Unlocking procurement savings through Redesign to Cost

Posted on 16 Nov 2009 by The Manufacturer

Tim Slorick of procurement and operations consultancy K Consulting presents a way to unlock cash through a procurement savings model called Redesign to Cost.

What is the relationship between your procurement team and your technical, R&D or engineering department? If it is an arm’s length, servicebased relationship, namely one where a specification is drawn up by the technical team and is then ‘thrown over the wall’ to procurement to source from the supply market, then there could be a huge opportunity to unlock a significant amount of cashable benefit in your organisation.

Redesign to Cost (RTC) is an approach used to identify the difference between the actual and perceived cost in a product or service, with a view to designing-out the unnecessary or non value-adding elements. It can yield a number of benefits to an organisation, including:

• Cashable, sustainable savings
• Better innovation, both internally and with the supply market
• Increased competitiveness
• Better working relationships between procurement and technical departments

The chart below shows the typical savings that can regularly be secured through traditional approaches (strategic sourcing activity) and a combination of sourcing and redesign activities.

When to use RTC?
There are several positive and negative situations where using RTC might be an appropriate tool to use. On the minus side, if there has been little encouragement with existing suppliers to propose technical improvements to yield better productivity or, as a result of specific constraints, a monopolistic supplier situation exists, then RTC is an excellent candidate. On the plus side, for progressive organisations wishing to innovative to improve competitiveness, i.e. not only decrease costs but also increase attractiveness to the final customer, or where technical alternatives are starting to emerge in the market, then this approach is certainly worth considering.

How does RTC work?
RTC follows a number of logical steps to identify and design-out unnecessary cost, and it can operate to different depths of intervention:

Depending on where you are as an organisation and the relationship you currently experience between the commercial and technical sides of the business depends on how deep you go into this approach. A big factor in a successful RTC initiative is the relationship with the customer, and how possible it is to incorporate their voice into the process, bearing in mind that a significant part of the approach takes the customer’s perceived value as one side of the equation.

The approach takes two angles: a functional analysis and a value analysis, and combines these to determine where the value is, where it should be, and the opportunity to align the two.

Taking an extreme example to demonstrate the principle: a carbonated drinks producer that believes its customers value a solid gold bottle top; very expensive, but it is what the customer supposedly wants. In reality, the functions a customer expects are for the bottle to be secure (tamper proof), leakfree and to stop the drink going flat. The solution: a plastic, tamper-proof cap with a seal.

Starting with the functional analysis, a cross-functional team should consider the expected functionalities and then take its assessment from there.

By first establishing the expected functionalities of a product in order of importance, it is then possible to conduct a detailed technical analysis to determine the critical items that need to be optimised. Then, by converting engineering costs into functional costs, the cost per component can be apportioned to the function it fulfils. Comparing those elements which represent a large proportion of cost with the value expected by the customer quickly identifies the discrepancy between the two, and builds the case for redesign opportunities for these elements, as shown in the example above right.

The elements where designed costs are higher than perceived costs (the customer’s perspective) represent opportunities for redesign. Statistically it has been shown that the total of the differences for each ‘over designed’ element represents the size of the prize for potential savings.

While more complex, both technically and organisationally, the RTC approach is an extremely powerful method to identify misalignment of cost and value, unlock savings opportunity and sustainably secure the benefits for your organisation.

Case study: Twenty per cent savings by redesigning a smoke treatment facility

A company that was in the process of building a new smoke treatment facility as part of an incineration plant was looking to deliver savings through innovative approaches. From the outset, the context was complex: a diverse range of direct and indirect customers, including local authorities, the engineering consultancy firm which specified the owner’s needs, local associations and the operator itself. In addition, there was a double-edged sword of continuous, expected price erosion, but within an industry with commonly used and proven technology. Finally, due to the existing design of the overall plant, other elements of the scheme (furnace, boiler, energy recovery etc) had already been designed, so the ‘interface’ constraints were also extremely tough.

By following the functional analysis assessment of RTC, which included a series of workshops with the design authority, the customer and other key stakeholders, the customers’ requirements were established and compared against the current design scheme to highlight the value created for them. The comparison between the expected value and design value highlighted a number of discrepancies on the critical components of the important sub-systems. By taking these critical elements, and working with the design team to establish alternative approaches — which included swapping with newer, cheaper technology, and an overall reduction in some working areas (which had the knock-on effect of reduced civil engineering costs) — both the expected value by the customer and the actual cost of the facility were optimised. Cashable savings of 20% were secured and the value expected by the customer was designed in to the scheme.

Tim Slorick is a director at K Consulting, a procurement and operations specialist that works with organisations to secure efficiencies and increased effectiveness. www.kconsulting.co.uk