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describes the need and importance of life cycle costing in cost reduction
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Life Cycle CostingLife Cycle Costing
Assessment of the costs of a good or service over its entire life cycle.
Life Cycle Costing-definition
Product Life Cycle
R & D Design Manufacturing Marketing & Distribution
Customer Service
Upstream Costs(before Manufacturing)
Downstream Costs( After Manufacturing)
Life Cycle Costing
Life Cycle Costing
Industries with High Upstream Costing
Computer SoftwareSpecialized Industrial EquipmentsSpecialized Medical Equipments
Industries with High downstream Costing
PharmaceuticalsPerfumesCosmeticstoiletries
Improving Up stream & Down stream Costs
Improving relationship with suppliers
Improving Design
Improving Manufacturing Process
Value Chain Analysis
Process Re-engineering
Value Chain showing Up stream & Down stream linkages
Design
Service &Warranty
Marketing &Distribution
Manufacturing
Poor Design
Poor Quality Rush Small Orders
Not EasyTo Manufacture
PoorQuality
Improper TrainingInstallation
The Importance Of DesignImportance Of Design
Reduced Time to Market
Reduced Expected Service Cost
Improved Ease of Manufacture
Process Planning & Design
The Importance Of DesignImportance Of Design
Reduced Time to Market
In a competitive world speed of development &speed ofDelivery are critical. Priority must be to reduce time of the product to market
The Importance Of DesignImportance Of Design
Reduced Expected Service Cost
Through Careful, simple design and use of modular,Interchangeable components, the expected serviceCosts can be greatly reduced
The Importance Of DesignImportance Of Design
Improved Ease of Manufacture
To reduce production costs and speed the ProductionThe design must be easy to manufacture
The Importance Of DesignImportance Of Design
Process Planning & Design
The plan for the manufacturing process should be
Flexible, Allows fast setups and product Change over, using agile manufacturing concepts,Computers integrated manufacturing, Computer Assisted design and Concurrent Engineering .
Four Design Methods
1 Basic Engineering
2 Prototyping
3 Tem plating
4 Concurrent Engineering
Four Design Methods
1 Basic Engineering
Basic engineering is the method in whichproduct designers work independentlyfrom marketing and manufacturing todevelop a design from specific plansand specifications
Four Design Methods
2 Prototyping
Protyping is a method in which functionalModels of the product are developed andTested by engineers and trial customers
Four Design Methods
3 Templating
Templating is a method in which an Existing Product is scaled up or down to fit the specifications of the desired new product
Four Design Methods
4 Concurrent Engineering
Concurrent Engineering is an important method that integrates product design with manufacturing and marketingthroughout the product life cycle
Characteristics of the 4 design methods
Design Method Design Speed Design Cost DownStream Costs
Basic Engineering Fast Desired Complexity, Low High –non integration of Mkg-Prod
Protyping Slow Significant Cost Can reflect significant reduction
Templating Fast Modest Unknown-can be costly
ConcurrentEngineering Continuous Significant-design Can result in cost Reduction ongoing process
Application of LCC in a Software Firm
Firm's Name: Software Solutions
SS has two products—SS-1 for large banks & SS-2 for small banks and Savings & Loans. Each Product is updated regularly
Using Normal Analysis GP margin Ratio 72% 60% SS-1 SS-2 Total
Sales 45,00,000 25,00,000 70,00.000Cost Of Sales 12,40,000 10,05,000 22,45,000 Gross Margin 32,60,000 14,95,000 47,55,000
Research & Devl 21,50,000Selling & Service 18,50,000 Income before tax 7,55,000
Application of LCC in a Software Firm
Firm's Name: Software Solutions
SS has two products—SS-1 for large banks & SS-2 for small banks and Savings & Loans. Each Product is updated regularly
Life Cycle Costing for Software Solutions SS-2 is more profitable
SS-1 SS-2 Total
Sales 45,00,000 25,00,000 70,00.000Cost Of Sales 12,40,000 10,05,000 22,45,000 Gross Margin 32,60,000 14,95,000 47,55,000
Research & Devl 15,50,000 6,00,000 21,50,000 Selling & Service 14,50,000 4,00,000 18,50,000 Income before tax 2,60,000 4,95,000 7,55,000
Application of LCC in a Software Firm
Firm's Name: Software Solutions
SS has two products—SS-1 for large banks & SS-2 for small banks and Savings & Loans. Each Product is updated regularly
Life Cycle Costing for Software Solutions SS-2 is more profitable
1 Total income of SS-1 is 2,60,000 of SS-2 is 4,95,000
2 Ratio of R&D, Selling & Service Cost to sales in case of
SS-1 is 67% (30,00,000/45,00,000) in case of SS-2 it is 40% (10,00,000/25,00,000)
Management can use this breakdown of costs throughout the product’s life cycle
Pricing Using the Cost Life Cycle
Cost Leadership Differentiation
Operating Efficiency to Reduce CostPenetration PricingSkimmingValue PricingPattern in the MarketSeasonal, Cyclical, Economic factors
Critical Success Factors, Strategic Pricing and Research and Development at the 4 Stages of the Sales
Life Cycle for a Manufacturer of Computer Processor
Computer Sales LC Critical Success Factors Strategic Pricing Research & Development Processor
Z300 introduction Differentiation, Innovation High Expenditure is High performance
Y300 Growth Development of Distribution High Expenditure is High Channel & Marketing
X 300 Maturity Cost Control, Quality Service Target Costing Value Engineering New Features
W300 Decline Control Of cost, Capacity Reduction, Spin off Low Price is set None
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