Mar 042013
 

 

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:

  1. A baseline with New Design 1 that lacks sufficient capacity needed by the customer demand
  2. A New Design 2 that uses DFEE to use the existing manufacturing environment and can meet customer demand.
  3. Making New Design 1 by buying more capacity (capital investment)
  4. Pre-Building New Design 1 to meet demand
  5. 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?

References
  1.  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
  2. 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
  3. Thomas, A.L., 1975, The FASB and the Allocation Fallacy, Journal of Accountancy, 140, 65-68.
  4. 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).

  16 Responses to “DARPA false!? 80% of Cost is Not Controlled by Design?”

  1. Moderator re-posting comment from linked in group here: http://www.linkedin.com/groupItem?view=&gid=2097640&type=member&item=219497915&commentID=123300088&report%2Esuccess=8ULbKyXO6NDvmoK7o030UNOYGZKrvdhBhypZ_w8EpQrrQI-BBjkmxwkEOwBjLE28YyDIxcyEO7_TA_giuRN#commentID_123300088

    Sounds to me like some MBA genius took the Pareto principle too far. Any time I see the numbers 80/20, if there is not hard data backing them up then I am immediately suspicious. Add to this the fact that someone is throwing around the DARPA name to add credibility to the statement, and I wonder even more. Did Hiller Associates check Snopes to see if they list this urban legend, because to me it has all the markers of pure myth. Finally, isn’t part of the design process for a product designing how the product will be produced? Aren’t variations in production cost attributable to the design activity?

    • @James — Sadly, no one at Snope.com has done the research to prove whether DARPA is an urban legend or not. If it is a hoax, it is the greatest lie perpetrated on the design world ever. Let’s be honest: PLM has built their whole industry based on the DARPA study.

      Sadly, with most engineers, part of the design process is NOTdesigning how the product will be produced. This is often not intentional, but there is often little information to guide them. I agree with you the variations in the production cost ARE attributable to the design activity (i.e. I don’t think DARPA is wholly wrong). And, to be fair, the study covered in my article concedes that the design does have a big influence on mfg cost — just not 80% influence.

  2. Moderator re-posting comment from linked in group here: http://www.linkedin.com/groupItem?view=&gid=131114&type=member&item=219498010&commentID=123302562&report%2Esuccess=8ULbKyXO6NDvmoK7o030UNOYGZKrvdhBhypZ_w8EpQrrQI-BBjkmxwkEOwBjLE28YyDIxcyEO7_TA_giuRN#commentID_123302562

    Larry Dzaugis SAYS:

    The design drives the majority of the cost.
    What drives the design is what is the functionality/desirability and how many will be made. The target volume is a big deal in the design process.

    Apple is a good example.
    The device is designed to work and to appeal.
    There is margin in the product so that a nickle will not kill it, there is enough volume that nickles add up. A large amount of investigation prior to the release of design for production with even low volumes in the lowest incremental unit cost production method.

    I doubt there is more than 10% in cost that was not fixed by the design.

    For those of us in the rest of the world, volume drives over 20% of the potential cost. I had a product manger want a factory that could function effectively at a 2 order of magnitude of order variations. That is why there are contract manufacturers, a bigger base to swing production volume changes.

    More importantly, the design of components would change. Die cast housing, stamping lines replace investment cast and machine formed parts made with more steps or parts. Basically one end was custom nothing, little tooling unless it was critical to design to custom everything with the tooling costs to lower incremental unit cost.

    • @Larry

      It sounds like you have several points above.

      I agree that the functionality/desirability *should* drives the design. Apple is a fascinating example, but it is a poor example of a *typical* product. I am just as guilty of using the iPhone as an example, but it is one of those six-sigma event, in terms of product popularity. Most products will never have this type of silly success where the margins are outrageous. That being said, I agree that people need to heavily work on:

      a. Producing product people want.
      b. Product Cost Management

      The goal of a. & b. is to drive a huge profit buffer between revenue and product cost, so that the firm has protection from manufacturing and supply chain problems that could wipe out profit.

      I believe your other point about volume is correct. It certainly dictates which processes are cost effective.

      Thanks for responding to the article, and I look forward to hearing your thoughts in the future.

      • Moderator re-posting comment from linked in group here: http://www.linkedin.com/groupItem?view=&gid=131114&type=member&item=219498010&commentID=123302562&report%2Esuccess=8ULbKyXO6NDvmoK7o030UNOYGZKrvdhBhypZ_w8EpQrrQI-BBjkmxwkEOwBjLE28YyDIxcyEO7_TA_giuRN#commentID_123302562

        Larry Dzaugis SAYS:

        The one other area for high variation with lower volume products is the Supply Chain.
        Capabilities within organizations vary tremendously.
        In Electronics it is everything.

        The real world example of superb Supply Chain management is Walmart. They have invested billions in having the right product at the right place at the best price at the right time. This includes software, hardware, transportation and distribution as well as seamless distribution of demand information to suppliers.

        I quoted assembly of the Osborne II for assembly in the US. We were beaten by a US company assembling in Taiwan. At the time the delivered price was lower than our BOM cost. It drove home that the key driver in the business for execution was the Supply Chain, right part, right time, right price. After that we stayed away from products where there would be unequal footing in procuring parts.

        Apple and Walmart are the extreme. Most of us do not work in companies with the drive and vision as successfully executed. They do illustrate what World Class looks like and the continuing effort required to improve.

  3. Moderator re-posting comment from linked in group here: http://www.linkedin.com/groupItem?view=&gid=3758755&type=member&item=219829642&commentID=123302720&report%2Esuccess=8ULbKyXO6NDvmoK7o030UNOYGZKrvdhBhypZ_w8EpQrrQI-BBjkmxwkEOwBjLE28YyDIxcyEO7_TA_giuRN#commentID_123302720

    Osamu Higo SAYS:

    Interesting article, thank you Eric. It’s obvious that cost allocation is not the problem.

  4. @Higo-san: Thanks for responding to the article, and I look forward to hearing your thoughts in the future

  5. Moderator posting comment from linked in group:
    http://www.linkedin.com/groupAnswers?viewQuestionAndAnswers=&discussionID=219497916&gid=2263672&commentID=124401200&trk=view_disc&ut=2nSg5ijJluIRE1

    Kirk Hoy •SAYS:

    I would like to see the study too. However, I believe that the manufacture (or production) cost and operations and support cost was probably added into what was being influenced by the ‘Design’ and hence how they got such a large percent.

  6. Very interesting article. Coming from personal experience, while claim of 80% of cost are determined by during its development, 80% of the design are usually based on older products that have been manufactured, field tested and improved during the later 80% of their life cycle.

    • That is a fair point. The DARPA study, as I understand it was primarily focused on defense applications, which of course, were probably likely to be more from scratch designs than re-designs or modifications.

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