We are still on our epic quest to find the DARPA study (a.k.a. the legendary seminal study reported to say that ~80% of product cost is determine in the first ~20% of the product lifecycle). However, during our search we have been aided by Steve Craven from Caterpillar. No, Steve did not find the DARPA study, but he did send us a study attempting to refute it.
Design Determines 70% of Cost? A Review of Implications for Design Evaluation Barton, J. A., Love, D. M., Taylor, G. D. Journal of Engineering Design, March 2001, Vol. 12, Issue 1, pp 47-58
Here’s a summary of the paper and our comments and thoughts about this provocative article.
Where’s DARPA and Can We Prove this 70-80% number?
First, the authors question the existence of the DARPA study and say that most studies that support DARPA’s findings reference other corporate studies that are alleged to support DARPA’s findings. Most of these corporate studies are difficult to trace. They authors then analyze a Rolls-Royce study (Symon and Dangerfield 1980) that investigates “unnecessary costs.” In the Roll-Royce study, Symon and Dangerfield find that the majority of unnecessary costs are induced in early design. However, Barton, Love, and Taylor make the point that unnecessary costs are NOT the same as the TOTAL cost of the part itself. That’s fair.
The authors then go into a more “common sense” line of discussion about how the costs induced at different stages of the product lifecycle are difficult to disaggregate. The difficulty occurs because design choices often depend on other upstream product cost choices and the knowledge or expectation of downstream supply chain and manufacturing constraints. This section of the paper concludes with a reference to a study by Thomas (The FASB and the Allocation Fallacy from Journal of Accountancy) which says that “allocations of this kind are incorrigible, i.e. they can neither be refuted nor verified.”
We at Hiller Associates agree with these assertions in the sense that these statements are tautologically true. Maybe someone should have given this study to Bob Kaplan of Harvard Business School before he invented Activity Based Costing in the 1980’s in collaboration with John Deere? After all, wasn’t ABC all about the allocation of costs from indirect overhead? However, Kaplan’s attempt illustrates the reality of the situation outside of academia. We in industry can’t just throw up our hands and say that it’s impossible to allocate precisely. We have to make a reasonable and relevant allocation, regardless. If it is not ‘reliable’ from a canonical accounting definition point of view, we just have to accept this.
Is DARPA Actually Backwards in Its Cost Allocations?
What if the DARPA study’s 80/20 claim is more that an allocation problem? What if DARPA is actually promoting the opposite of the truth? The author references a paper by Ulrich and Pearson that may reverse DARPA. Ulrich and Pearson investigated drip coffee makers and conclude that the design effect on product cost accounted for 47% of cost, whereas manufacturing accounted for 65% of product cost variation. They did, of course, make their own assumptions for that type of possible manufacturing environments that could have made the 18 commercially available coffee makers.
Considering the pre-Amazon.com world in 1993 when the Ulrich and Pearson study was done, it brings a smile to my face thinking of MIT engineering grad students at the local Target, Kmart, or Walmart:CLERK: Can I help you? GRAD STUDENTS: Uh, yeah, I hope so. We need coffee makers. CLERK: Oh, well we have a lot of models, what is your need… GRAD STUDENTS: Awesome, how many do you have? CLERK: Uhh… I guess 17-18 models, maybe. GRAD STUDENTS: Score! We need 18. CLERK: 18 of which model? GRAD STUDENTS: Oh, not 18 of one model. One of each of the 18 models. CLERK: What! Huh… wha-why? GRAD STUDENTS: We’re from MIT. CLERK: Ooohhhhh…. right… GRAD STUDENTS: Uhh… Say, what’s your name? CLERK: Um… Jessica… like my name tag says. You say you go to MIT? GRAD STUDENTS: Um, yeah, well Jessica, we’re having a party at our lab in Kendall Square this Friday. If you and your friends want to come, that would be cool. What do you say? CLERK: Uh, yeah right… how about I just get you your “18” different coffee makers. Good luck.
… but we digress. Is product cost determined over 50% by manufacturing technique rather than design? That seems a bit fishy.
Design for Existing Environment
With the literature review out of the way, the authors get to business and propose their hypothesis:
That consideration of decisions further down the chain are beneficial can be illustrated with a new ‘design for’ technique, Design For the Existing Environment (DFEE) that aims to take into account the capacity constraints of the actual company when designing the product… This contrasts with the conventional DfX techniques that take an idealized view of the state of the target manufacturing system.
They then talk about a simulation that they did which they hope takes into account inventory, profit, cash flow, missed shipments to customers, etc. They run 5 scenarios through their simulation:
- A baseline with New Design 1 that lacks sufficient capacity needed by the customer demand
- A New Design 2 that uses DFEE to use the existing manufacturing environment and can meet customer demand.
- Making New Design 1 by buying more capacity (capital investment)
- Pre-Building New Design 1 to meet demand
- Late deliver of New Design 1
Not surprisingly, the authors show that scenario 2, using their DFEE technique, beats the other alternatives, considering all the metrics that they calculate.
Thoughts from Hiller Associates
This article is from over ten years ago, but it is thought provoking. Is 80% of the cost determined in the first 20% of design? We don’t know. We certainly believe that over 50% of the cost is determined by design. In our professional experience, a large part is controlled by design, even allowing for the relationships between design, purchasing, manufacturing, and supply chain. We’ve personally observed cases in which moving from one design to another allowed for the use of another manufacturing process that reduced total cost by 30%-70%.
Overall, the authors bring up a valid point that goes beyond the traditional ringing of the Total Cost of Ownership (TCO) bell. They present a simulation in which they claim to calculate Total Cost of Ownership in a rigorous way. The problem is that the calculation is too rigorous (it took them 4 hours per simulation). That kind of time and, moreover, the complexity underlying such a model is likely not practical for most commercial uses. However, a more simplified estimation of Total Cost of Ownership is more appropriate. In fact, Hiller Associates has helped our client’s teams use flexible tools like Excel, along with a well designed process, to estimate a Total Cost of Ownership. Is that an end point? No, but it is a beginning. Later, as a client’s culture, process, and team improve, more advance Product Cost Management tools can be added into the mix. And, we do mean TOOLS in the plural, because no one tool will solve a customer’s Product Cost Management and Total Cost of Ownership problems.
Hopefully, we will see some more academic work on the product cost problem. But, until then, we’re still searching for the original DARPA Study. Anyone know where it is?
- Design Determines 70% of Cost? A Review of Implications for Design Evaluation, Barton, J. A., Love, D. M., Taylor, G. D., Journal of Engineering Design, March 2001, Vol. 12, Issue 1, pp 47-58
- Symon, R.F. and Dangerfield, K.J., 1980 Application of design to cost in engineering and manufacturing. NATO AGARD Lecture Series No. 107, The Application of Design To Cost And Life Cycle Cost to Aircraft Engines (Saint Louis, France, 12-13 may, London, UD 15-16), pp. 7.1-7.17
- Thomas, A.L., 1975, The FASB and the Allocation Fallacy, Journal of Accountancy, 140, 65-68.
- Ulrich, K.T., and Pearson, S.A., 1993, “Does product design really determine 80% of manufacturing cost? Working Paper WP#3601-93 (Cambridge, MA: Alred P. Sloan School of Management, MIT).