Eric Hiller exposes the biggest blunders leaders make when it comes to product cost management and design to value.
Product cost management (PCM) and design-to-value (DtV) are two areas in companies capable of delivering the greatest of impact, but are sadly prone to the biggest blunders by leadership.
Trying to save one’s way to growth
As great as product cost management and some of its sub disciplines like should-costing are at increasing your profit, but they will not grow your top line. To do that you’re going to need to focus on design-to-value. Make sure that you understand both the benefits and the limitations of these techniques.
Not understanding the massive leverage of COGS savings on margin
Cost of goods sold (COGS) is almost always the largest expense on the income statement of a product company. Often it is 70 to 90% of each dollar of revenue. People think of cost reductions in terms of big percentages (e.g. reducing product cost by 50%). That is one of the things that often scares people off from attempting such a transformation period, however you do not need to save massive percentages on cost of goods sold to meaningfully impact the bottom line People forget that margins at product companies are often thin, often less than 10%. Therefore, the leverage is huge. For example, if a company had a COGS of 80% and reduced it to 79%, they only saved 1% as a percent of sales. But, if the margin was 5%, reducing COGS of 1% equates to a 20% increase in margin. Executives might think design-to-value or product cost management transformations are “too expensive.” They are; they are too expensive NOT to do.
Key points in this article include:
- Focusing on short term savings without a plan for long term Product Cost management
- Not believing cost avoidance is more important than cost savings
- Thinking that a tool is the solution, not simply an enabler
- Under investing in a separate team and capability building for the organization
Read the full article, The biggest mistakes executives make in design-to-value and product cost management, on Medium.com.