Managing costs - Materials and design - Part 3

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Materials and design

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.

Design and materials cost reduction

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:

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".


The product features

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 costs of getting it wrong

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" map for design

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:

The materials team and actions

Some key actions in materials cost reduction in either design or production are:

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!

Final Words

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, you’re just not going fast enough".

A longer hit list of "Things to do Next!" to reduce materials costs is given in Easy Guide 4a.

The "Managing Costs" Series.

"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  

Tangram Technology Ltd. 1998

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