-off projects.
However, in looking for ways to signi®cantly improve cost and quality competitiveness, and
achieve ``lean design'', a number of the world's leading manufacturing companies are now
employing structured cost reduction approaches, that integrate DFMA as a key component.
Two very different, but highly successful strategies, which both utilize DFMA as a core tool, were
highlighted at the 18th International Forum on Design for Manufacture and Assembly, hosted by
Boothroyd and Dewhurst Inc.

Structured cost reduction at Hewlett-Packard

A systematic and structured methodology for assessing product cost improvement
opportunities, based around traditional value-engineering and DFMA, has now been used
successfully at Hewlett Packard (Compaq Computer Corp., and Digital Equipment Corporation)
for a number of years. Crucially, by adopting a systematic method for looking at costs, not only
has this yielded signi®cant cost improvement for individual products, but the process itself
means that a cost database and benchmarks exist, the time necessary to analyze a product's
cost can be reduced, and opportunities for cost reduction are not overlooked.
As with most best practices, the cost reduction approach by Hewlett Packard involves
considerable preparation, including the creation of an ef®cient database of all relevant data,
which is used to form a ``base case''. Without the baseline data, it is often impossible to get to
the root of why parts costs are the way they are and when they can be reduced. Careful
checking for data errors is also a crucial step in establishing baseline data. Another key
preparation is to identify the main product cost drivers ± while an obvious need for cost
reduction, the reality is that many organizations do not know where most of the cost of a
product occurs. Also, it is equally important to understand the overhead structure, as this can
help to identify perverse incentives that may affect later decisions.

DOI 10.1108/02580540410527520 VOL. 20 NO. 4 2004, pp. 31-33, ã Emerald Group Publishing Limited, ISSN 0258-0543
| STRATEGIC DIRECTION
| PAGE 31
 `` Manufacturing reality is that around 70 percent of the
cost of any product is dictated by decisions made during
the design and early manufacturing process
development phases.
''
From this preparation, the cost reduction team can then apply a number of techniques to lower
product cost:
J Redesigning ± using DFMA ± to reduce parts count, simplify assembly/test, and use lower
cost parts offers the biggest potential for cost reduction, especially when initiated early in the
design process. For instance, one study by Boothroyd Dewhurst that looked at 117 product
development projects has shown average reductions for part count of 54 percent, part cost
52 percent, assembly cost 45 percent and material cost 32 percent by using DFMA early on
in a project.
J Reducing existing component costs by renegotiation, or sourcing through a different vendor,
Downloaded by University of Sri Jayewardenepura At 21:31 03 September 2016 (PT)

offers the fastest, least intrusive way to decrease product cost. However, this can only be
done effectively when it is possible to establish what a part should cost. For custom parts or
assemblies this can be dif®cult, but again DFMA can be used to calculate a cost goal for
these parts.
J Component substitution is an effective, and the second fastest, method for reducing product
cost. The fact is that many products are over-speci®ed and over-designed and it is usually
possible to substitute lower cost parts of lower performance, lower tolerance, or lesser quality
and still achieve the product requirements without sacri®cing quality control. However, this
practice is reliant on understanding what customers really want, and ensuring that only
robust substitutions are made.
J Finally, de-featuring ± offering only the features that make economic sense ± is another fast
method of lowering cost. Too often products incorporate features that companies believe are
essential, yet in reality are rarely used by customers.
This approach has proven that it can yield quick and important results for Hewlett Packard. For
example, on one ± post new-product introduction ± project, the year following the product's
launch, a ``value engineering'' team was able to reduce cost by over 13 percent. This was
mainly as a result of component substitution, along with some redesign. On another project,
which began prior to product introduction, projected product cost were reduced by nearly
39 percent, again primarily through component substitution. With a further project, where
extensive compliance testing and agency certi®cations limited the options for de-featuring and
component substitution, the use of redesign helped to reduce costs by nearly 10 percent.

Digital manufacturing at Visteon

In looking to improve its competitiveness, Visteon Corporation, the world's second largest
supplier of automotive systems, with $18.4 billion annual revenues, has become one of the
leading ``tier 1'' adopters of digital manufacturing (DM).
DM is now seen by many as a critical and emerging technology in which every individual
manufacturing operation can be digitally modeled and validated. DM manages manufacturing
process information; de®nes, optimizes and validates manufacturing processes; and supports
effective collaboration across the organization by using full digital product, process and
resource de®nitions. According to the consulting ®rm CIMdata, organizations using this
technology can reduce lead-time to market by 30 percent, reduce the number of design
changes by 65 percent and process planning time by 40 percent. Production throughput can
be increased by 15 percent and overall production costs can be cut by 13 percent.
As a key component of its strategy, Visteon has gradually integrated DFM/A with the DM
process. By leveraging other tools and data in DM, such as manufacturing process planning

PAGE 32
| STRATEGIC DIRECTION
| VOL. 20 NO. 4 2004
 information, CAD and visualization tools, the company has found that DFM/A can provide
more value. Similarly, the results generated by DFM/A studies can also be shared with other
DM activities, such as operations engineering analysis, 3D digital factory modeling and
collaboration.
For example, state-of-the-art DM tools and strong analytical know-how were combined
effectively to build Visteon's ®rst digital factory for manufacturing next-generation twin sheet fuel
tanks at two new regional assembly plants in North America. These tools were used for virtual
product design validation, visualization and analysis of both plants in a 3D world, arranging
facilities and streamlining material ¯ow within the four-walls, evaluating push versus pull
scheduling strategies and analyzing the performance of the operator-controlled lean assembly
lines. DFM/A was applied to the twin sheet fuel tanks very early in the design stage to identify
potential part consolidation opportunities and assembly issues. Most of the information used in
DFM/A, such as planning data, CAD geometry and BOM, was shared by the other DM studies.
The results of DFM/A analysis, such as virtual assembly process, cycle time estimates, and
human interaction information were also shared with other DM analyses.
The result of this approach was that the digital representation of the fuel tank plants increased
communication between the program team members and addressed manufacturing feasibility
Downloaded by University of Sri Jayewardenepura At 21:31 03 September 2016 (PT)

issues at an early program stage to avoid last minute engineering changes. Additional analyses
helped in optimizing plant layout, material handling labor, and equipment and assembly labor.
Overall, by applying its DM approach, a total of $2 million of cost savings/avoidance was
achieved for these two plants. Moreover, program launch quality and factory safety were
signi®cantly improved, and the information and knowledge from this DM implementation were
later reused in the design of manufacturing lines at three other plants with similar fuel tank
products.
Overall, Visteon is ®nding that by starting the product design stage with the aid of DFMA,
followed by the application of other DM tools to generate and validate production processes
before building the facility, the company is able to achieve an improved lean design that leads to
less labor, less tooling and facility investment, less material usage, less inventory, and excellent
product quality. Over the last few years, it claims that signi®cant cost savings/avoidance of
about $30 million/year have been achieved by this DM strategy applied to 24 of its plants. Not
surprising, Visteon's goal is to apply this approach to all major new programs in the next few
years.
The paper ``Structured cost reduction; value engineering by the numbers'' was written by David
Meeker and F. James McWilliams, Hewlett Packard Company, Marlborough, MA, USA. The
paper ``DFM/A as a part of digital manufacturing approach'' was written by Tim Zheng, Digital
Manufacturing Manager, and Wan-San Chiu, Senior DFM/A Engineer, Visteon Corporation,
USA. Both were presented at Boothroyd Dewhurst's 18th International Forum on DFMA, held in
Newport, RI, USA (www.dfma.com).

VOL. 20 NO. 4 2004

| STRATEGIC DIRECTION
| PAGE 33