Reverse-engineering isn’t about crashed UFOs in Roswell, New Mexico – it’s a solid manufacturing practice that simply means to begin with the end-result in mind and work backwards from there. When companies seek to lower their materials costs (and who isn’t?), they need to begin with the end-result – a less expensive product – and then determine where they can save time and money along the way. Companies quickly discover there are only five ways to make this goal a reality, and they spell an easy-to-remember acronym: YIELD.
Materials Make the Product
Materials are simply any components used to make a product or good, from the time the first nut is placed on the first bolt through the delivery of the finished product to the customer.
This even includes the packaging needed to ship the final product. In short, materials consist of all the variable costs a manufacturer incurs because a sales rep made a sale. Along with payroll, materials are the largest components of the company’s expenses.
To lower materials costs, companies need to “begin with the end in mind,” as management guru Steven Covey says, by reverse-engineering their product. The end-result is a lower-cost item. Managers should ask themselves, “How will the product look when we’re done fixing it?” Once companies can visualize that lower-cost end-product, they can use the YIELD approach to find the areas in which savings can be gleaned.
YIELD and the Bottom Line
“YIELD” stands for yield, innovation, evaluate, lower and develop.
Yield. “Yield” refers to how much companies get out of the materials that they purchase. The goal when examining yield is to eliminate scrap and waste. Scrap and waste may be generated due to mistakes, poor quality products from old, malfunctioning or otherwise faulty machines or the way the machines use the materials. Waste can also be generated by damaged finished goods that are sitting in inventory due to overproduction, and it may result from cannibalizing items to fill orders. Companies should drill down to find the root causes of scrap and waste and eliminate them, rather than purchase more materials.
Innovation. This refers to the company’s ability to tweak or creatively modify the product, system or process to use fewer materials. It’s finding new ways to do things. Consider computer chips: each new generation uses less plastic and silicon but is more powerful and efficient, thanks to the innovations crafted by engineers.
Evaluate. Evaluate vendors to obtain better prices, terms or discounts. Often, companies have been using the same vendors for years out of habit. By bidding out materials to multiple sources, forming buying groups, arranging better terms or leaning on those long-standing relationships, manufacturers can often obtain their materials at lower costs and with terms that allow them to keep their cash longer.
Lower. “Lower” refers to reducing costs by lowering the amount of materials that a product requires. Consider the lowly bottle of water. Today’s plastic bottles use far less plastic than their predecessors because manufacturers realized that the water bottle is a throw-away item. Creating a thicker, sturdier bottle that uses more plastic simply wasn’t necessary for an item that spends only a few minutes in the consumer’s possession.
Develop. Manufacturers can develop new ways to utilize their existing sources to help save money. They need to ask themselves how they can improve their system with the vendors they already have in place. A great example comes from the automotive world. In an effort to save money, Chrysler had their vendors put the materials right on the assembly line, rather than ship them to a warehouse and have a Chrysler employee deliver them to the line. By bypassing a step, Chrysler made its process less expensive and didn’t ask any more of their vendors than to deliver materials to a different door.
Avoid These Mistakes
There are some caveats to consider when implementing YIELD. They are:
- Productivity – Managers should make sure productivity doesn’t suffer because of their decisions. It’s important to measure productivity before, during and after product changes.
- Efficiency – Savings in materials costs don’t make sense if it now takes more steps to make the product, resulting in cost increases elsewhere.
- Safety – Cost-saving measures shouldn’t put employees at risk.
- Capacity – Changes that result in lost capacity aren’t really money-savers.
- Cycle time – Cost-saving measures shouldn’t force manufacturers to produce goods in a longer period of time than their competitors.
- Quality – Of course, quality can’t suffer. The new, lower-cost product needs to be as good as or better than the old product.
Bottom Line Impact
The end-result to manufacturers who take the YIELD approach is a bottom line impact, since materials make up such a large percentage of costs. Materials are often an item on the P&L that is overlooked, because managers assume that materials costs are what they are, and start to cut employee benefits and cancel office parties to save money. But YIELD can result in as much as a five to eight percent savings in materials costs.
That kind of impact is profound. If the company lowers materials costs, but continues to sell the product at the same price, it will see a larger profit. And if it lowers the price but keeps the same margin, it becomes more competitive and the product becomes more attractive in the marketplace.
This approach is not just theory. There are documented examples from companies that have used this process to their advantage. For example, consider the results from Bitterman Family Confections, a Kansas City candy manufacturer. The company used the YIELD process to lower materials costs.
“By identifying what to measure and how to measure it, we were able to begin improving our end goal immediately,” explains company President Stuart Bitterman. Here’s how: During the warm months the company ships temperature-sensitive chocolates and candies as ground freight nationwide. Recently, the company changed from a frozen gel pack that it had to pay to freeze, store, transport and individually wrap, to dry ice.
“By making this change, we reduced our cost so much we were able to just add the cost of dry ice to the finished goods instead of having to charge our customers extra for the gel packs,” Bitterman says. “It also reduced the overall carton weight, thus reducing freight cost. This one was a big winner for the company and for customers.”
An Alien Concept?
A goal of every manufacturer should be to increase throughput, which is essentially sales revenue minus materials costs. In that simple formula, there are two ways to increase throughput: increase sales or reduce materials cost. By questioning every input, decision-makers must ponder how they’ll get a return on every dollar they spend. The YIELD process makes them more intuitive in looking for ways to save money. They’ll soon realize they’re not cost-cutting but building profits, and experience shows that when company is doing well, the employees will fare better as well.
YIELD and reverse-engineering aren’t anything groundbreaking, yet it’s amazing how many manufacturers fail to follow the simple steps that can save them tremendous amounts of money.
When companies forget to think about their end-product, they have no goal to achieve. The result is the same product produced with the same expensive materials. For these companies, reverse-engineering may indeed be an “alien” concept.