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 / Summer 2010 / Issue 59(originally published by Booz & Company)


The Importance of Frugal Engineering

To achieve the drastically lower prices that emerging markets require, companies must be open to rethinking all aspects of the product. The Nano uses not only just one wiper, but also just one side-view mirror, and the seats are not adjustable. This represents a clear departure from the trends in conventional vehicles, and involves questioning the form and necessity of so-called standard features. Making these sorts of radical decisions is a form of innovation. Such choices are answers to questions that too few global companies are asking.

Organizational Agility

Frugal engineering requires that companies be open to organizational innovation, as well. Three areas are particularly important.

1. Cross-functional teams. The Tata Nano was developed by a team of 500 mostly young engineers, significantly smaller than the teams of 800-plus typically employed by Western automakers. In fact, a team for a new platform like the Nano at a U.S. or European car company would likely total more than 1,000. To make sure that the project got the attention it required, Tata created a separate unit, isolated from the rest of the company. In addition to its compact size, the Nano engineering team had another advantage over traditional engineering groups: It worked cross-functionally with other teams to maximize the chances of finding ways to keep costs low. When a legacy automaker like General Motors launches a car, its marketing group might be five times the size of the Nano’s marketing team, which totaled three people.

The computer chip that replaced the compressor in Godrej’s low-cost refrigerator represented such a radical move that it likely would not have made it to the final product had the development group started with the standard operating procedures of the refrigerator industry. The procurement team instead raced to identify a low-cost component supplier while the manufacturing team quickly reengineered the assembly line to handle chips instead of compressors.

Why would that kind of agility be difficult for a Western company? Typically, the more mature an organization, the more rigid the functional silos. There tends to be little coordination between functions without an explicit effort from top management, which must either create a new structure for the team or use brute force to encourage communication. That is happening more often, but it’s still more the exception than the rule.

In mature industries, companies are optimized for their main customers. For emerging markets, a different organizational approach is required, both within and outside the organization.

2. A nontraditional supply chain. When reducing costs, most companies focus on getting better prices from their suppliers. The problem with this approach is that the reductions can go only so far; cut too deep, and the suppliers’ margins are eliminated. Frugal engineering instead treats the suppliers as an extension of the enterprise. Such a lean manufacturing approach is not new, of course. But frugal engineering pushes the concept further, by demanding new levels of cost transparency, and by requiring that suppliers grant genuine authority to their representatives on the core product team.

A frugal development team must look beyond the usual, approved list of suppliers. The targets in frugal engineering projects are often so tight that conventional suppliers are unlikely to be able to meet the requirements for cost, quality, and timeliness of delivery.

At the same time, suppliers step up and become more involved in development projects. Traditionally, original equipment manufacturers (OEMs) dictate their requirements to suppliers; the suppliers ask few questions and compete on price. In frugal engineering, the game is different. OEMs and suppliers team up to set cost targets and a cost structure. Rather than focus on individual components, they work together to optimize entire systems. For example, the Nano uses a simple motorcycle-style speedometer and forgoes a tachometer in the instrument cluster, but it includes a digital odometer. The costs saved on one were spent on the other, avoiding an analog odometer and a tachometer that few customers would use. By cooperating on developing the whole system, the supplier and Tata created a more appealing instrument cluster while still meeting the target cost.

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