Contract Manufacturing

Contract Manufacturing of Complex Instruments Cost Reduction

Reducing the Manufacturing Cost of Complex Instruments Without Compromising Quality


5 August 2009

A primary goal of companies producing complex instruments is to reduce the cost of manufacturing their products, without compromising quality.

Fig 1. Step-Change Cost Reductions through next generation cycles of design.


Fig 2. Incremental Cost Reductions through sourcing alternate parts or re-designing parts.


Fig 3. Combining both Step-Change and Incremental Cost Reductions.

Step-Change Cost Reductions

Time-to-market with adequate quality is the primary focus of companies launching first-of-kind products. Once established and growing in the market, focus may shift to adding customer valued features and reducing cost. A major focus for companies with fast following next generation designs is reliability and functionality. At the same time, the CM design team can apply value engineering and design-for-manufacturing analysis to provide additional cost reductions that can be integrated seamlessly with the product's new feature.

Incremental Cost Reductions

Incremental cost reductions are generally achieved by having a CM partner who routinely reviews the bill of materials (BOM) using its experience to identify parts that could be:

  • a. sourced through lower cost supply chains or
  • b. re-designed to continuously reduce the manufacturing costs. This approach requires a contract manufacturer that is not just motivated to identify cost reduction opportunities, but is technically capable to assess and implement cost reduction changes. It is also beneficial for the product company to be proactive in supporting product modifications and provide incentives that share the benefits.

a. Alternate components

A typical example of selecting alternate components for cost reduction would be the replacement of an OEM power supply costing $500 with an alternate power supply costing only $180 that still matches the required specifications. These opportunities may go unnoticed if the CM partner has no capability or no incentive to look for them.

b. Redesigning parts

The second way to achieve a significant cost reduction is to re-design and re-engineer the part. Like the alternate component method, this begins with the CM partner proactively reviewing the BOM to identify high-return-oninvestment opportunities. A classic example may be identifying individually machined parts that can be replaced by a single part that instead of being machined, is formed by plastic injection moulding.

Combining both Step-Change and Incremental Cost Reductions

While both step-change and incremental cost reduction models can be implemented individually, maximum benefit can be achieved more rapidly by applying both models. A well prepared design change recommendation should include full technical feasibility and costing calculations including the payback period.

Cost reduction sharing model

An ideal reduction model shares cost savings between the CM and the product company. It provides strong motivation for the product company and their CM partner to work together to maximise cost reduction opportunities. This motivation can be achieved by structuring the contract manufacturing agreement to clearly and effectively share the benefits.

Summary

There is significant opportunity for a product company to drive down the cost of their products by partnering with a trusted and technically expert manufacturing partner. Through regular assessments of the cost of the parts, ongoing improvement to the manufacturing process, sourcing alternate parts and investing in the product design both short and long term benefits can be achieved. Whether a company is looking to increase profit or reduce their product price, a contract manufacturing partner with strong product development capabilities may hold the key to maximizing competitive advantage.