Managing costs - Materials and design - Part 3
In Part 2 of this series we looked at overheads - a major segment of the cost of plastics products. This week we look at materials, probably the biggest cost segment of them all!
Plastics processing is a conversion industry where we convert raw materials to a finished product, we rarely add much to the product in terms of additional items apart from the forming process. This means that direct materials are inevitably one of the largest cost elements of the finished products and yet it is again one of the least attacked. Depending on the type of product the raw materials cost element will vary from 45% (technical products) to 80% (mass produced products). Concentrate on this large cost element to get rapid and significant payback.
The first lines on the paper
Product designers and their assumptions influence product cost from the very start of any project. The initial stages are where the very basic decisions on the shape and design of the product are taken. The "simple and obvious" decisions such as the type of material, the production method, the wall thickness and the rough outline dimensions effectively define the overall cost of the product. Once you have decided the length, width, height, wall thickness and material type at least 80% of the product cost is already bolted into place!
With any design project the first 15 to 20% of the project involves little actual spend but defines and commits 80 to 90% of the final product cost.
Expenditure committed and actual spend for a typical product.
Care and innovation at the start of a project can dramatically reduce product costs but there is almost always an unseemly haste by product designers to get past the critical first stage and on with the more exciting stuff of actual design. There are two simple reasons for this:
- Product designers rarely understand the costing systems used and how their decisions affect the cost (or they are not interested or not told).
- Accountants rarely understand the technical aspects of product design and how they can influence the design at an early stage rather than just calculating the cost after it is all finished (or they are not interested or not told).
If product designers do not understand the implications of their decisions and accountants do not understand the reasons for the decisions then we have a recipe for disaster and designs which simply use too much material and cost too much are the result.
"We were late in starting the project so we had to make up the time somewhere".
Excessive product features are often included by designers because they have been inadequately briefed on what the customer will pay for the features. Cost-effective product design always starts with a very clear brief of what the customer wants (and will pay for) and what would be nice to have but will not achieve any higher price in the market. Extra unwanted features generally increase the design and development cost (and hence both the product cost and price to the customer) but do not increase the price the customer is prepared to pay.
Customers will buy a product provided that the value to them is greater than the price - additional features which add no perceived value to the customer almost inevitably add cost to the product and do not increase the sales of the product. Over-design is rarely free and adds costs which cannot be recovered in the price.
The effect of over development and too many features.
The cost of fixing any errors or mistakes or making other changes to a design escalates dramatically as a project proceeds. Changes in the initial stages are relatively easy to carry out but the cost of any change rises rapidly as the actual expenditure takes place. Care and innovation at the start of a project reduces the changes necessary and the costs of development. Product development efforts must be concentrated more in the early part of the project to get the basics right.
The costs of getting it wrong during product development.
The "Pentamode" Code of Practice (available free from the British Plastics Federation - 0171 457 5000) gives explicit instructions on how to effectively manage new product development and is strongly recommended as essential reading. The development process is the ideal time for materials cost reduction and much of the guidance given in Pentamode is simple and easy to understand. If you are not implementing Pentamode you are almost certainly wasting money and effort.
Current products and materials cost reduction
Materials cost reduction in current products is difficult to achieve and some general approaches are:
- Value analysis - This provides a formal method for product assessment and cost reduction strategies. Value analysis needs open accounting information to be effective and to provide the focus for the cost reduction efforts.
- Retooling - It is rare to retool simply for materials cost reduction but the calculations sometimes show that even this "unthinkable" option is profitable over a short time scale - do the calculations if in doubt. When retooling is needed for other reasons it is logical to seek materials cost reductions rather than simply purchasing a replacement tool.
- Scrap reduction - Scrap (with the exception of a small amount of start-up scrap) is generally the result of inadequate production control and presents an opportunity for materials cost reduction. One of my favourite quotes is "We don't have any scrap because anything that is not right is reground and the material is used again". Scrap, even when reused, has consumed time, power, effort and has created unnecessary costs in the business. Machine start-up parameters and running control are key points for scrap reduction. Many scrap problems arise from "tweaking" of the machine by staff on shift changes - establish set-up sheets (using Taguchi analysis to determine the optimum parameters), keep set-up sheets up-to-date, ruthlessly follow the set-up sheets, introduce Statistical Process Control and you will be well on the way to reducing scrap.
Some key actions in materials cost reduction in either design or production are:
- Set up a "Materials Team" - to include Design, Purchasing, Production and Accounts to ensure that all materials are used cost-effectively. A 1% reduction in purchasing spend has the same effect as a 10% increase in sales volume.
- Provide the Materials Team with accounting information to allow them to do their job.
- Reduce the number of suppliers and involve them in the materials team actions.
- Ensure that a full Product Design Brief, including essential and desirable features, is available to designers and the materials team.
- Ensure that all new product designs are subjected to a full materials design and usage review before the design is signed off.
- Ensure that the Pentamode Code is followed.
- Use Taguchi methods to find the optimum process parameters and stick to them!
- Institute Statistical Process Control on every product.
The materials cost is one of the largest costs in plastics processing and yet there are few formal attempts to manage these costs in many processors. The attempts that are made generally involve "variances to standard" without real attempts to reduce the absolute usage. When materials represent between 45 and 80% of the cost there is a lot more to do than simply report the variances!
We hope that you have enjoyed reading this short series and that it has stimulated some ideas about what managing costs really involves. It is not simply concentrating on the labour element and laying off workers. It is about ensuring that your company actually works to minimise costs in the key cost areas such as overheads and direct materials. It is not solely about what direct labour is doing - in fact it has very little to do with them. Not at all what you first thought of?
A final thought from Mario Andretti "If things seem under control, youre just not going fast enough".
A longer hit list of "Things to do Next!" to reduce materials costs is given in Easy Guide 4a.
"Managing costs" is designed to give you direct and clear information on some ways of looking at the way we generate cost information in our companies and some ideas for managing them. The series has been written specifically for plastics processors but most of the information is equally relevant to general business. The series is:
Part 1: Introduction
Part 2 - Overhead cost management
Part 3 - Materials cost management -This article
Last edited: 11/03/10
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