Cost Reduction Strategies for an Automobile Supply Chain

Enhancing Supply Chain Competitiveness Through Cost Excellence

What is Supply Chain?

Conceptual Diagram of a Supply Chain

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

Cost Management Strategy for Two

Different types of Products

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

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.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.

Target Cost of Future Truck (May be…)

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

Target Cost for all Major Systems (May be…)

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.

Cost management For Red Ocean

Strategy Products

Three types of Values

Functional Value

Value in Exchange

Esteem Value

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

VALUE ENGINEERING

A HUMOUR STORY

22

Welcome to the court of Emperor

Jalaluddin Muhammad Akbar

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.

Thank you