If Your Company Does Product Cost Reductions, It’s Already Too Late
Product cost is the largest expense for manufacturing and the key to profit. Companies today focus on reducing cost after start of production, rather than meeting their product cost targets initially at launch. A pure cost avoidance strategy is far more profitable than a pure cost reduction strategy. Product cost management teaches us that the most profitable strategy is a combined strategy of both avoidance and reduction, with the majority of resources focused on avoidance. The combined strategy requires culture change and process design, before hiring people or buying software. It is challenging, but the added profit gains are worth the effort.
Product cost, which is roughly equivalent to cost of goods sold on the income statement, is the biggest expense for manufacturing companies, typically 70% to 90% of revenue. You can see COGS as a percent of sales for a random sample of companies in the table below.
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