- Cost Transformation
New products should be designed to be flexible enough to allow the addition or elimination of features to suit as many markets as possible without sacrificing margin.
The purpose of creating value for customers is to enable higher prices to be charged, stimulating what economists call "willingness to pay." It is vital as early as possible in the conceptualisation of new products to engage relevant stakeholders (such as the sales and marketing, engineering, production, logistics and management accounting functions) to agree variants serving each targeted customer segment.
Sales and marketing, for example, might request multiple variants. This can be achieved most efficiently and effectively if the creative, development and production functions are represented, since due consideration can be given to achieving commonality of components and modules.
Consider price and margin before production
Since 80% of a product's direct cost is determined at the design stage, it's vital that product design takes account of the marketable price and required margin. Decisions made after the product moves into production typically account for only 10-15% of costs. The management accountant must work alongside colleagues at the development stage to drive down costs, drive up customer value and gain buy-in to the logic and structures behind costing and pricing decisions.
When a company faces a profitability problem and undertakes a cost-reduction programme, it will typically reduce R&D spend and focus on post-development activities such as production, sales and general/administrative expenditures. This is often too little too late. It is fundamental that new products are:
- Introduced at a targeted price
- Designed to offer value to specific customer segments at the target prices
- Designed to fulfil a quantified demand at each target price
- Developed to provide features of value to diverse customer segments.
Sustainability is good for profits too. Costs that are avoided by design not only improve cost competitiveness, they can also reduce consumption of resources, thereby contributing to the sustainability of operations. Avoiding such costs has a direct positive impact on the bottom line.