Book Overview by Jon M. Quigley

Many organizations have a series of activities or processes that they go through to produce the end product or service. The work will start with some kind of development process, which may be a matter of days, months or years, depending on the complexity of the product or service.  As part of the decision to undertake the project, we must understand the business case. Specifically, we must understand whether we can achieve the cost targets for the project and the product or service as compared to the value we present to the customer.  If we are a sophisticated organization, we may have a series of actions (tools and techniques) that we undertake to secure the cost of the product or service meets our project objectives. Among these tools are our project management activities and any gates or review points we have in the process that aide in identifying whether we can meet the cost targets.  We may also employ tools like Pugh Matrix to facilitate creation and selection of the optimum design concept.

These activities are in place so we deliver the product at the best possible cost such that we can deliver the best value to the customer. There are considerable tools we can use to improve the value proposition.  We discuss these tools at length in our book Reducing Process Costs with Lean, Six Sigma, and Value Engineering Techniques. Cost improvement possibilities do not end when we launch the product or service. In fact, as the product or service matures, we may have increased competition or will become in the uncomfortable position of competing on price. We will have to ensure our product or service is ready to compete over the metaphorical lifetime.

To ensure we deliver the best value proposition our organization has a number of possibilities available to develop our value proposition.  Depending upon the level of sophistication of our organization, we may use brainstorming or Function Allocation System Technique (FAST) to generate the seed of a design solution. Though thought not effective, experience suggests that brainstorming techniques can work to produce a number of ideas from which to start.  Additionally, may make use of value analysis and value engineering techniques.  The analysis phase of this activity is called value analysis. The design phase of this activity is called value engineering.  Finally, for the design phase (and actually any time we revise our product), we can make use of decision-making tools such as Pugh Matrix to determine the best of our ideas. The Pugh Matrix tool provides a way of comparing a selection of possible solutions to a prioritized set of criterion.  This comparison further enables design refinement. For example, we may see how we can take the superior elements of an overall inferior design to improve the design of the most likely to succeed design candidate.

Early on in the life of the product or service, there are few customers and possibly no or not much competition either.  We may wish to drop our sale price while improving our profit margins.  As the product matures, we acquire more customers along the way. However, if this is a profitable product it is likely our competitors will notice.  At some point, we may have to start competing on cost with those competitors as the product races to the end of the useful lifecycle.  That is okay, we have a variety of tools to improve our value proposition.  As we start to compete on price, for example, we may use tools such as Total Quality Management (TQM) as well as Six-Sigma techniques can help us reduce waste, improve quality and streamline our material handling and product manufacturing processes.  However, these are not the only tools at our disposal.  We can use those previous value analysis and value-engineering techniques to improve our product cost structure and ultimately our value proposition.  We are a bit constrained during these activities since as we have a product already in existence. For example, a major tooling change may not be our most appropriate product adjustment due to the costs associated.  We have to work within the confines of the existing design and manufacturing methodology as well as customer expectation. Still it is an exercise that we must go through as the use of these techniques can stave off product or service “death” for some period. As long as we can maintain our margins, we can still produce the product or deliver the service. If we do not have competition in the market yet, we improve our profits. Even if we have competition in the market place, with these value improvement activities ongoing through the product lifecycle, we are better able to maintain our profit margins as we steadily reduce our product or service cost and associated price.

It may not seem obvious, but we can benefit from these exercises even if we do not have the cost pressures due to competition.  As we improve the value proposition we reduce any cost barrier to the customer for purchasing the product increasing the “take rate” for the product or service. The same can be true for competitive markets where the organization may have to use cost to attract or retain customers.

It is in our best interest to optimize the product cost from the start of the lifecycle, even during conception.  Those up front activities really matter.  However, all is not lost if achieving optimum product cost up front was not possible.  Even if we did spend time optimizing the design during the conception and development phase, there are ample opportunities to improve the product or service cost in any number of ways during the lifecycle. It should be clear the longer amount of time we spend optimizing the product or service margins, the better corporate stewards we are and the more probable the company will be profitable. We can also say that you can not “cost cut” your way to profitability as a long-term strategy. Generating new products and services is the other half of the equation for maintaining a profitable organization.  We discuss all of these tools and techniques in detail, and much more in our book Reducing Process Costs with Lean, Six Sigma, and Value Engineering Techniques.

 

This entry was posted in Book Club, Cost Management, Strategic Management Accounting, Value Management. Bookmark the permalink.