Lecture 4

Question 1

Change the nature of demand

Answer 1

1. Innovation breakthrough
2. Risk management
3. Technical data mining
4. Re-specification

Question 2

Innovation breakthrough

Answer 2

Monopolies, patents or a too high specification of the product can make you totally dependent from a supplier
Innovation breakthrough helps you to get independent again!

1. Core-cost analysis

• Too many features make a product unnecessary expensive
• Zero-Based“ Method in product development
• Go back to the basic product and think about which features are really needed
• Optimizing to basic requirements

Checking basic requirements and resulting costs under the ideal conditions -> theoretical minimum level of costs -> step by step adding new functionalities; moving towards reality -> target costs: new product

2. Invention on demand

Patent protected suppliers may have a high power and are able to dictate their prices. Invention on demand is used to develop technical alternatives. Invention on demand is based on the TRIZ* ( theory of inventive problem-solving.) Method and takes all natural sciences into account.

3. Design for sourcing

Close collaboration between purchasing and research & development. High specification can make you dependent from one supplier. The target is to reduce specifications and allow the sourcing from different suppliers

4. Leverage innovation network
   - Cross-company collaborating networks (Strengthening development;Insight in new technologies)

Question 3

Risk management

Answer 3

Designates the sum of defensive measures that a business may employ to:

• ensure that its customers are supplied and
• the company´s financial outcomes stay in control

1. Bottleneck management
   AIM: ensure the supply of end products to the customer, whatever the circumstances

Steps to help avoid:
Recognize early and timely action against bottlenecks

a) Short range measure

• Establishing targeted program management and focusing resources on problem components
• Implementing near-term change of supplier (focusing on development and testing resources for short-term approval)
• Dispatching a number of employees to the supplier; obtaining delivery forecasts from the supplier, which can be updated daily; ensureing timely internal communication

b) Middle range measure

• Substituting parts or eliminating variants
• Making further supplier changes in order to achieve greater diversification
• Focusing on new developments and new technologies in order to reduce dependence on old technology

c) Long range measure

• Building up additional suppliers with capabilities identical to those of current suppliers
• Identifying suppliers who, while not yet at the required level, can be developed further with measures already in the drawer
• Dual sourcing (that is, using at least two suppliers in parallel for critical components)

2. Vertical integration
   - In a volatile market, the long-spurned/ (rejected) method of vertical integration is coming back into favour.
3. Political framework management

Influence on the product range and associated prices
Application:
for mono- and oligopoly

Monopoly: break down through liberalization

Oligopoly: Restriction by import duty, which means if too much comes from abroad, you can restrict the regulations

With this method you can change supply
and demand relationships!!!

4. Intelligent deal structure

When buying from monopolistic suppliers, careful drafting of contracts is of paramount importance.

Hedging is a method for “planning certainly over the budget period”. Depending how high the company´s want their risk content, different methods exist.

Swap: a fixed price is agreed independently of the actual market price

Cap: only an upper limit is placed on market price fluctuations; if prices fall, the company can take full advantage of them

Collar: a range is defined, within which prices can follow the market fluctuations

Question 4

Technical data mining

Answer 4

Reasons for Technical data mining

Shorter product life-cycles; Increasing product variety

Usage of EoS gets more difficult
Get an overview over the market
Reduce complexity

1. Product benchmark
2. Identification of comparable products (Ask suppliers about their products; Procurement does market research)
3. Evaluating of competing products; Criterias and priorities have to be defined (Possible criteria: wipe quality, montage, convenience of procurement, life cycle
   define priorities
4. Invitation for bids; Invite old and new suppliers; Tender (Also ask new (smaller) suppliers for prices;Try to use EoS as much as possible)
5. Analysis (Cost savings possible? Is an alternative better than the current product?)
6. Composite benchmark

Goal of Composite Benchmarking:

• Comparison of similiar products by suppliers
• Result: list of different components and their costs and their production-steps
• Composition of the ‚best of the best‘ product is possible

1. Agreement with suppliers
2. Find adequate products
3. Develop a cost-calculation sheet
4. Suppliers fill out the sheet
5. Evaluate the offers
6. Identify possible cost savings
7. Feedback for every supplier
8. Complexity reduction

Reasons:
Shorter product life-cycles
High innovation rates
Multifarious* customer needs

How to reduce Product complexity?

Structure – Prove – Clear - Implement
1. Build variant trees (Create transparency, Get a better understanding, Add numbers (prices, sold pieces, frequency,…)
2. Develop a maximum scenario( Compare all variants;
Which ones are similiar? Could some Variants be combined or eliminated?; Pareto-Law)
3. Create a business case (Cost saving potentials; Income effects; Required investmens and resources; Result: fact-based decision)
4. Create an action plan
(Discussion with all involved parties: Product management, Sales, Development,Production, Procurement, Logistics)
Decission: What are the measures?

Ariel and Frosta examples

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4. Process benchmark
5. Preparation
6. Involvement of Suppliers
7. Best-Practice costs
8. Implementation of cost savings potentail

Question 5

4. Re-specification

Answer 5

Reasons for re-specification

• High investments in development of a product
• Most products have a huge number of variants
• Cut costs at the beginning of the development

1. Product teardown
2. Deconstruct product, analyze differences
3. Analyze potential improvements (material, weight, assembly)
4. Identify cost improvements (dicuss in a interdisciplinary team)
   - > Implementation
5. Functionality Assessment

• Products( e.g.; Swiss Knifes) offer an exorbitant number of functions
• Functions are cost drivers
• Which functions does the customer want?

1. Break the product down into subsystems to discover all functions.
2. Give the function a meaningful name (e.g. prevents corrosion, absorbs vibration)
3. Classify the function in one of the four groups: basic, critical, supporting, non-supporting
4. Evaluate the functions, calculate the cost-benefit ratio
5. Identify potential improvements; most functions should be basic or critical; improvements at non-supporting functions
6. Design for manufacture

Design for manufacturing is a systematic method for designing products so that they are easy and cheap to produce.

Steps:

1. Analysis of the costs of manufacturing a product:
   First, all of the pre-material and processing costs have to be established in detail so as to identify the major cost blocks
2. Generation of a cost driver tree:
   A cost driver tree is created as a means of analyzing the source of costs
3. Generation of recommendations for action:
   On the basis of the cost driver tree, ideas are generated for lower-cost design
4. Implementation of the new, lower-cost design
   In the course of calculating the cost of the new product, the solutions with the highest savings are applied

5 success factors:

• The work starts only after a detailed cost structure is implemented
• Suppliers are closely involved in the design for the manufacture process, so there ideas can be included
• All departments involved understand the needs and interests of the other departments
• Ideas without actual relevance to cost cutting are dropped as quickly as possible
• The service to the customers is not affected by cost reductions, either in perception or in the scope (e.g. Jaguar switches from Ford - looked “sloppy”)

4. Specification Assessment

The specification assessment is a method to clearify if current specifications are really needed and if they are usefull.
If this method discovers some disadvantages like increase in cost and complexity, so the specification will be changed.