Product Cost and Content Optimization in the Automotive Industry
Cost down, value up: Getting a grip on margins in vehicle projects
Digital transformation and the transition to electrified vehicles are upsetting product and cost structures in today’s product development process and increasing the pressure on Research & Development (R&D) teams. With our holistic approach to business case optimization, OEMs can increase product margins by cutting manufacturing costs and improving product & content strategy.
Over the last decade, complexity has been increasing for all commodities – and yet companies are more dependent than ever on the profits from new product lines to create the financial leeway they need to transform their business. Add to that the current crises, which are bound to have a major impact on performance for years to come and cause even more upheaval in product cost and content optimization. Teams charged with controlling costs need to rely on realistic scenarios: sales volumes are likely to be drastically reduced and they will have to slash direct costs as a result to avoid upfront expenditure.
Going through a phase of economic downturn like we have today reveals the weaknesses in our product cost structures, and classic teardown methods promise no remedy. Where complexity costs are not regarded as a KPI in business decisions, companies often fail to identify the impacts – especially on production – until it’s way too late in the development process. They also fail to give project-overarching issues the attention they deserve, if any at all.
Driving the paradigm shift with a keen eye on costs
During recent boom years, OEMs have responded to customer demand for individualization by expanding the product portfolio to include tiny niche offerings with an ever-growing number of variants and options. This has increased the product complexity to such an extent that almost all of the commodities are impacted as a result. The same is true for the split into internal combustion, hybrid and battery electric vehicles. OEMs that want to drive this paradigm shift – and continue showering shareholders with the success and growth they have become accustomed to – will have to grow profits on their current and future product portfolio to furnish the capital for their transformation initiatives.
Overall, product development is not a process that is subject to rigorous cost control. R&D divisions are usually sent on their way with the very granular specifications used to design the component and specific targets derived from them. Although they have access to the benchmarks and results of previous projects, each new project requires its own bespoke solution. The cost balance doesn’t become decisive until offers are submitted by or negotiated with the relevant suppliers.
At this point, however, about 90% of the development work has already been completed, all alternative concepts have landed on the cutting room floor and the development teams have fully committed to their solutions. The ability to discuss project-wide trade-offs between requirements and component costs is now quite limited within the internal organization. To put it bluntly: purchasing focuses on costs, engineering delivers solutions that overshoot the product positioning and product management pushes special requests – this creates the optimum tension to strive for the best solution.
Multiple trade-offs are necessary to achieve the best-fitting solution
The solution lies somewhere in the Venn diagram of component prices and one-off expenses as well as overall vehicle requirements such as target weight and electrical range.
Cost-down levers applicable for different project phases
Deloitte's holistic approach offers the decisive modules for cost reduction and can be adapted to the status of the relevant vehicle project.
This article focuses on the three modules designed to provide significant cost reduction in the critical phase of product development. As complementary modules, they produce a holistic cost reduction strategy that helps break down the barriers of the segmented, specialized approach of most development teams. In today’s challenging environment, these are the success factors that have the greatest impact on cutting manufacturing costs:
When we bring these success factors to life, we can construct an integrated approach based on the named modules. We recommend joint workshops and a rigorous analysis of the current situation from different angles to make the most of the time invested by the client teams.
Product cost and content optimization: a holistic approach
Cost-down programs are not new, yet vehicle programs often face cost overruns during the development process.
To increase the benefit of a cost-down project, we have tested a holistic approach with our customers that keeps the margin on target.
This approach is based on
- Advanced analytics solutions to enable teams to get a grip on the factors driving complexity – one of the few successful implementations in complexity management
- Market experts to challenge all your product marketing and sales plans
- An extensive benchmark database to validate supplier quotes
- A network of product and manufacturing experts to tap into whenever additional expertise is needed
- New approaches to known tasks, such as creativity techniques in cost-down workshops and a forum for team members to introduce their own ideas in the process
Precise evaluation of cost and content optimization projects on a case-by-case basis
With these success factors brought to life, we can launch an integrated approach based on the named modules that follows four parallel and interactive work streams. Joint workshops and an analysis of the current situation from different angles make the most of the time invested by client teams.
- The product & content strategy stream analyzes the positioning of the vehicle based on the projected content range in the competitive environment. The aim here is to find the right trade-offs between content-related cost drivers and customer needs in the competitive context.
- In the complexity stream, we analyze variant-heavy items that are almost at the point where suppliers produce the required tools. Here we deploy advanced analytics and address variants where demand is presumably lower.
- In the product cost optimization stream, we apply technical levers and benchmarks to decrease technical costs and ultimately convert them into price reductions with support from purchasing.
- Reporting & steering manage all of the work streams, enabling and guiding rapid decision-making and implementation.
Key areas in product & content strategy to look for potential cost-savings
We can precisely evaluate the delivered value of individual cost optimization projects on a case-by-case basis, but it is difficult to derive global averages. And yet, the results of numerous projects show that they tend to pay off quickly.
Download our whitepaper “Cost down, value up” to read a detailed account of how automotive OEMs can achieve effective product cost and content optimization.
At Deloitte, we offer companies holistic support in their product development endeavors – from strategy to implementation – and help them set a course for success in the post-crisis world. Get in touch with our experts and find out what we can do for you.