The market controls how much you can sell your products for; you control what your products cost to make. The difference is your profit. So to increase your profits you have to continually reduce your costs. How you develop your products determines what they cost to make. It therefore determines your profits. This is your major challenge.
As a manufacturer you won’t make real money unless you develop your own products. In the USA, maybe one in eight is a product developer and in the UK maybe one in ten. That’s a very small number. Why so few?
Some burnt their fingers badly and are afraid to do it again. Some think it’s too risky. Others vacillate and continually delay. And yet it’s the only option for a manufacturer to generate real wealth. Why?
It’s all about creating wealth. The market decides what it will pay for your products but you control what your products cost to make. The difference is your profit. To increase your profits you have to continually reduce your costs. It’s the way you develop your products that determines what they cost to make - and therefore determines your profits.
When you develop your own products, you may unwittingly be spending two thirds of your time and budget on activities that don’t add value to them. You may be taking three times as long as you could. And they may be costing you more to make than they could. Not only that, but many products are not what customers want so they buy a competitor’s.
What can be done? How can we all cut our budgets or use them to better effect, do it faster and surer, and develop products that cost less to make and therefore generate more profit?
You may think your problems are unique; they’re not. All industry sectors experience the same generic ones: a real challenge to continuously reduce costs; hard to define what customers want; serious product development time over-runs and over-spent budgets; projects difficult to manage. Through doing unnecessary tasks on the one hand and missing out vital ones on the other, most companies load cost onto their products and reduce their profit.
A thousand hours worth of useful work often takes two years. Poor organisation and uncontrolled delays are the usual cause. But few companies use an effective route map or do the tasks really well. This leads to inadequate product programmes with poorly controlled time and budget.
Did you try to improve profitability through a cost cutting exercise or by business process re-engineering? Did it unintentionally reduce your capability? You can’t do it with a partial quick fix such as by coming down hard on one particular area, kicking a particular manager or setting amazing targets. It’s built on everyone understanding how, what and when every area contributes.
To get a sound foundation, you need to understand that the way you develop your products is as important as doing the right tasks. To develop products fast, at the lowest possible cost, you do the right things, in the right way, at the right time.
Product development impacts into every corner of your company’s operation. It sets your cost base. All the areas the product touches need to contribute right from the start. So first you look at the shape of your organisation. Everyone needs to understand how they can contribute.
Surprisingly few companies do it really well. How can you research the subject and find out what to do? There are hundreds of books on various aspects of the process, but no concise management guide to the integrated whole. See what you think: browse through the book lists in The Product Development and Management Association, Productivity Incorporated and the Time to Market Association. (Click here for further useful publications.)
So what are you trying to do? What are your aims?
It starts with the unified culture throughout your company. The way you organise your production operation is almost certain to influence how you have been developing your products. The culture of how you organise and run one interacts with how you run the other.
Unnecessary tasks in both areas waste time and load cost onto your products. It’s almost certain you’ll have too high a cost base. For example, a typical ratio of indirect to direct staff in companies in the West is around 1.2 to 1. What’s yours? It should be nearer 0.3 to 1. Do your accounting practices inadvertently encourage you to continue creating waste?
If you are not familiar with this area, sites such as The Lean Enterprise Institute, the Association for Manufacturing Excellence, and the High Performance Manufacturing Consortium disseminate knowledge on world best practice in manufacturing. (Click here for further useful links.)
To measure where you are, look at your own production area. Is there work in progress between operations? Do you make large batches because some operations take a long time to change over? Do you make products before customers order them? This culture will be having a knock-on effect across your company, adding time and cost to the way you develop your products.
Management’s biggest challenge is how to reduce costs continuously. How you go about developing your product is the key. It sets your cost base. It all starts at the beginning - with product development. The way you develop your products determines how you make them. It also determines whether your customers will like them. And it will fix what they cost to make and your margins. It’s fundamental.
You integrate how you develop the product with how you make it with what customers want and when. It’s a seamless whole. The most effective way to cut cost is to reduce the number of parts and simplify. Contrary to traditional thinking, it also cuts cost to design them to be made at the same rate as you sell them, even if the processes are slower and simpler. You use production cells with all the processes one after the other. Why? Because if you design and develop products to be made faster than you sell them, it creates stock mountains that consume factory overhead, waste floor space and cost you money to fund.
How much money could you put in the bank if you could sell all the stock that customers haven’t ordered? And sell all your work in progress? How much more could you make by using the floor space that would liberate? It all relates to the way you develop the product in the first place.
The fastest, most effective way to develop products is to use small self-governing cross-function teams. You bring the right people around the table to do the task. You define what you want them to do and make them responsible for doing all of it - from start to finish. You don’t drag the task from one area to the next or circulate it at arms length around departments. Your team manages all the routine tasks, not the departments. (Your departments shrink to centres providing help and resources.) Your teams use a proven route map and a disciplined system to monitor progress. And you get them to eliminate all the steps that waste time and money.
If you could develop products in a third of your current time and cost, what would the direct saving be worth? What would the extra sales be worth? What extra profit would your reduced cost base give you?
We’ve been concerned to discover how few companies have a really good methodology for developing their products. Having examined more than 400 product developers over the past two years, we’d now like to help you cut your cost base and improve your capability. So we’re disseminatinginformation to help companies that are keen to grow and want to do it really well. You can quickly learn to do it as well as the best from our management manual, The product development process - an outline blueprint. (See Useful publications.)
The manual tells you how to set up, run and control a product development project. It explains what you do, in what order, and the logic of why you do it. It’s a practical guide for managers. It’s not padded out with detail you can’t use, but it does refer you to the most useful sources if you want to explore in more detail. (To save your having to browse through the vast library that’s out there, we recommend you a small essential reference list.)
The product development process - an outline blueprint: How to order and price.
If you want to go one step further and explore in more depth, come to one of our intensive one-day interactive workshops. It deals with strategy, planning, operating and management control. Learn about running product development the leanest, most effective way. At the same time, share experience with managers from five or six other companies. Or have an in-house workshop to yourselves.