Companies tend to assume that a large percentage of a product’s costs are locked in by design — that little can be done to reduce costs once the design is set. This belief has shaped many cost-management programs across diverse products’ life cycles. Because of it, firms will often focus on cost reduction during the design phase and cost containment during manufacturing. But are much of a product’s costs truly locked in during design?
To answer that, we studied the consumer-products division of Olympus Optical Co. Ltd. in Tokyo, Japan. In-depth field observations of the life cycle of the new Stylus Zoom camera helped provide a detailed understanding of how the company applies various cost-management techniques across a product’s life cycle. (See “About the Research.”) In particular, we investigated the level of costs that are designed in because that shapes the way a company manages costs across the product life cycle. If a significant portion of costs is designed in, we would expect to observe aggressive cost management predominantly in the design (and not the manufacturing) phase of the life cycle.
About the Research
To test the assumption that a large percentage of a product’s costs are locked in during the design stage, we conducted in-depth observations at the consumer-products division of Olympus Optical Co. Ltd. We chose that research site for four reasons. First, Olympus Optical was known to operate in a highly competitive market that demanded aggressive cost management. We chose such an environment to ensure that the cost-management systems documented were a critical aspect of company survival.i Second, Olympus Optical was reputed to have a mature and sophisticated cost-management program.ii Third, the consumer-products division was known to operate as a lean enterprise. The adoption of lean design principles increases the effectiveness of cost management during the product-development process, such as through the application of target costing.iii Finally, the Olympus Optical division produced high technology products with a short life cycle, which favors a high level of designed-in costs and implies that there are fewer opportunities for cost management during the manufacturing phase.