Enhancing Supply Chain Competitiveness Through Cost ExcellenceCost Reduction Strategies for an Automobile Supply Chain
What is Supply Chain?Conceptual Diagram of a Supply Chain
Why Cost Reduction? AIM Profit = Selling Price – Cost of Mfg. CCan you Increase the Selling Price of your product in todays Environment. C= Cost of Direct Material + Cost Of Conversion + Taxes
Cost Management Strategy for Two Different types of Products
TWO TYPES OF STRATEGYRed Ocean Strategy Blue Ocean StrategyCompete in existing market space Create uncontested market space Beat the competition Make the competition irrelevant Competitive Advantage Value Innovation Segment existing customers Attract noncustomers Exploit existing demand Create and capture new demand A STANDARD BUS A NANO 5
Cost management For Blue Ocean Strategy Products Tata Nano Tata Ace
Mechanics of Target Costing Suppose you work in an Automobile Company? Your Chairman wants you to make a Truck ( LCV) Market Price for Truck = Rs 2 lacs Total no. of parts in a truck = 1000 no.sHow would you decide which part to procure at what cost? The Answer?
When do you lock your cost? 100 95 85Committed Costs (%) Incurred Costs (%) 66 Product Design & Productio Logistics Concept Development n Support
Target costing is A structured approach A structured approach to to determine cycle costcost at which the proposed determine life life cycle at which the proposed product with specified functionality and quality must be produced productto generate the desired level of profitability over its lifecycle with specified functionality and quality must be when sold at its produced selling price anticipated to generate the desired level of profitability over its It is a price based costing rather than cost based lifecycle pricing. when sold at its anticipated selling price It is a price based costing rather than cost based.
Seems a Little fictional?• With all these unknowns – – Selling Price – Life Cycle Sales Volume – Dedicated and Common Investment – Expected Costs of Materials, Conversion and post production – WACC• Is it not getting a bit too theoretical?
Target Costing ProcessTarget Price Target Profit Allowable Cost Kaizen CostingCurrent Cost Value Target Cost Engineering Design Phase Production Phase
Now, lets come back to the main problemManufacture a product which can be sold at Rs 2 Lac and profitable to company as well. What is the Cost of each of the 1000 parts used to manufacture this product.
We Decided that Total Material Cost of a Truckshould not exceed 1,16,500 ; else we cannotsell it at Rs 2 Lacs which is the Aim. Now, Lets try to find out from Target Costing Methodology , what should be the Target cost of each Major System
Lets Take An Example Of Braking System We have a Target Cost for Full Braking System (i.e. Rs 9323)Now, either I can give this target cost to my vendor or can ask him to design for me a braking system for me in this cost Or I can find out target cost for each of the braking parts and procure them seperately from different vendors
Target Cost for all Parts of Brake System (May be…) Now, you would know , how much target price you need to give to your brake drum supplier. Supplier should design a new part at this cost. Similarly , find target costs for all other parts.
Cost management For Red Ocean Strategy Products
Three types of Values Functional Value Value in Esteem Exchange Value
How to Enhance Contribution? ( Cost Reduction) Some Important Levers Feature de-contenting Specifications Levers De-specification Alternate Material Weight ReductionTechnicalValue Engineering Design Levers Part Commonization Parts substitution Modularization Mfg Process Change / Yield Manufacturing Levers Improvement Make vs. Buy Joint Process ImprovementCommercial Levers Supplier Management Levers Alternate/Global Sourcing Negotiation improvement Feature AdditionValue Enhancement Levers Specifications Levers Specification Up-gradation
Welcome to the court of EmperorJalaluddin Muhammad Akbar 22
The raw materialNoble men! There price is shooting up. is a very I want to handle The material cost ofimportant matter this situation a sword has gone up before the court without by Rs.10 . And …. today. increasing the We are adding 50,000 soldiers to taxes. Please our army this year. give your valuable suggestions as to how we should face this situation. 23
Why everyone’s Your Majesty, I quiet? have six ideas Birbal! I amwhich can reduce surprised that you the cost of a too have become sword by atleast silent!! Rs.20 without Brilliant!.compromising the Tell us those functional ?? ideas. !! requirements. !? 24
Part Count Reduction Presently,the hilt has 7 parts. The proposeddesign will have 4 . Existing Design New Idea 7 parts 4 parts 25
Part Commonisatio n For the new hilt,instead of designingexclusive rivets, wecan use the rivets of daggers. x 26
Benchmarking When the Shah ofPersia was our Guest last month , I observed that thehilt in his sword does not have a curved portion. We can design similar hilts for our experienced soldiers. Existing Design New Idea Curved portion 27
Alternate The sheath Material which houses the blade ismade of copper now.We can switch over to Alloy steel which is cheaper. Copper Steel Sheath Blade 28
WeightSince alloy steel is Reduction stronger than copper, we can reduce the thickness by 0.5mm which will save material 2 mm 1.5 mm Sheath Blade 29
Yield The curved Improvement blade design is yielding only 2pieces per die. If a straight blade is designed, we can extract 3 pieces per die. 2 Blades 3 Blades 30
There is an advantage also. I do not have to Saheb, there is no increase the tax. doubt that the present sworddesigned by you for Your majesty. The my Grandfather’s present design is being army is superior. used since the time ofHowever, let us test Babur this new design in without any failure.our barracks.If they We should not risk any pass the tests, we design change.will deploy them in If the ideas pass the battle field. the test, we can save atleast Rs. Ten Lakhs this year, thus serving the purpose of cost reduction. 31
Yes, your Majesty. If six ideas for the With the help of Functional Analysis System sword itself can Technique(FAST) any body can generate such save Rs. Ten lakhs , ideas. FAST is a powerful tool used in ValueEngineering (VE) which is an extremely effective imagine how muchsystem to improve products and services for cost money we can save and productivity improvement. on other weapons like spears, arrows and cannons etc. Birbal! I wonder how you developed these ideas! Is there a systematic way by which others can also be trained to generate such ideas. 32
Birbal! There are four divisions in my army – Infantry, Cavalry,Artillery and Elephant brigade. I want you to teach the engineers in each of these divisions the application of Value Engineering (VE), especially the Functional Analysis SystemYes, your Technique(FAST). Each division shouldMajesty. release Armoury Change Requests (ACRs) for the worth of Rs.25 lakh. 33