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 / First Quarter 1997 / Issue 6(originally published by Booz & Company)


Setting Supplier Cost Targets: Getting Beyond the Basics

Exhibit IV

Breaking Things Down into Subsystems

Source: Booz-Allen & Hamilton

The next step -- setting target costs at the subsystem level -- is among the more complex and critical ones facing the team. The objective is to translate the cost targets for functional needs to the major subsystems. Once targets are set at that level, the team can work with suppliers to create the designs that provide the right trade-offs vis-à-vis cost and value.The translation is performed by creating a matrix in which the five major subsystems are listed in rows while the five sets of "functional needs" are listed as column headings. (See Exhibit V.)

Exhibit V

Translating Cost Targets from Needs to Subsystems


Source: Booz-Allen & Hamilton

By comparing the primary functional needs and secondary attributes with the subsystems and components, the team allocated percentages of each need to the various subsystems. These percentages were then multiplied by the cost targets for each of the needs, as previously determined by their importance weightings. The sum of those multiplications (i.e., the addition of the numbers by row) generated cost targets for each subsystem.

Next, tear-down analysis of the higher-end products offered by Tag Heuer and Rolex were used to create a composite, "best-in-class" subsystem design. This composite design was nearly 50 percent above the market-based price target. The team then compared these subsystem cost estimates to the value-based targets. This analysis showed that although the overall "best-in-class" design was over by 50 percent, the cost gap at the subsystem level ranged from 42 percent under the target to 99 percent over the target. Exhibit VI shows the calculations of the gaps by subsystem.

Exhibit VI

Finding Gaps in the Price Targets

Source: Booz-Allen & Hamilton

The team also constructed a value graph, by plotting the targets against the tear-down cost estimates for each major subsystem. Exhibit VII provides a clear visual focus on the appropriate areas of opportunity: the band and the power supply.

Exhibit VII

The Value Graph: Focusing on Opportunity

Source: Booz-Allen & Hamilton

An internal sub-team was asked to examine a wide range of new concepts for the band other than the gold-plated style employed by the high-end competitors. In fact, the team discovered that the gold-plating was viewed as "too flashy" by the target consumer segment and not practical for true athletic use. The team visited a wide variety of suppliers -- not just watchband makers -- to get ideas. Ultimately, the team members agreed on a design employing a cloth-covered nylon strap that was stylish enough for business wear and rugged enough for athletic use -- and at a significant cost savings.

To address the power supply cost gap, the team conducted a design competition among the key suppliers in the industry -- including some non-traditional sources from emerging markets in Asia. Simultaneously, the team members examined the option of deleting some memory functions, which required additional power but were not highly valued by the consumer. This option reduced the cost of the timer subsystem as well.

The value graph also persuaded the team to revisit the functionality provided by the displays of the competitive products. The team noted that neither of those products provided back-lighting for nighttime use -- a "want" by some, but not all, of the target consumer segment. Given the current favorable gap on the display front, the team set out to add the back-light functionality while still retaining some of the target "cushion" currently available.

When the team re-aggregated the new cost estimates, the design came in just under the overall cost target -- and the individual subsystems now ranged from 30 percent under the value-based target to 69 percent over. (See Exhibit VIII.)

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