In the article below our authors Jon M. Quigley and Steve Lauck will explain and talk about the process of making project strategy decisions.
If you have been managing projects for any length of time, you will know there is a strong connection between project success and business results. We start by refining the scope of the project. The scope will guide our depending decisions. We would not want to select a strategy with no chance of success.
We were recently in discussions on a project defined to improve the organization’s cost structures with the goal of enhancing the company’s profitability. The bulk of the discussions was about procurement and associated processes. Should that be the limits of the discussion?
For-profit, companies must balance the books, the income, and the expenses. This is probably true even for non-profits; after all in both instances, we are working to effectively make the most out of what we have for resources. For companies that produce a physical product, material costs can be a significant source of expenditure. This includes the acquisition and processing of the incoming material.
Expense, Cost of Goods Sold
Cost of Goods Sold (COGS) is a financial metric that represents the cost of producing or acquiring the goods that a company sells during a specific period. COGS includes the direct costs of materials, labor, and overhead required to produce or acquire the goods, and it is deducted from a company's revenue to determine its gross profit.
For example, if a company sells widgets and it costs $5 in materials and labor to produce each widget, and it sells 1,000 widgets during a given period, the COGS for that period would be $5,000. The company would subtract this amount from the revenue it earned from selling the widgets to determine its gross profit.
COGS is an important metric for businesses as it provides insight into the profitability of their operations. By tracking changes in COGS over time, companies can monitor the efficiency of their production processes, identify areas where costs can be reduced, and make more informed pricing decisions.
Material costs can be a significant component of operations costs. Without the material, there is no product, so removing the material is impossible. To be sure our procurement can help us immensely when we are working to reduce material costs. The project manager should be part of all of these explorations.
- Supplier identification and selection: The procurement organization is responsible for identifying potential suppliers, evaluating their capabilities and prices, and selecting the ones that meet the company's requirements.
- Negotiation and contracting: The procurement organization negotiates and establishes contracts with suppliers, including terms and conditions, delivery schedules, and pricing.
- Purchase order management: The procurement organization creates and manages purchase orders to ensure that the right goods and services are ordered and received on time.
- Inventory management: The procurement organization manages the inventory of goods and services to ensure that the company has the right level of stock on hand.
- Cost management: The procurement organization works to control costs by negotiating with suppliers to get the best prices and managing inventory levels to avoid waste.
In this case, the product already exists; therefore, there is an existing supply base, and contracts and manufacturing processes are in place. Our procurement efforts may improve upon this but it will only be incremental.
The scope of this change could be small; that’s the good news. There is a downside though, and that is any material improvement will likely only be incremental. Perhaps that will be sufficient for the project to be considered successful.
In our consultation project, the team was focused on incremental changes to the material acquisition, specifically, volume purchasing agreements and sourcing locations to reduce the incoming material. We proffered a solution that was different from this incremental approach, that being a material substitution.
From experience and research, we knew at least one material substitution could be used in this specific industry. This material would be easier to acquire, not isolated to specific regions for appropriation. The present material used is mined, but the proposed material is not. In general, the material is easier to acquire and if substitution is possible, the cost reduction could be significant.
It should be noted, that while there is an available substitution material for this industry, the specifics of the application may mean the proposed solution may not work. However, material substitution is a long-standing product cost improvement approach. As a product matures the margins on the product may erode as competition increases.
In 1940, only .4% of the rubber used by American companies was synthetic. Production of one type of synthetic rubber increased in the U.S. during the war from 3,721 tons in 1942 to 756,042 tons by 1945. By 1950, the use of synthetic rubber outpaced natural rubber. Today more than 70% of rubber production utilizes synthetic rubber.1
Not So Fast!
We confess we were surprised when there was no excitement over the opportunity to significantly reduce material costs by changing the material. It is likely true that this new material will have a profound impact on the manufacturing processes, that is if material substitution is possible.
This means the scope for these two approaches, change in material acquisition process, or change in the material may be able to solve our cost reduction efforts. One of these is likely to cost more but could yield better cost-saving results for the business. The other is likely to provide some modicum of cost improvement.
How to proceed?
We do not know if material substitutions are an actual solution for this project. We cannot just create a project to introduce the new material. That would be a risky proposition when we have no idea of the possibility of success.
We can choose to explore through operations. This could be handled in various ways, but the goal is to use our operations people to assess the material against the present used to assess the new material against the performance requirements for this specific application.
• Mechanical properties
• Thermal properties
• Chemical properties
A few of the questions we want to answer the following questions before we proceed to create a project:
- Is this new material directly substitutable for the present?
- Can we handle the material with the same level of precision (cutting and etching for example)?
- Is this material as durable as the present material? If not, it is it durable enough to make the business case positive?
- How does this proposed raw material change impact the current manufacturing processes?
- What would need to be changed of the present manufacturing line to use this material?
Another tool at our disposal to compare solutions are decision matrices. There are two types of decision matrices, the weighted and the unweighted. No matter the choice, these tools can help us determine the best course of action based on desirable attributes and assess each of these alternatives against these objectives. We will write further on how to use decision matrices in the future.
From experience prematurely selecting an approach to achieving the project objectives often does not lead to the best solutions. We cover this in our (with Amol Gulve) latest book through SAE International, Modernizing Product Development Processes: Guide for Engineers coming out later this year.
We can explore the best strategy to meet the organization’s objectives. This can be part of the project, but structuring our project phases in a way to accomplish this exploration. Or we can handle it via some operations mechanism, or perhaps a combination of both.
The results are likely to be much better than when we select the best approach to the problem. This will require us to not just summarily dismiss potential wins because we do not know, or we for sure. We may think we do, or perhaps do not want to truly learn.