Design has a major impact on product costs because during this activity the choices are made about the product that generate little containable costs in the later stages. Design costs less than other activities but generates the largest shadow on product costs.
Concurrent design or concurrent engineering is the way to affect the cost shadow. In the construction world, the organization of work site activities can find great efficiency through executive design.
Shadow diagram – Development costs and impact of activities
Rielaborato da History Of Lean Design di Sandy Munro e Associated
The costs of product development
Managing the costs of new product development is critical to ensuring project profitability.
From my many years of experience in making physical products, I can confirm that the cost of product development is predominantly determined by the cost of materials and the cost of the labor that makes the product and the cost of management.
In this regard, I find very valid the breakdown of development costs, noticed in 1988 by Sandy Munro, regarding the U.S. auto industry and shown in the figure also called the “Shadow Diagram.”
Percentage of costs incurred during development
- Design (5%)
- Purchase of materials (50%)
- Labor (15%)
- Overhead costs (25%)
Overhead costs are given by the activities that are not calculated to develop the project.
- Portion of General Costs.
- Project management
- Design management,
- Materials management in terms of purchasing and logistics
- Management of construction and final assembly
Monitoring product costs is critical, and I remember very well from my last company experience that the estimator, integrated into the development team, was charged with keeping up-to-date cost estimates of BOM items from the early stages of development.
This BOM evolves during the development of the prototype by budgeting and accounting for all the elements that make up the prototype and any pretypes.
In the case of mass-produced products, the estimator updates cost estimates from the bill of materials that is released to production.
In the construction world, the metric bill of materials is the document that contains a simplified bill of materials and workmanship.
Equally important is to update the estimate of operating costs that are indirectly associated with the product under development.
Even in the case of the construction industry, the costs of design are very small compared to the costs of materials, processing, and overhead costs
Particularly in the construction sector, classic management costs are often added to real estate brokerage costs.
Shadow of product development costs
Munro analyzed the impact of car model development activities on the actual cost of the product. This impact or “shadow” of development activities on product cost is distributed as follows:
- Design impacts 70%
Design choices directly affect the cost of the product directly on materials and labor, and to some extent also on management
- Design impacts 70%
The purchasing department’s margin of intervention on materials negotiation is less than 20 percent
- Labor impacts 5%
Even major labor efficiencies of up to 30 percent, for example, have an effect on 15 percent of costs and thus impact 5 percent overall
- Overhead costs impact 5 percent
Management cost efficiencies however significant are normally less than 5 percent of the total product cost.
Thus, design is the stage of development on which action can be taken to have an impact on reducing product costs. Design choices condition materials and labor for processing and assembly.
To control the costs determined by design choices, concurrent engineering must be done, where different departments work simultaneously on different aspects and/or phases of product development.
Concurrent engineering is typically complex because it brings out solutions that cannot be predicted a priori, and for this reason the agile approach strongly skills concurrent engineering.
I will return to this topic in a future article also seeing the impact this has on site work and management aspects.
