Principles of cost reduction are well established. These begin with a classification of costs:
Manufacturing costs, total costs and lifecycle costs. We then proceed with the methods of cost Reduction in each of the areas. Cost management is necessary in the development of innovative and high performance products - products about which customers would be enthusiastic, and which fulfil the market requirements. It makes more sense to lower the costs right at the beginning of product development, rather than afterwards by the usual steps of personnel reduction when the costs are found too high.
Management's primary goal in cost reduction is to lower the fixed costs. On one hand, their goal is to improve the company's earning power, since a considerable part of a company's reserves are in its fixed costs (frequently more than 50% of its total costs). Concurrently, the breakeven quantity with which the company can generate profits is lowered, so there is more flexibility. By doing so, the company gains product development freedom in the market and becomes more resistant to market fluctuations.
Product development has an influence on cost generation in a series of other company processes that should not be underestimated. First, there is the production process. The logistics and service processes in the company are also cost-relevant, the costs of which also depend considerably on decisions during product development.
The costs of product development consist of a number of different components. Whatever the models for assigning costs might be, personnel costs are the decisive portion of the product development costs, depending on the company's strengths in design and development.
Therefore, personnel performance is a defining factor. These costs must be seen as fixed costs in the company because in the short run it is hardly feasible to reduce personnel simply in response to market changes. Besides the pure cost considerations, the strategic importance of innovative in-house product development is also to be taken into account when thinking about product development costs.
It is necessary to carefully select projects and tasks to be worked on and to focus on projects important for the company.
In many companies, too many tasks and too many projects are regarded as urgent and necessary, and are pursued more or less simultaneously. The results thus do not satisfy expectations because the company's capacities are overwhelmed by too many projects; high priority problems dominate the daily agenda. The company needs to develop a system for prioritizing projects, bearing in mind the requirements of the market as well as questions of profit and return on investment.
The company's strategic direction should be the primary criterion in decisions about prioritizing projects. Therefore, integrated considerations are called for, not just the isolated viewpoints of product development, marketing, or customer service. The profit orientation of project work must not be considered a constraint but, rather, as the condition that creates the necessary room for basic product development and innovations. The entire company, not only the product developers, must consider setting and prioritizing the goals for product development.