Strategic Design-to-Cost Practices for Maximizing Profitability

This post originally appeared on owensdesign.com. Owens Design is now part of AIR.

Overhead view of a team joining hands over a table

By Lori Runyan
VP of Program Management

In a competitive business landscape, the reluctance of new customers to disclose their cost targets is an understandable instinct. When we have insight into these cost goals, however, it opens a wide range of options for making informed trade-offs and crafting a solution that aligns with these objectives.

Understanding the cost targets enables our engineering team to apply the principles of value engineering and focus on what the customer values most. For some, the priority might be a swift market entry, for others, the aesthetic appeal or durability or tool functionality holds the most significance

Understanding a client’s cost objectives allows us to optimizing the product to provide the greatest value for their budget. Whether it’s simplifying the design, choosing different materials, or tweaking the manufacturing process, we can strike the right balance and ensure that the end product not only meets the financial criteria but also provides the quality and functionality the market expects.

This collaborative approach, where cost goals are openly shared and understood, paves the way for solutions that are not just cost-effective but also engineered to meet, and often exceed, our clients’ expectations.

In business, profitability is the ultimate goal, and every decision we make plays a role in achieving it. Product development is no exception. To maximize profitability while delivering innovative solutions, we must strike a balance between cost, performance, and schedule. For capital equipment original equipment manufacturers (OEMs), cost is often the linchpin that determines success or failure.

Studies consistently show that most of a product’s cost is established during the early design and development stages. This is where “design-to-cost” emerges as a strategic methodology that treats cost as an equally vital objective alongside performance and schedule throughout the entire project lifecycle. This blog provides an overview of design-to-cost strategic principles and their impact on low-volume, capital equipment product development.

1. Establish a Profit-Oriented Cost Target

A profit-oriented cost target established in collaboration with the client is a core part of any product design strategy. This target should align with key specifications, performance goals, and project timelines, with the goal of optimizing profitability. Unlike traditional cost-focused approaches, where cost considerations are deferred until later stages, we recognize that up to 70% of a project’s cost is determined during the concept stage. To seize this strategic advantage, achievable target costs must be clearly defined upfront.

In the concept stage, functional specifications may not be fully detailed, making it challenging to create a precise cost model, but our objective is clear: allocate budgets for each component of the tool to support the overall cost structure. It’s a top-down and bottom-up approach, allowing us to swiftly compare various concepts on cost, performance, and schedule.

Real-World Strategic Cost Alignment

Last year, we partnered with a semiconductor industry customer aiming to launch a new wafer processing tool. Initially, they were hesitant to discuss specific cost targets. Our first cost estimation encompassed all their desired specifications and stakeholder wish lists with no cost constraint.

Unsurprisingly, this perfect world scenario exceeded their budget. Recognizing the need for a more cost-aligned approach, we organized a brainstorming session with the client’s team.

Together, we scrutinized each feature and requirement, distinguishing the ‘must-haves’ from the ‘nice-to-haves.’ We identified creative workarounds and areas where requirements could be adjusted or features could be streamlined. It wasn’t just about cutting costs; it helped us hone in on what truly mattered to the client and their end-users.

Through this collaborative effort, several features that were initially earmarked as crucial were reassessed and removed without compromising the core functionality of the tool. These adjustments drove a more focused and cost-effective design and a solution that aligned with the client’s budget without sacrificing the overall result.

This experience echoes Stephen Covey’s wisdom, “Don’t let the perfect get in the way of the possible.” It highlights the importance of flexibility in the design process and the value of working with clients to realize a product that is not only feasible but also profitable and market-ready.

2. Embrace Value Engineering as a Profit Driver

Value engineering is not just a cost-cutting exercise; it’s a strategic tool for analyzing designs to determine if their function justifies the cost. We seek to identify designs that consistently deliver the required function at the lowest total cost, providing the best value to our customers.

Value engineering uncovers opportunities to eliminate unnecessary costs while ensuring that quality, reliability, and performance requirements are met. It helps identify design elements that may contribute more to cost than function, allowing us to eliminate them in the design phase, to enhancing profitability without compromising excellence.

3. Ensure Accurate Cost Estimation for Strategic Decision-Making

Strategic decision-making relies on precise cost estimation. To effectively compare design costs against the profit-oriented target cost requires accurate cost estimation at the sub-system level. Key practices include:

Design engineers maintain a strong connection to actual costs, ensuring that estimations are grounded in reality.
Databases store design and cost history, reducing design costs by leveraging insights from past projects.
Regular contact with suppliers is maintained and detailed designs are sent to suppliers for pricing at the earliest opportunity. If prices exceed expectations, we prioritize cost drivers and work collaboratively to reduce total costs. This “design-it-twice” approach is a strategic move that adds time in the initial schedule, but can significantly reduce overall costs and minimize need for future redesigns.

4. Practice Continuous Cost Tracking for Strategic Decision-Making

Cost tracking is not only an operational task but also a strategic practice. We monitor costs as the design evolves, and equip our design engineers with processes for easy cost comparison against the profit-oriented target cost. Cost tracking extends to quantity roll-offs for materials, accounting for procurement methods and additional factors such as freight, taxes, and duties. For materials sourced from the Far East, we consider these factors in our cost assessments.

5. Mitigate Risks through Strategic Scheduling

Scheduling to ensure time for thorough design consideration is a pivotal element of design-to-cost. While management often pushes for compressed timelines, overly aggressive schedules can compromise strategic objectives and lead to a more expensive “any design will do” mentality.

A Profit-Driven Approach

Our design-to-cost approach is more than a technical process; it’s a profit-driven strategy that aligns design and development with maximizing profitability. By establishing profit-oriented cost targets, embracing value engineering, employing accurate cost estimation and tracking, and carefully managing schedules, we ensure that products are not only cost-effective to produce but also maintain our reputation for quality, reliability, and timely delivery.

In a competitive landscape, profitability remains at the forefront of our strategic goals. Our commitment to design-to-cost reflects our dedication to strategic excellence, cost efficiency, and sustainable profitability and allows us to remain competitive, responsive, and positioned for long-term success.

View all news & insights