The answer is; it depends. If you have a short-term situation where your business is really in trouble (for example a competitor announces a new product that obsoletes your best seller, or a patent issues that restricts your freedom to practice), then looking at a quick hit to reduce costs is likely a prudent business decision. When faced with a crisis, then short-term actions are often necessary, but if you are taking the long view, then cost cutting is not a sustainable option. Companies that are positioning themselves for future growth know that innovation and product development are the keys to sustained growth.
Companies that focus only on short-term cost cutting are doing themselves a disservice in two ways. Once the cost cutting has been achieved, then there is little or no future improvement possible. You will potentially get a nice boost in profitability for a given product or product line, but going forward, price pressure or rising material costs can erode the gains. Secondly, your competitors are most likely focusing on product development, so as we mentioned before, if you are standing still (from a product innovation point of view) you will be falling behind.
Wait a minute! Aren’t there more benefits from reducing costs than just the monetary gains? The answer is yes. But with one caveat, and the following is critical. Successful companies apply the lessons learned from manufacturing process optimization to the new products in the pipeline. I learned this lesson first-hand at Allied-Signal in the mid 1990’s. Larry Bossidy was our new CEO and he launched an enterprise wide Six Sigma program to reduce costs in our manufacturing operations. The results were impressive, but the most important was the development of a 5 week training program called Product Development Master. The training consisted of four weeks of Six Sigma Black Belt training followed by one week focused on product development specific tools (like mixture DOE for formulations). The genesis of the program was the realization that if you don’t introduce new products with very high process capability (very low defect rates, six sigma level yields) then it would be impossible to hold the gains long term from the process improvement work. Fix an existing product, introduce a new product (or products) with low yield and the overall organizational process capability will decrease over time.
Introduce a steady stream of new products designed from the beginning to have very high process capability and you can sustain the operational excellence gains and further improve process capability. It’s a win-win. I think this is the main reason many Six Sigma programs got a bad name. Nice gains in the short-term, but they missed the critical product development aspect. I helped teach the Product Development Master class and have been using statistical methods in product development since then. Some in the industry call is Design for Six Sigma (DFSS) or Design for Manufacturing, but the focus is laser-beam sharp; introduce new products that can be manufactured in high volume with very good process capabilities.
When you are constantly improving the manufacturing of your existing products and the your rate of new product introductions is high, but the products have lousy process capabilities, it’s like “walking up the down escalator.” When the volume of existing products ramp down, then the overall manufacturing process capability starts to decrease. Introducing new products with high process capability either holds the process capability or steadily improves it over time. The goal of every new product is to increase to top line sales and improve margins leading to high profits.
The bottom line is you must take the lessons learned from operational excellence and apply them to product development using systematic approaches like DFSS or Lean Product Development. The result will be a stream of new products with improved profit margins.
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