How did we get this far before learning we can’t meet the product cost target?

This is one of the most common failures in capital equipment product development.  The new product was on time and met or exceeded all the stated performance requirements.  After building the first prototypes there was some concern about achieving the final cost target but the team was confident that once manufacturing volumes ramped to a certain level everything would work out.

Product development teams are continually asked to balance tradeoffs between time to market, performance and cost.

Two out of three isn’t bad, right?  

Wrong.

It is often a massive failure.  Many capital equipment product lines are high mix, low volume operations that are unable to significantly reduce cost through volume procurement.  It is a common misconception by engineers that component savings of 20% or more can be gained from initial development stage procurement of one or two units at a time to, say 25-50 at a time when in volume production. This simply is not the case when considering global volumes of that component are in the hundreds of thousands annually. There is also a common mindset in engineering teams that they will have an opportunity to design-out cost long term, this is often not the case.   

When products are introduced to the market at a higher than planned cost of goods sold (COGS) it puts pressure on pricing and/or gross margin.  The net result can be fewer sold units, reduced factory absorption, further increases to COGS and a margin profile that does not support additional investment.

It’s a death spiral that can drive frantic cost reduction activities.  The result might be some level of COGS reduction but it decreases product stability which is required to obtain efficiency in manufacturing and field service.  It often takes years to dig out of the missed cost goal hole and while the team is working the current product cost issue they certainly are not working on the next product opportunity in the funnel.  

CapSure Solutions is here to help.  We can coach product development teams along the way to ensure there are no unacceptable compromises to the interdependent goals of time to market, cost and performance.  This is accomplished via a combination of Advisory and Coaching activities.  Advisory will address any process gaps (who owns the COGS target anyway?  Engineering?  Supply Chain?  Manufacturing?) and Coaching will ensure the cross functional team keeps the COGS target front and center all through the process.