cost reduction in automobile supply chain
DESCRIPTION
This file is received from Mr Vishal Rajani .Very useful information on cost reduction methods. Specially AKBAR -BIRBAL story used to explain cost reduction in simple words. Thanks Vishal.TRANSCRIPT
Cost Reduction Strategies for an Automobile Supply Chain
Enhancing Supply Chain Competitiveness Through Cost Excellence
Why Cost Reduction?
Can you Increase the Selling Price of your product in today's Environment.
AIM
Profit = Selling Price – Cost of Mfg.
C
C = Cost of Direct Material + Cost Of Conversion + Taxes
Profit = Selling Price – Cost of Mfg.
CC
Profit = Selling Price – Cost of Mfg.
C
TWO TYPES OF STRATEGY
5
Compete in existing market space Create uncontested market space
Segment existing customers Attract noncustomers
Beat the competition Make the competition irrelevant
Blue Ocean StrategyRed Ocean Strategy
Competitive Advantage Value Innovation
Exploit existing demand Create and capture new demand
A STANDARD BUS A NANO
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.s
How would you decide which part to procure at what cost?
The Answer?
Com
mitte
d C
osts
(%
)
When do you lock your cost?
Design & Development
Production
66
8595
100
ProductConcept
LogisticsSupport
Incurr
ed C
osts
(%
)
Target costing is
A structured approach
to determine life cycle cost at which the proposed product
with specified functionality and quality must be produced
to generate the desired level of profitability over its lifecycle
when sold at its anticipated selling price
It is a price based costing rather than cost based
pricing.
A structured approach
to determine life cycle cost at which the proposed product
with specified functionality and quality must be produced
to generate the desired level of profitability over its lifecycle
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 Price Target Profit Allowable Cost
Current Cost Target Cost
KaizenCosting
Production PhaseDesign Phase
ValueEngineering
Target Costing Process
Now, lets come back to the main problem
Manufacture 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 Truck should not exceed 1,16,500 ; else we cannot sell 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
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
Lets Take An Example Of Braking System
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.
How to Enhance Contribution? ( Cost Reduction)
Some Important Levers
Technical
Value Engineering
Specifications LeversFeature de-contenting
De-specification
Design Levers
Alternate Material
Weight Reduction
Part Commonization
Parts substitution
Modularization
Manufacturing LeversMfg Process Change / Yield
Improvement
Commercial Levers Supplier Management Levers
Make vs. Buy
Joint Process Improvement
Alternate/Global Sourcing
Negotiation improvement
Value Enhancement Levers Specifications Levers
Feature Addition
Specification Up-gradation
23
Noble men! There
is a very
important matter
before the court
today.
The raw material
price is shooting up.
The material cost of
a sword has gone up
by Rs.10 . And ….
We are adding
50,000 soldiers to
our army this year.
I want to handle
this situation
without
increasing the
taxes. Please
give your
valuable
suggestions as
to how we
should face this
situation.
24
!?
!!??
Why everyone’s
quiet?
Birbal! I am
surprised that you
too have become
silent!!
Your Majesty, I
have six ideas
which can reduce
the cost of a
sword by atleast
Rs.20 without
compromising the
functional
requirements.
Brilliant!.
Tell us those
ideas.
25
Presently,
the hilt has
7 parts.
The
proposed
design will
have 4 .
Existing Design
7 parts
New Idea
4 parts
Part Count
Reduction
26
For the new hilt,
instead of designing
exclusive rivets, we
can use the rivets of
daggers.
Part
Commonisatio
n
x
27
When the Shah of
Persia was our Guest
last month ,
I observed that the
hilt in his sword does
not have a curved
portion. We can
design similar hilts
for our experienced
soldiers.
Benchmarking
New IdeaExisting Design
Curved portion
28
Alternate
Material
Blade
Sheath
Copper Steel
The sheath
which houses
the blade is
made of copper
now.
We can switch
over to Alloy
steel which is
cheaper.
29
Weight
Reduction
Blade
Sheath
Since alloy steel is
stronger than
copper, we can
reduce the
thickness by 0.5
mm which will save
material
2 mm 1.5 mm
30
Yield
ImprovementThe curved
blade design is
yielding only 2
pieces per die. If
a straight blade
is designed, we
can extract 3
pieces per die.
2 Blades 3 Blades
31
Your majesty. The
present design is being
used since the time of
Babur
without any failure.
We should not risk any
design change.
Saheb, there is no
doubt that the
present sword
designed by you for
my Grandfather’s
army is superior.
However, let us test
this new design in
our barracks.If they
pass the tests, we
will deploy them in
the battle field.If the ideas pass
the test, we can
save atleast Rs.
Ten Lakhs this
year, thus serving
the purpose of
cost reduction.
There is an
advantage also.
I do not have to
increase the tax.
32
Birbal! I wonder
how you
developed these
ideas! Is there a
systematic way
by which others
can also be
trained to
generate such
ideas.
Yes, your Majesty.
With the help of Functional Analysis System
Technique(FAST) any body can generate such
ideas. FAST is a powerful tool used in Value
Engineering (VE) which is an extremely effective
system to improve products and services for cost
and productivity improvement.
If six ideas for the
sword itself can
save Rs. Ten lakhs ,
imagine how much
money we can save
on other weapons
like spears, arrows
and cannons etc.
33
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 System
Technique(FAST). Each division should
release Armoury Change Requests
(ACRs) for the worth of Rs.25 lakh.
Yes, your
Majesty.