Core-Cost Analysis
What is a cheap car? If this question had been put to a European engineer 15 years ago, the answer would probably have been, “One costing less than $ 20,000.” Today, the answer would likely be, “A Tata Nano.” At its launch, the Tata Nano was priced at around $ 1,500.
The different answers result from the different methods used by the manufacturers in question. The usual method of manufacturing a cheap car is to look first at the lowest-cost competitor. Tata adopted a different tack and asked: What are the absolute minimum requirements that a car needs to fulfill (that is, transporting four persons from A to B with protection from the weather)?
The core-cost analysis strategy works in the same way. Instead of trying to cut the costs of an existing product through incremental measures, the idea is to start with a blank sheet of paper and ask what basic requirements the product needs to fulfill and what the cost structures would look like under ideal manufacturing conditions. The result is usually savings of up to 40 to 60 percent. The next step is to move toward reality again by asking:
What additional features are customers prepared to pay for?
What measures are necessary for risk management?
What production processes are actually available?
What suppliers are available?
Even with these concessions, the cost is usually still 20 to 30 percent below that of current products. This strategy seriously questions existing structures and calls for completely new ways of thinking. Procurement, being particularly well placed for finding alternative solutions through its contacts with suppliers , is ideally suited for driving this process.