Profit Beyond Measure by H. Thomas Johnson & Anders Bröms

Author:H. Thomas Johnson & Anders Bröms
Language: eng
Format: epub
Publisher: The Free Press
Published: 2001-05-15T00:00:00+00:00

From decades of disciplined practice, Scania’s design engineers have developed an intuitive “sixth sense” for spotting ingenious ways to make small changes in modules with few, if any, additional part numbers. Always, of course, Scania’s designers give first consideration to meeting each customer’s unique needs—to achieving variety. But their basic design rule is to strive continually to meet any need with fewer different part numbers, not more.

MODULARIZATION, PART NUMBER PROLIFERATION, AND COSTS

It is widely understood that when variety in end products is desired, modular designs reduce substantially the costs of achieving that variety. Management experts usually give two reasons for this result. First, modularization decreases costs, they say, by reducing the number of different part numbers required to meet a given variety of customer needs. Second, using fewer part numbers allows mass-producing parts in longer runs and larger batches, thus capturing scale economies. Both reasons are true as far as they go. Neither reason, however, reflects a thorough understanding of why modularization improves a company’s long-run financial performance by affecting revenue and profitability. The next two sections consider further financial implications of modular design.

Part Numbers, Commonality, and Costs

The proposition that fewer part numbers reduces costs usually is considered to be unarguable. Commonsense observations certainly support the idea that reducing the number of part numbers by itself saves money. Fewer part numbers mean, for one thing, a need for less design work and fewer designers. Moreover, fewer part numbers make for less work and less confusion in manufacturing. They also mean less work and fewer resources required to ship, store, and keep track of parts in the after-sales market. Finally, all things being equal, a product made with fewer different part numbers will be easier to service and probably more dependable to operate.

But reducing part numbers in itself is not sufficient to guarantee improved profitability and decreased costs. It is the way numbers are reduced that affects overall profitability. Scania’s particular way of decreasing part numbers enhances opportunities to earn revenue because it maintains and even increases the variety of end products. Moreover, it increases profitability because the added revenue from increased varieties of product comes with little, if any, increase in cost.

Reducing the number of part numbers by attending carefully to the degree of parts commonality among end products increases revenue because it does nothing to reduce the variety of end products that a company makes and sells. If a reduction in part-number count curtails the variety of a company’s end products, revenue probably will decline. Such is the predicament of many companies with activity-based accounting systems that use “part numbers” as a cost driver to motivate design decisions. In such companies, the average design and handling cost may be $1,000 per part number if annual parts design and handling costs are $100,000 per year and 100 different part numbers are in use. In that case, the activity-based cost of a part number used 10 times in the year—for example, the middle wedge used only in right-hand drive dashboards in

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