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02/27/2012

Controlling Complex Matter – Well-Conceived Variant Management Lowers Costs in Mechanical Engineering

The complexity of parts is ever increasing, the supply chain is getting longer, the number of interfaces is growing. Modern manufacturing enterprises must specifically manage the manifold variants to minimize the costs in the entire supply chain for a great number of different components. A well-conceived variant management can simplify processes and structures as well as measurably increase supply chain efficiency — without losing customers.

 
Martin Kotula and Sebastian Petrak

More than ever before, manufacturing companies are working in a global environment and accordingly face great competitive pressure. And their customers? They increasingly demand customized or niche products. Frequently, the same product with just one differentiation will be produced: For example, a terminal box can be mounted from the left, the right or from the top, without any major differences in its function. But the inevitable result will be that the terminal box must be procured in different variants for its installation and electrical connection.

All departments must collaborate

Complexity will increase both externally and internally, the supply chain will become longer, the number of interfaces will also grow. Manufacturing companies must specifically manage the manifold variants to minimize the costs in the entire supply chain for a great number of different components.

A well-conceived variant management can reduce the complexity in processes and structures and result in a measurable increase in supply chain efficiency — without losing customers. In this respect, the establishment of a continuous variant management cannot be any isolated management function but must comprise all specialized departments of the value chain. Ideally, these departments include product management, development, production, materials management and controlling. In this case, materials management may well be the initiator since that department will feel most noticeably any of the consequences in terms of cost.

A first step in an analysis stage will bring together product and variants data. The objective will be an identification of profitable variants as well as their corresponding sales volume in an annual comparison, ideally in a comparison over several years – from three to five years. On the basis of the analyses performed, workshops will determine criteria for a portfolio adjustment or correction. If a marketed variant is rarely sold and with a negative profit contribution, it should be eliminated. A more in-depth analysis of the data is required to determine the inclusion of variants in a second step. Objective will be the dissolution of parts lists and the identification of ratios for identical parts, unique parts or for the design coefficient.

Thirty percent fewer variants will reduce costs by 8 percent

The optimization potential is particularly high in mechanical engineering. While Volkswagen, for example, can show an identical parts rate of 60 percent or more with its introduction of the platform strategy, there are in parts mechanical engineering companies today having a very low identical parts rate of under 10 percent with regard to their variants. The potential is accordingly significant. A clever 30 percent reduction of variants can reduce the cost basis by 8 percent – without changing customer benefits, sales prices and margins.

The company must decide on how product placement is to be oriented. Central decisions are, for example, which will be the >basic products< for the next five years and which products, in terms of their product life cycle, can now be taken from the market or be terminated in one or two years. Moreover, action plans must be set up so that concrete measures are defined for each variant. Changes or terminations should be communicated early to the end customer and an equivalent alternative offered.

High costs are often incurred in materials management

Especially in the purchasing department, an excessive number of variants will result in problems and higher costs. The consequence of a greater variety of variants are smaller quantities and thus usually a higher cost price. At the same time, bundling effects and thus potential savings will be reduced to a minimum or even entirely prevented.

Moreover, particularly specific parts may result in allocation problems in the supply chain. There is frequently only one supplier for such products; so the risk of production standstill will increase. Accordingly, purchasing should introduce various measures in collaboration with the departments of sales and development.

It must be explored from the beginning – in collaboration with product development – whether it will be expedient at all to build a specific variant. Frequently, materials are replaced to make the product more innovative although the proven technology could still be used for a number of years. Any additional benefit which is not recognized as such by the customer can just be readily left out. It's also necessary to develop an awareness for the fact that any small change, e.g. a different material or a different color, is already a variant and requires a different step in manufacturing.

Development, manufacturing and purchasing can cooperate to increase the rate of identical parts. To this end, preferential components and preferential modules may be specified for example. By preparing a limited product catalog with a clear presentation of variants, the company will concentrate on products which can be manufactured by means of a modular system. Within the course of changing the purchasing strategy, the purchasing department can change from component-oriented procurement to module or systems suppliers and thus realize huge potentials. Special variants will also continue to play a role, of course; however, handling them must be defined to reflect customer requests. The multitude of variants can also be contained by establishing system suppliers and external partners.

Another cost dimension is warehousing. The more variants need to be served, the higher the inventories – capital is tied up long-term. Warehouse management will be even more difficult when companies promise their customers a long spare parts supply guarantee. Thus, certain parts must be kept stocked for ten or more years to finally end up being scrapped anyway in the worst case. Materials management should here identify any so-called shelf warmers and let findings gained in this respect enter into the already mentioned portfolio adjustment.

Ratios allow specific control

Monitoring the achievement of objectives in variant management will be supported by ratio-based control. It is crucial to establish ratios and a >baseline< to be able to track the development. In situations which are particularly critical in terms of profits and results, financial ratios will be dominant – such as the profit contribution intensity. Moreover, the following should be measured: ratios such as identical parts rates and unique parts rates, as well as the design coefficient.

It might appear difficult for a small or medium-sized enterprise which had served all customer needs in the past to remove products from its portfolio. In many cases, fears of sales losses will be running relatively high. However, if good planning, transformation, communication and collaboration between the departments is a given condition, the multitude of variants can be significantly narrowed down – without offending customers or increasing sales prices.