Cost optimization and reduction remain a constant focus in the manufacturing sector

but new cost resilience trends have emerged during COVID-19

Publish date:

Cost optimization and reduction have always been key to profitability for manufacturers. The COVID-19 crisis has sharpened this focus and seen the emergence of new cost resilience trends. Enabled by digital, these are likely to change the competitive landscape for the long term.

Increasing cost-consciousness in manufacturing

Certain sectors in the industry have always been highly cost competitive. Automotive and consumer products, in particular, typically retain a strong focus on costs throughout the value chain from design, through sourcing, to production. It is no surprise that the Lean manufacturing approach first emerged in the automotive sector, at Toyota. In other more design-engineering focused manufacturing sectors, such as aero and defense, this focus on cost has not been so prevalent – until now. The need to configure and customize design has brought with it associated costs.

Now, however, at Capgemini Invent we’re seeing a paradigm shift, with our manufacturing clients looking at their costs through a new lens, regardless of whether they are highly cost competitive or design led.

Where growth and sustainability used to be the primary business drivers, now cost management and long-term resilience represent a new organizational focus.

Of course, the business drivers are different in each manufacturing segment. A design-engineering led company will typically sink costs into concepts, R&D and prototyping. Whereas another company with serial products might have high distribution costs due to the volume of products manufactured and geographic reach of its business.

First trend: Designing for cost

Those companies that have invested heavily in a product before it is manufactured, such as in the prototyping or tooling, are rethinking their approaches to cost resilience. They are making cost a constituent of how they design. To elaborate further, in addition to designing for usability, customer delight, or serviceability, they are now designing for cost as well.

This is easier for manufacturers of serial products whose mass production enables scope for economies of scale. The Engineer-to-Order (ETO) manufacturers don’t have that luxury. Rather they must look at the design changes that might bring about a cost reduction, going back to the drawing board to rethink their designs. Digital technologies, such as artificial intelligence (AI), digital twins and 3D modeling are helping in this effort and can be used to build new design use cases aligned with business drivers.

Where previously (pre COVID-19 era) we hadn’t witnessed this use of digital to better manage costs that strongly, the pandemic has now shown the art of the possible.

For example, let’s take a manufacturer of specialist tires. When the tire is designed, the rubber used is clearly a big cost factor – as are testing, approval, quality control and branding. To reduce costs, you can’t simply change the rubber because a lot of cost is already locked in. You can, of course, look at aspects such as your supply chain, inventories, sourcing, etc., but still, some 70% of the cost is tied up in the design. If you can re-look at the design and use digital, perhaps to rapidly prototype new ingredient specifications, you can take out cost from the outset.

In another example, let’s consider a manufacturer of industrial goods, such as turbines or boilers, following the ETO process. With the design phase contributing significantly to the overall cost of the product, cost optimization needs to focus on various design aspects. These include engineering analysis, concept design, architectural design, detailed design and, ultimately, the manufacturing process. A number of key steps will help speed the process and reduce costs. These include the ability to model the design and manufacturing process quickly through model-based manufacturing, as well as undertaking design scenario validation using the right digital simulation tools. This can help in rapid prototyping, while quickly eliminating sub-optimal design, which can reduce lead times and enable cost optimization from the outset.

Second trend: Product-as-a-service

Product-as-a-service models allow manufacturers to design products in such a way that even if production costs are higher, perhaps due to embedding smart connectivity, the opportunity to increase revenue grows. By using smart technology, you can bring down the product lifecycle costs for the end customer.

Combining the new and the old

These two trends are emerging in a manufacturing sector where traditional levers of cost reduction – including procurement, inventory visibility, lean manufacturing, supply chain towers and IT costs – are no longer delivering sufficient benefits. I am not advocating that they should be ignored, however: A focus on these areas offers the opportunity for quick wins that create short-term momentum and can make your cost resilience program self-funding.

So, manufacturers should continue to use them in parallel with rethinking their design engineering and using digital to build new service-led product development. It’s important to make a ladder for this cost resilience activity, so that each step funds the next one. Understanding the profit and loss (P&L) position is essential across all of these.

To reduce your costs, you need to know your costs.

In this context, at Capgemini Invent we work with our clients to provide a 360˚ perspective of every aspect of their operations, from the core business and support functions, to technology and external fixed and variable costs associated with their existing outsourcing arrangements. Only then can a strategy be built around each cost ‘bucket’ in terms of the best cost reduction lever to use.

In the end, because so much of the cost resilience activity will have strategic impact, both on what you do and how you do it, it should be part of your overall go-to-market strategy. Traditional cost reduction and optimization efforts have pivoted to cost resilience, which is integral to the long-term strategic mix.

Find out more about Strategic Cost Resilience with Capgemini Invent here
Or contact Vikas Kumar, VP Operations Transformation, India.

Related Posts

Capgemini Invent

How Direct-to-Consumer selling can help your business rise

Caroline Le Bars
Date icon November 23, 2020

Direct selling channels, both e-commerce and social commerce, have exploded in locked-down...

Capgemini Invent

Intelligent contact center transformation

Wolfgang Enders
Date icon November 19, 2020

Reshaping the contact center experience towards customer satisfaction and operational...

Capgemini Invent

The FinCen leak is a call to action

Gaurav Bedekar
Date icon November 13, 2020

Banks need to tighten controls as the industry prepares for the next phase of regulatory...