Why cost-out programs often fail
However, many industrial manufacturers struggle to fully implement cost-out programs. The main obstacles are organizational rather than methodological. Engineering, procurement, and production frequently operate in silos, pursuing different objectives. Reliable cost data is not centrally transparent, which makes fact-based decision-making difficult. Moreover, cost awareness is often predominantly driven by procurement, leaving product development and engineering without clear incentives to optimize costs early in the design process. These barriers mean that even well-intentioned initiatives can fail to deliver meaningful results, highlighting the need for a structured, integrated approach that coordinates initiatives across four levers – process, design, contract, and strategy. In combination, they yield both short-term efficiencies and long-term structural improvements. When executed methodically, such programs can deliver product-level savings of up to 20 percent, while embedding cost management into the organization’s daily operations.
- Process changes (0-2 years, 2-5 percent cost reduction potential)
Process changes offer a fast and effective way to reduce product costs without requiring redesigns or significant capital investment. These changes focus on optimizing how products are made, targeting inefficiencies in production, assembly, logistics, and quality control. Lean production principles, for example, help eliminate non-value-adding activities and redundant processes, while manufacturing simplification – such as replacing bent parts with pressed components or reducing machining steps – streamlines operations. Assembly optimization also plays a key role by redesigning components for self-alignment, minimizing joint elements, or using clips instead of screws to speed up production. Furthermore, logistics efficiency can be achieved by reducing packaging efforts, cutting out intermediate suppliers, and improving internal material flows. Quality enhancement measures, such as shifting from 100 percent inspections to sampling, adjusting test rates, and implementing Poka-Yoke systems, then further reduce rework and improve throughput. Together, these process changes deliver measurable savings in a short timeframe.
- Design Changes (1-5 years, 5-20 percent cost reduction potential)
Design changes are among the most powerful levers for long-term cost reduction, as they directly influence the structure and composition of the product. These changes require extensive cross-functional collaboration across engineering, procurement, and manufacturing, but the payoff is substantial. By applying variant management strategies – such as standardizing parts, reducing unnecessary variants, and increasing reuse of carry-over components – companies can simplify their product portfolios. Redesigning parts to integrate multiple functions, simplify geometries, or reduce material complexity further enhances cost efficiency. On top of that, Design-for-X principles ensure that products are optimized for sourcing, manufacturing, assembly, and service. Additionally, aligning functional features with actual customer requirements helps avoid over-specification and ensures that design choices reflect real-world usage patterns. These design-driven improvements not only cut costs but may also enhance product performance and customer satisfaction.
- Contract Changes (1-3 years, 2-15 percent cost reduction potential)
Contract changes focus on the commercial aspects of procurement and supplier management, offering a flexible path to cost reduction when technical modifications are constrained. These changes rely on strong procurement capabilities and transparent cost data. Fact-based renegotiation, supported by tools like should-cost models, bottom-up price calculations, and index-based clauses, enables companies to realign supplier pricing with actual cost structures. Competitive pressure can be introduced through structured tendering processes, auctions, or reverse auctions, driving down prices. Volume bundling that aggregates orders within or across business units unlocks scale advantages and reduces per-unit overhead. Expanding the supply base to include global or low-cost regions through best-cost sourcing can further reduce costs, provided that associated risks are effectively managed. These contract levers complement technical strategies and deliver quick wins in supplier negotiations.
- Strategy Changes (3-5 years, 15-20 percent cost reduction potential)
Strategic changes redefine the company’s approach to its value chain, offering the highest potential for long-term cost reduction. These initiatives are complex and require sustained effort but yield transformative results. For instance, make-or-buy decisions help companies focus on core competencies by outsourcing non-differentiating functions based on cost, availability, and proprietary know-how. Additionally, supplier integration may move beyond transactional relationships, fostering collaboration through joint development, profit sharing, and frame contracts. On that note, supplier development initiatives support critical partners in improving performance, reducing costs, and enhancing quality over time. To manage material cost volatility, especially for commodities, commercial hedging strategies such as financial instruments or physical stockpiling can be employed. These strategic levers not only drive cost efficiency but also strengthen the company’s resilience, scalability, and innovation capabilities.