The Challenge: Designing what customers value mostRising commodity prices, consolidating supply markets and persisting economic pressures are making it difficult for companies to maintain margins.
Many input costs have exploded over the last years, driven by an increasing need for raw materials and a growing global mismatch between demand and supply.
From a product design and development perspective, many companies suffer from 'creeping elegance', meaning that their product designers implement complex and costly features that are not necessarily being paid for by customers.
Companies continue to invest efforts in reducing product cost. Since up to 80% of product costs are set during the design stage, it is important to make the right value/cost trade-offs in the early design stages. 'Value engineering' has emerged as an element of Product Cost Management which promises to unlock new margin and cost opportunities.
Design-to-Value: It is about understanding what product attributes customers care about most and to translate this into new design options that create more value at less cost. In other words: Design-to-Value increases the performance of a product if the customer needs it, wants it and is willing to pay more for such performance. 5 Steps to make Design-to-Value workDTV encourages Sales, Marketing, Operations and R&D teams working together from the outset to optimize the full product instead of component level optimization.
When working with clients, we have seen that there are 5 essential steps to make Design-to-Value work, taking in mind that it is as much a cultural as a process change:
1. Build a cross-functional team: To make DTV work it is essential to establish a cross-functional view across the company. Getting internal alignment on the approach within the company is essential to lay the foundation of success. This requires to get an understanding of the design decision criteria from different stakeholders. It also requires to introduce a cross-functional team, mandated to implement the DTV process in the organisation. The cross-functional DTV team should include the following participants: A DTV Manager, Customers (if possible), Product Development, Operations, Sales, Product Marketing, Controlling, Quality and Regulatory Compliance.
2. Understand customer value and competitor products: DTV is centred around the understanding of what customers value and what they are willing to pay for. Hence, it is important to start capturing customer (B2B) or consumer (B2C) insights, including quantitative and qualitative data from marketing like attributes valued by consumers. These customer requirements then need to be prioritised (led by Product Marketing or Product Line Management), building the base for a cost/value-model. To support building this fact base, it is recommended to capture competitive insights, including the collection of competitor products from local and global markets, tearing them down and analysing its components, features, functions and cost. In order to find the right trade-offs between Customer requirements, functions and cost the DTV team should implement an unambiguous requirements management process. This is one of the essential components of DTV. Doing this right is key! To establish the fact base on customer requirements and competitor offerings, we recommend facilitating a number of cross-functional workshops, as this is typically the most effective way.
3. Generate ideas and create an initial DTV process for your company: To identify opportunities for cost reduction and value improvement, our SCORE methodology provides a proven framework. During SCORE workshops, which cover the entire lifecycle of a product, the cross-functional team uses various brainstorming and creativity tools to generate ideas. These ideas will subsequently be evaluated against the set of customer requirements to identify the biggest cost/value opportunities. In the SCORE workshops, it is highly recommended to develop an outline of the DTV process. This process draft will help team members to understand the process and also provides insight into capability gaps the organisation has and that might be a barrier for using the full value of DTV. To make DTV work in a company, there is as much of communication and change management required as doing the process implementation itself.
4. Pilot the Design-to-Value process on a specific product: As DTV will most likely be a significant change to the organisation (functional as well as mental) it is highly recommended to test the approach through a DTV process pilot on a specific product. This product needs to be early enough in the product concept/design process. DTV will surface conflicting internal views between functions and different views on what constitutes customer value. Running the DTV process pilot on a specific product will help to resolve such conflicts. In our experience, such a pilot usually takes 3 months and the learnings can be applied to other products in a structured rollout afterwards.
5. Transfer learnings, drive process adoption and continue cost optimisation: Once the DTV process pilot is completed, the learnings should be captured and changes to the DTV process should be integrated int the process roll-out plan. As part of the assessment, it needs to be evaluated how the total cost of the final design compare against the initial baseline of the product. Once DTV is completed and applied to the product design and its architecture, there might be additional opportunities to reduce product cost during the lifecycle of the product. 'Series Engineering' or 'Design-to-Cost' can be applied to utilise opportunities to exchange components with lower-cost ones as technology progresses.
The Benefits: Improving value and cost at the same timeA well-implemented Design-to-Value philosophy provides top-line and bottom-line improvements. Social and environmental value can be included as well into DTV.
While Industry dynamics will play a role, the typical margin improvement that can be expected will be around 4% to 8%. In most cases, this is a combination of price and cost improvement.
While the pricing aspect will be influenced by industry and competitive dynamics, the development cost and time-to-market will definitely be improved by Design-to-Value. Development cost improvements of up to 10% are realistically achievable.
Looking only at the operational cost benefits of Design-to-Value, the typical range of cost improvement lies at 10-20% for direct and indirect material cost. This is mostly achieved through simplifications across Procurement, Manufacturing and Distribution and requires the implementation of ideas from the DTV process.
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1. Design-to-Value (DTV) is a product cost management tool to optimize product cost and value at the same time. The approach helps to understand the perceived value for the customer, and to drive the right product (or system) design decisions.
2. Design-to-Value might be the right approach for your business if you experience declining product sales and margins, while customers are more intrigued to buy competitor products.
3. Design-to-Value typically improves product margins by up to 4-8%. Also, reductions in product development cost and the 'cost of good sold' of 10-15% can be achieved.