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«COST EFFECT OF COMPONENT COMMONALITY: MANUFACTURING COST PERSPECTIVE Jouni Lyly-Yrjänäinen Tommi Lahikainen Jari Paranko Tampere University of ...»

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NordDesign 2004 – Product Design in Changing Environment

18-20 August 2004, Tampere, Finland

COST EFFECT OF COMPONENT COMMONALITY:

MANUFACTURING COST PERSPECTIVE

Jouni Lyly-Yrjänäinen Tommi Lahikainen Jari Paranko

Tampere University of Technology Tampere University of Technology Tampere University of Technology

Industrial Management Industrial Management Industrial Management P.O. Box 541 P.O. Box 541 P.O. Box 541 FIN-33101 Tampere FIN-33101 Tampere FIN-33101 Tampere

FINLAND FINLAND FINLAND

E-mail: jouni.lyly-yrjanainen@tut.fi E-mail: tommi.lahikainen@tut.fi E-mail: jari.paranko@tut.fi Component commonality, component standardization, cost management Abstract The aim of the paper is to analyze the measurement of component commonality and its cost effect from the manufacturing cost perspective. The unit of analysis is a new subassembly, i.e.

a motor support of a roll conveyor. Component commonality is discussed using three evolutionary stages of the motor support. The researchers have provided cost information for the product development team and have also been questioning the cost efficiency of the proposed constructions. Despite its simplicity, the selected case subassembly illustrates the problematics related to component commonality – analyses at different levels give contradictory results. Detailed analysis of the case subassembly increases the understanding of the phenomena involved and highlights the importance of multiple levels of analysis when discussing component commonality.

1 Introduction Product costs are mainly determined at the product development stage [see e.g. Turney91].

Literature presents various guidelines for reducing manufacturing costs [see e.g. Hundal97].

However, the impacts of these guidelines are not always completely unambiguous. Especially, some component commonality literature rather straightforwardly states that component commonality in general decreases costs. Labro [03] has made a profound review of the empirical results in the literature related to the topic and concludes that research findings supporting both cost increase and decrease are available. Thus, Labro notes that insufficient empirical evidence exists of the cost effect of component commonality and that more empirical case studies are needed.

Cost of complexity has been discussed in the management accounting literature and several studies have identified the number of components as an important determinant of complexity.

However, the cost effect of component commonality has not been discussed in management accounting literature very extensively. Furthermore, measuring component commonality has not been profoundly studied in empirical case studies either. Various authors have discussed the topic [see e.g. Martin & Ishii00], but unfortunately at a rather

Abstract

level. In addition, the development of innovative methods and technical solutions enabling component commonality is a challenging area in which management accounting knowledge and especially an understanding of cost behavior logic are an invaluable asset.

1.1 Objective of paper The aim of the paper is to discuss the measurement of component commonality and its cost effect from the manufacturing cost perspective. In order to do that, an understanding of the technical solutions that enable standardization is vital. According to Stake [01], issues of product structuring and product architecture are essential for understanding commonality.

Thus, component commonality cannot be analyzed separately from the innovations forming the basis of it. The unit of analysis is a new subassembly, i.e. a motor support of a roll

conveyor. Component commonality is discussed using three versions of the subassembly:

• The first version has been used in project deliveries for several years.

• The second version is a new innovation that simplifies the construction of the motor support significantly decreasing manufacturing costs.

• The third version makes it possible for only one motor support subassembly to be used in all end product models. Thus, the third version is an outcome of a commonality innovation.

First, theory related to component commonality and its measurement is discussed briefly.

Second, the evolutionary stages of the case subassembly are introduced and analyzed with some basic component commonality measures. However, component commonality is not the objective in itself; rather, the company must aim at increased profitability. Therefore, the different measures used for estimating component commonality are compared to the manufacturing costs (incl. direct and indirect manufacturing costs) of each version. Third, component commonality is analyzed from the subassembly commonality perspective. That, on the other hand, shows the case subassembly in a new light and illustrates the importance of finding proper levels of analysis when discussing component commonality.

1.2 Research method In the literature, standardization and component commonality have been discussed at a rather general level and more practical case descriptions have been demanded [Labro03]. The case selected for this article enables detailed analysis of the technical requirements of component commonality as well as its cost effect. The case also illustrates the value of in-depth case studies when trying to understand complex phenomena such as component commonality. In the case company, the researchers have provided cost information for the product development team and have also been questioning the cost efficiency of the proposed product constructions.





Because of the strong commitment of the researchers, action research [Coughlan&Coghlan02] seems to be a sensible choice of research method. In action research, commitment to the organizational goals is seen as a benefit and not only as a factor distorting the results [Gummesson93]. All the figures presented in this paper are real-life-based – the same figures have been presented to the case company management. The figures are presented with the permission of the company management.

2 Component commonality in literature Commonality is a rather complex concept. In general, it means that two or more objects share some characteristics [Stake01]. According to Stake, it can be understood in a number of different ways, ranging from standardization of parts to the re-use of various conceptual solutions within a product or product family.

Thus, commonality can take place at different levels of abstraction and detail, as also illustrated by Sanders [72] in Figure 1.

In the figure, the standardization perspectives of this study are bolded. The objective of the case company is to limit the variety of components and subassemblies at the company level, i.e. to introduce component commonality. However, component commonality is not the ultimate objective; rather it is seen as a way to increase sales volume and improve profitability.

Considering the elements of profitability, namely costs and revenues, this paper focuses on costs. The success of component commonality is thus measured from the cost perspective. Solutions enabling the selected Figure 1. Standardization perspectives customer demand to be completely fulfilled with [Sanders72].

the lowest costs are considered to be the best.

2.1 Component commonality Component commonality [Labro03] or component sharing [Fisher et al.99] can be defined as the use of the same version of a component across multiple products. Component commonality is seen as a way to offer a higher variety of products with lower variety in their production, which allows for economy of scale since a common component can be produced in larger volumes [Stake01]. Furthermore, component commonality is claimed to improve predictability of component use and also to decrease inventory capital [Baker et al.86]. When the same component can be used with several end products, the accuracy of demand forecasts of components increases. It is no longer necessary to estimate the sales volumes of individual end products because the demand of common components is more related to the total sales volume. Furthermore, the same service level can be offered with decreased inventory levels, which increases the capital turnover. When discussing component commonality, it is also necessary to consider its impact on revenues [see e.g. Kim&Chhajed00]. Component standardization, for example, can be divided into internal and external component commonality, depending on whether the commonality decision has an effect on the customer value [Robertson & Ulrich98]. Modularity also comes close to component commonality.

Modularity is one way to reduce problems related to number of product variants by increasing the degree of commonality [Baldwin&Clark97]. The unit of analysis, however, is slightly different.

According to Perera et al. [99], component standardization – practically the same as component commonality – means that several components are replaced by a single component that can perform the functions of all of them. According to Perera et al. [99], there

are three possible situations for standardizing components:

• Component standardization within a product: Several unique components in a product are replaced by one common component.

• Component standardization among products: Several unique components in different products are replaced by one common component.

• Component standardization among product generations: Common components are used in different products or in upgraded products across the time frame.

Component commonality, however, might not be quite that simple. Numerous additional levels for analyzing component commonality can also be found. In addition to the situations stated above, component commonality can also be analyzed, for example, at different subassembly levels. Furthermore, differences between subassemblies and components are not that clear-cut either.

2.2 Measuring component commonality In this paper, a component is defined as a part that cannot be divided into smaller units with their own ID codes. Thus, a component is seen as very context-specific; what is merely a component for one company can be the end product for another. Components in combination form all sorts of subassemblies. In this paper, however, a subassembly is considered to be a combination of components and subassemblies that is stored at some point of the process and that also has an ID code of its own. Components and subassemblies together form different systems, and eventually products that a company actively sells to its customers. Therefore, the concept of the product is equally context-specific. The after-sales perspective naturally might alter the situation regarding the definition of a product or component, but this paper discusses new product business only.

Number of components is seen as a proper measure of component commonality [see e.g.

Labro03]. However, when discussing different types of commonality indexes [see e.g.

Martin&Ishii00], Stake [01] mentions that in many formulas components, subassemblies, or subsystems could be used to estimate the degree of commonality between them. Analyses done at different levels might give contradictory results. Thus, it is not self-evident which level should be used in measurements. Since the objective is overall profitability, the eventual contradictions must be solved by choosing the right alternative from the corporate perspective. Therefore, cost efficient designs require analyses also at the highest level impacted by the decision. On the other hand, acquiring detailed data about the different alternatives requires analyses at the lowest levels, i.e. component and subassembly levels.

2.3 Cost effect of component commonality It is rather difficult to identify unambiguously the literature discussing the cost effect of component commonality, because the existing management accounting, operations research, and product development literature touching the topic overlap. Especially in the field of operations research, the cost effect of component commonality can be identified as a separate topic. Labro [03] has written a profound review of the literature on component commonality.

On the basis of her analysis, Labro states that management accounting literature includes lots of material related to the cost of complexity and that the number of components has been identified as a significant variable describing the complexity of products and processes. On the basis of Turney [91], it is easy to arrive at the interpretation that component commonality has an impact particularly on various indirect costs.

Literature on machine design, and especially literature discussing product development, presents various rules of thumb for reducing manufacturing costs. However, these rules of thumb have been separated from the original contexts and that is why the generalizability of those design principles is not clear-cut either. Labro [03] and Nobelius and Sundgren [02] criticize strongly that part of the literature on component commonality which rather straightforwardly states that component commonality in general reduces costs. In her literature analysis, Labro names studies that between them have produced many divergent conclusions. Thus, no simplified conclusions about the cost effect of component commonality can be made. Therefore, more detailed case descriptions are needed in order to determine the true nature of the cost effect of component commonality.

3 Technical innovations enabling component commonality The paper is based on a case study in a machine construction company specializing in material handling equipment. Until now, the company has been a project supplier managing complete material handling and production equipment projects, mostly for the food industry.

Net sales of the case company in 2003 were about 8 MEUR and the company had 48 employees. Despite its project management expertise, the company has been developing mass-customized standard conveyors. In the case of standard conveyors, the development of roll conveyors has advanced furthest. A picture of a prototype is presented in Figure 2.



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