Reducing Cost Of Goods Sold

a p p l i c a t i o n

n o t e

Reducing Cost of Goods Sold (COGS)

Company: Location: Implemented:

Fortune 100 Industrial Equipment OEM Midwestern United States 2003

project objective This project was initiated by the Company to assess aPriori’s direct impact on reducing Cost of Goods Sold (COGS). The ultimate goal was to assess the hard savings, both quantifiable and verifiable, that aPriori could deliver if implemented at a project, product, or program level.

w w w . a p r i o r i . c o m

a p p l i c a t i o n

n o t e

Reducing Cost of Goods Sold (COGS)

Results of traditional post-production cost reduction exercise.

project descr iption The Company had introduced to the market a newer version of

Result: Cost knowledge before it matters

a $1 billion product line, and was experiencing significant profit

As a result of this exercise, using aPriori the Company was able

loss because the product costs exceeded the Company’s projected

to estimate the amount of savings they could have netted

cost target. As is common practice after a product has been

had they been able to make these cost-saving changes before

delivered to the market, the Company initiated extensive

the manufacturing process commenced. By this Company’s

post-launch cost reduction activities. For a period of the next three years, the Company’s design engineers, manufacturing engineers, and procurement professionals diligently generated and implemented cost reduction initiatives, sacrificing new product designs. The project’s case team collected data which showed the incremental savings by year during the 3-year

estimation, had aPriori been implemented at the beginning of the product program, they could have saved more than $18 million by identifying upfront which parts and assemblies exceeded cost targets prior to the product launch. The Company’s Chief Information Officer stated that when used

cost reduction exercise is shown in the table above. At the

at a corporate level, aPriori could effectively reduce COGS by a

end of production year 3, the Company’s cost reduction team

minimum of 1%, equating to a savings of $136 million annu-

had reduced the annual COGS on the income statement by

ally, which in turn would provide an 11% increase to the

$17.9 million—a huge savings when compared to the COGS

Company’s net income.

at the time of product launch. However, during the 3-year hiatus that the company was preoccupied with implementing cost-saving revisions to the product design, production strategy, and supply chain, the company realized a loss of $31 million due to its inability to remain competitive with new product offerings.

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