As Cost Reduction in 2009 is our KPI, we are target to reduce cost for our engine through localization and ask the supplier reduce their price, is there any body tell me the formal calculation formula of COST REDUCTION?? Thanks in advance!

As Cost Reduction in 2009 is our KPI, we are target to reduce cost for our engine through localization and ask the supplier reduce their price, is there any body tell me the formal calculation formula of COST REDUCTION?? Thanks in advance!

I don't think the solution is to use a formula, the existance of one would be dubious at best. If you want to reduce your costs, there is no magic wand; you will need to sit down and work with your suppliers back through the supply chain/s.

Items such as quality improvement, reduced labor requirements (of all components), transportation costs, minimizing expedited shipping charges, etc.; all contribute to a lower cost product for the consumer. The biggest problem with reducing costs is that the products aren't typically designed with this focus, and that makes life very difficult. The majority of your costs are locked based on the design. If you truly want to be competitive, you have to start at the design process and as early as possible.

Wayne

What I mentioned just focus on the outsouced parts cost reduction, not these cost reduction from internal control....for example, the flywheel may be RMB 500/unit in Jan 09, however it is may be only cost RMB 200/unit in the middle of 2009, and RMB 180/unit by the end of 2009, we have above 500 parts outsouced, how can we calcualate the overall cost reduction?

What I mentioned just focus on the outsouced parts cost reduction, not these cost reduction from internal control....for example, the flywheel may be RMB 500/unit in Jan 09, however it is may be only cost RMB 200/unit in the middle of 2009, and RMB 180/unit by the end of 2009, we have above 500 parts outsouced, how can we calcualate the overall cost reduction?

In simplest terms, take your current standard costs for all active part numbers at the top level of your Bill of Materials (BOM). This would account for all raw materials and sub-assemblies, and then just review it on a monthly/quarterly basis. Of course, this means you'll need to adjust your standard costs within your MRP/ERP system on a routine basis. So the recommendation would be to not look at in periods shorter than three months.

One way that would be fairly simple to calculate might be:

(material costs per period / (total sales per period- labor costs per period)) * 100

The resulting number should trend downward.

What I mentioned in my previous post can just as easily be accomplished at the vendor's site/s, and should be, in order for you to minimize your total cost. Lowest total cost is where you should focus your efforts if you truly want to be successful. There is always a danger to focus on the lowest piece price, which in the long run can actually be more expensive. By looking at total cost you should be considering things such as: piece price, standard shipping costs, expedited shipping costs and potential frequency, quality level, on-time delivery, currency conversion/s, carrying costs, risk, cost of capital, and so forth.

If I can sell you a part that is 10% cheaper, but requires 5% more labor on your part due to poor quality, and increases your warranty costs by another 5%; how would you quantify your true savings. From a cost reduction standpoint of piece price, you've met your goals; from a business standpoint, you'll likely be closing your doors soon.

Food for thought....

Wayne

In simplest terms, take your current standard costs for all active part numbers at the top level of your Bill of Materials (BOM). This would account for all raw materials and sub-assemblies, and then just review it on a monthly/quarterly basis. Of course, this means you'll need to adjust your standard costs within your MRP/ERP system on a routine basis. So the recommendation would be to not look at in periods shorter than three months.

One way that would be fairly simple to calculate might be:

(material costs per period / (total sales per period- labor costs per period)) * 100

The resulting number should trend downward.

What I mentioned in my previous post can just as easily be accomplished at the vendor's site/s, and should be, in order for you to minimize your total cost. Lowest total cost is where you should focus your efforts if you truly want to be successful. There is always a danger to focus on the lowest piece price, which in the long run can actually be more expensive. By looking at total cost you should be considering things such as: piece price, standard shipping costs, expedited shipping costs and potential frequency, quality level, on-time delivery, currency conversion/s, carrying costs, risk, cost of capital, and so forth.

If I can sell you a part that is 10% cheaper, but requires 5% more labor on your part due to poor quality, and increases your warranty costs by another 5%; how would you quantify your true savings. From a cost reduction standpoint of piece price, you've met your goals; from a business standpoint, you'll likely be closing your doors soon.

Food for thought....

Wayne


Thanks a lot for your input....really helpful...