Cost improvement activities are part of many if not all organizations. In the automotive industry, these cost improvement targets can have an annual schedule. That is, we can expect pressure from the customer to reduce the cost of the product to them every year. Immediately after launch we are able to hit these targets. We can improve our production processes with the things that we have learned over the year since the start of production. If we have a continuous improvement mentality at our company, we perhaps find this not so difficult a challenge. However, as we continue to provide the product to the customer this annual cost reduction can seriously erode our ability to make the product and remain profitable. After 5 years, at 6% annual reduction in cost, we can expect to have more than 20% reduction in the product cost to the customer. The margins from the start of the product are often not so high that would allow this cost reduction and for the organization to remain profitable.
There are things we can to stave off our running at a loss for the product. We can explore the manufacturing and assembly processes to produce the product. We can review the design for small but beneficial adjustments that can be made without compromising the integrity of the product. Of course, any changes to the produce or product must be carefully considered for any risks associated that may call for another round of product testing which may defeat any beneficial cost decrease. For example, in the automotive world, we may have to again perform the PPAP (Production Part Approval Process) activities and submission. A full PPAP can be expensive but experience suggests that we may not have to redo the entire submission but focus on the areas that would be at risk as a consequence of the cost improvement work. At any rate, it is prudent to reassign a new part number for the product when it is either built from a different manufacturing, assembly or incorporates design changes to reduce the cost. In this way, it is possible to discern any unanticipated and subsequent product quality impact from the previous line of the product.
There may be limits to what can be done to improve the product cost structure. We will not know until we start doing the work. If this is our supplier, we as the customer must understand that there may be limits and at some point, we may not be able to reduce the cost as the supplier is also in business and losses do not work for them either.