Finding new sources of revenue growth is a significant challenge organizations increasingly face. This creates pressure to protect margins through cost control. Cost takeout or cost reduction is one of
the key priorities on the business agenda.
CAPS Research recently conducted a report, Supply Chain Costing
Strategies: Establishing and Achieving Cost Targets, to determine how
companies are achieving cost-savings goals. Twelve companies with 41
respondents from supply management and other functions participated in
the research. This article focuses on one aspect of the report, cost-savings
strategies in new product development (NPD). The participating companies’
names are disguised, but further demographics can be found in the full
COST SAVINGS AND COST AVOIDANCE
How does procurement balance its accountability for cost savings versus
the need for cost avoidance in the NPD process? NPD savings generally
involve cost avoidance because the items have not yet been purchased.
The focus is on meeting a cost target. The fact that procurement is
rewarded and evaluated based on cost reduction creates a conflict —
potential cost avoidance is saved for future years, when procurement can
receive “credit” for it as savings.
There are several NPD best practices used by companies in this study
that balance out this issue. First, NPD nearly always requires a cross-functional team approach. Many functions (for example, product design,
cost accounting and others) help determine reasonable costs. Second, the
HITTING THE NEW
BY LISA ELLRAM, PH.D., AND WENDY TATE, PH.D.
A CAPS Research study focuses on how
companies meet savings objectives through
cross-functional NPD teams.