Cost Reduction For Automobile During Design Stage With Statistical
Method And Tear Down Technique
SURENDRA PRAJAPAT
Department Of Mechnical Engineering
Jaipur Institute Of Engineering And Managment
Jaipur, Rajasthan
surendra1300pra@gmail.com
Abstract—This research studies the
automobile industry and proposes a cost
reduction method for automobiles at the design
stage. Since cost data are confidential in many
companies, the research resorts to an indirect
method to estimate the product cost. The
automobile prices and specifications are
collected from website. Then a panel of experts
is invited to estimate product cost ratio using
Delphi method with these data. Therefore, the
automobiles’ costs can be calculated backward
from the retail prices. These automobiles have
design attributes with several possible values.
For each attribute value, statistical method is
employed to analyze the mean value, standard
deviation and probability distribution of the
product costs. The designer can then evaluate
the potential cost consequences of these values
and choose one attribute value which can better
match the target cost. To achieve such target,
Tear Down technique which is widely used in
Japanese automobile industry is introduced.
The application of the proposed method in a
Chinese automobile company is also given.
Keywords-Chinese automobile industry; cost
reduction; Delphi method; design stage;
statistical analysis; Tear Down technique
I. INTRODUCTION
By producing 9.35 million automobiles in 2008,
China has become the second largest automobile
producer in the world. While the importance of
Chinese automobile market increases, especially at
the time when the automakers worldwide are
heavily beat by the financial crisis, the competition
pressure in this market also increases sharply.
Chinese automobile market has several unique
characteristics rarely found in other markets and
among them the huge number of automobile
companies is the most prominent one. Unlike
European Union, United States and Japan which
have less than 15 major automakers, China has
over 80 automobile groups in 2006 according to the
statistics of National Development and Reform
Commission of China. Another remarkable feature
of the Chinese automobile market is the
complicated relations between the joint- ventures.
At present, the largest 10 automakers in the world
have all established joint-ventures in China. The
Chinese rules allow one Chinese automobile group
to choose two foreign partners to cooperate, while
one foreign automobile company can set up at most
two joint-ventures with different Chinese
automakers. For instance, Shanghai Automotive
Industry Corporation (SAIC) has joint-ventures
with both Volkswagen and General Motors, while
Volkswagen has joint-ventures with both the SAIC
and First Automotive Works (FAW). Although
both are in the same Shanghai automobile group,
the Shanghai Volkswagen and Shanghai General
Motors are actually competitors to each other.
More surprisingly, though the FAW-Volkswagen
and the Shanghai Volkswagen are all joint-ventures
of the Volkswagen, they actually belong to two
different automobile groups and have no alliance
relation in reality. The automobile types which the
two companies produce are carefully differentiated
by Volkswagen, but the two must compete with
each other to sell their own products.
Though possessing complex relations with each
other, these joint-ventures achieve great success in
the Chinese market. According to the statistics
from China Association of Automobile
Manufacturers (CAAM), the FAW-Volkswagen,
the Shanghai Volkswagen, the Shanghai General
Motors and the FAW-Toyota are the four largest
automakers in 2008. However, their positions are
challenged by Chinese domestic automakers such
as Chery and Geely. The price war in the Chinese
automobile market forces every manufacturer to
pay special attention to the cost control.
According to several research findings, among all
the factors, design has the largest influence on cost
and 70%- 80% of the product cost is determined
during the design stage [1]. However, little
attention is paid to reducing cost at the design stage
in China. One reason is that there were few original
designs in the Chinese automobile industry before.
Since the prevailing joint-ventures preferred
introducing matured automobile models from their
overseas headquarters, the new products design
were not respected in the past. Another reason is
that the domestic automotive companies adhered to
the traditional cost concept and concentrated on the
manufacturing process.
But the situation is gradually changing after the
Chinese government starts to encourage the
independent innovation rather than introducing
existing technology. More and more Chinese
domestic automakers are involved in the new
product develop process, and even the joint-
ventures are observed to put more resources in the
design in China. However, the long period
disregard has affected the research on the cost
control during design stage. There is no effective
tool to estimate the product cost and no method to
implement the cost reduction while designing.
Since the cost data are confidential, almost no
company is willing to share them with researchers
outside the company. The inaccessibility to the cost
information holds back the research on product cost
estimation and cost control. However, though
product cost data are unavailable, the retail prices,
which are the summation of costs, profits and so
on, can reveal some implications about them. By
introducing the Dephi method, the product cost
ratio of automobile can be estimated with a panel
of automotive market experts. Therefore, the
product cost can then be calculated backward from
the retail price. Then the specifications of
automobiles can be retrieved though the Internet.
These automobiles have design attribute with
several possible values. For each of these values,
the mean value, standard deviation and probability
distribution of the automobile costs are studied.
Then the designers can compare different designs
to work out which design is better for cost control.
After the design plan is fixed, the Tear Down
technique which is widely used by the Japanese
automakers is employed to reduce the product cost.
II. REVIEW OF COST ESTIMATION AND
COST CONTROL METHOD
Cost estimation approaches can be generally
classified into two categories: qualitative
approaches and quantitative approaches [2].
Qualitative methods can accommodate various
situations for its high flexibility [3]. Quantitative
approaches need detailed design information and
not suitable for complicated products like
automobile [4]. Therefore qualitative methods can
better adapt to cost estimation at the automobile
design stage.
Target costing is the most widely used cost control
method for product design [5]. According to
Moden [6], the two objects of target costing system
are: reducing the product cost during design while
keeping the quality; motivating all the employees
to participate the activities of target costing.
III. PROPOSED METHOD
The lack of effective method has limited the
application of controlling cost through design in
China. Therefore, this research proposes a method
for automobile cost reduction during the design
stage. Automobile in the Chinese market includes
business vehicle and passenger vehicle, the latter
further comprise sedan, Multi-Purpose Vehicle
(MPV) and Sport Utility Vehicle (SUV). To
simplify the study, the automobile in this study
focuses on the sedan only. The structure of the
method is shown in Figure 1.
Figure 1. The structure of proposed method
A. Data Retrieval
The difficulty for automobile cost study exists in
the inaccessibility to the cost data directly since
they are confidential information. However, the
cost can be estimated by analyzing the retail price
which has a close relation with it. The data
concerning the automobile’s parameters and retail
prices are collected from a major Chinese
automobile website–Cheshi (www.cheshi.com),
which has the complete, comprehensive, daily
updated database. Therefore, it becomes the main
data source in this study.
The cost studied in this paper is restricted in the
scope of product cost, which is defined as the cost
needed to manufacture an automobile. Thus,
marketing or sales cost is not taken into account.
For this reason, gross profit margin can not be used
and the concept of product cost ratio is introduced
to correlate product cost with its retail price. The
product cost ratio is defined in following formula.
Retail price = Product cost*(1+ Product cost ratio)
(1)
B. Cost Estimation with Delphi Method
Delphi method is developed by Rand Corporation.
The Delphi method [7] is a kind of method that
carried out among a panel of geographically
dispersed experts. Although these experts are
separated, they can communicate with each other
anonymously through the “facilitator” who is in
charge of sending out the questionnaires to the
experts, collecting the answers and analyzing them,
offering feedbacks to the experts to refine their
work. There may be several rounds of “ask and
answer” before a stable analysis could be
conducted. This technique allows experts to deal
systematically with a complex problem or task and
it can overcome the disadvantages of conventional
committee action.
C. Statistical Analysis of the Automobile Cost
When all the cost data and specifications are
obtained, the cost data will be sorted according to
different values of the attribute to be studied. For
instance, if the designer wants to study how the
front suspension will affect the product cost, he can
classify the automobiles into several categories on
their front suspension type. Then the mean value
and standard deviation of each category is
calculated. The histogram for product cost is also
plotted to demonstrate the characteristic of each
category. The probability distribution is judged
from the histogram and hypothesis testing is carried
out to prove whether the distribution assumption is
correct or not. Then the different designs’
probability to reduce the cost to a predetermined
value can be calculated. Such statistical
information can help the designer choose the
attribute value which is better for the cost
reduction.
D. Tear Down technique for cost reduction
Tear Down technique is a kind of Value
Engineering (VE) technology developed by the
Yoshihiko Sato of the ISUZU automobile company
of Japan [8]. Tear Down technique originates from
VE and develops in the context of Japanese
automobile industry. It is similar to Bench Marking
(BM) but more detailed and practical than BM. The
philosophy of Tear Down technique is to compare
every detail of product/design with that of the
competitors, find the differences and thereby
improve the product/design. The process of Tear
Down method is illustrated in Figure 2. Tear Down
technique is widely adopted by the Japanese
automobile industry and it is one of the most useful
tools to help Japanese automakers to reduce cost
and keep profitable.
Figure 2. The process of Tear Down technique
IV. APPLICATION IN AN AUTOMOBILE
COMPANY
The method proposed in this study can be
implemented during design stage. It offers the
designers a tool to evaluate different designs and
choose the cost saving one.
H company is a private automaker in China whose
products are mainly economical sedans with
relatively low prices. In order to enter the middle-
end market, H is developing a new sedan and the
method in this study is employed to analyse the
cost consequences of different designs.
After collecting prices and specifications of
automobiles from the website, eight experts are
chosen to form a panel for estimating the product
cost ratio of automakers. In order to increase the
estimation precision, in the second round, extra
information besides the answers of first round is
offered to aid their judgments. Such extra
information, which includes the profiles of the
companies, their production capacities, market
shares, government policies and so on, is all
gathered through public sources like company’s
annual report, newspaper and website. After 5
rounds, the replies stabilize to the pre-set level.
With the product cost ratio, the product cost of
each kind of sedan can then be easily calculated
backward with the equation (1). In this study, the
front suspension is taken as an example to show
how statistical and Tear Down technique is used to
control product cost. The designer put forward two
choices for the front suspension - MacPherson Strut
and double wishbone suspension. The product costs
of sedans in the market with these two front
suspensions are analysed with mean values,
standard deviation and histogram. The mean value
of product costs with double wishbone suspension
is 24.38, and the standard deviation is 5.72. On the
other hand, the mean value of product costs with
MacPherson Strut is 17.45, and the standard
deviation is 7.1. The shape of the probability
distribution for product costs with MacPherson
Strut is similar to that of a Uniform distribution,
while the shape of the probability distribution for
product costs with double wishbone suspension is
similar to that of a Normal distribution. However,
since the target cost of the new sedan is below 10,
there is no need for further study of the two
probability distributions. It can be inferred from the
figures that MacPherson Strut has larger
probability to realize the design target. But for
those designs whose probability to reduce cost is
not so obvious, the probability density funcion can
not be skipped over.
Then the Tear Down technique is applied to the
MacPherson Strut suspension and it is broken up
into over 55 components. Four competitors’ sedans
are chosen to compare with H’s products. Those
competitors have lower cost than H’s target cost.
Each component is compared in material, weight,
manufacturing process, quality and so on. The
reasons for the differences are listed out and the
corresponding measures are taken. This method is
proven to be a success in H company and reduces
over 7% of the product cost compared with original
target cost.
Figure 3. Histogram for double wishbone suspension
Figure 4. Histogram for MacPherson Strut
V. CONCLUSION
This study proposes a cost reduction method which
can be implemented at the design stage of
automobile. It overcomes the drawbacks caused by
the confidentiality of cost data and employs the
data from website and Delphi method to estimate
the product cost. Then the different designs are
evaluated with the statistical method. The design
which has larger probability to reduce the product
cost is thereby chosen. To realize the cost reduction
target, the Tear Down technique is employed. In
future study, the Quality Function Deployment
(QFD) should be introduced into the statistical
analysis and the balance between the cost and
quality should also be considered.
ACKNOWLEDGMENT
The authors gratefully acknowledge the editors and
the anonymous reviewers for their valuable
comments and suggestions. This research is
supported by the National Natural Science
Foundation of China (NSFC) under the project
50821003.
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