Cost optimisation vs cost reduction
Product cost optimisation means designing a product to hit the right cost from the start, instead of taking cost out after it's on sale. Cost reduction fixes a cost that's already too high. Optimisation stops it getting there, using target costing, design-to-cost reviews and should-cost estimates while the design can still change.
Both use the same method, value analysis and value engineering. The difference is timing, and timing decides how much you can save.
Why it has to start early
About 70–80% of a product's cost is fixed by the time the design is finished, while less than 10% of the money has been spent. Materials, part count, processes and suppliers are chosen on paper long before anything is bought. The exact share is debated, so treat it as a rule of thumb, but the direction isn't in doubt.
So a change made at concept costs a sketch. The same change after tooling costs new tools, new tests and new approvals, and often never pays back. Optimisation puts the cost work where it's cheap.
See the cost curve: why it pays to start early.
Target costing, step by step
Target costing starts from the price the market will pay and works backwards:
- Fix the selling price from the market: what customers will pay, net of VAT and the retailer's or dealer's margin.
- Take off the margin the business needs. What's left is the allowable cost. For example, a car that brings in £29,900 per unit, with a 22% margin, has an allowable cost of £23,322.
- Split the allowable cost across the product's functions or systems, in proportion to how much customers value each one.
- Compare each function's current estimate with its target. The difference is the value gap, and it's where the design team works.
- Close the gaps one change at a time, using function analysis, should-cost and the cost levers.
The one rule you never break (Cooper and Slagmulder): the target cost can never be exceeded. If a feature is added, its cost must be saved somewhere else. If the allowable cost can't be reached with any known design, set an achievable target and record the shortfall openly as a challenge for the next generation, instead of pretending the margin will turn up later.
Free template: target cost cascade (printable and Excel).
Design-to-cost at the gates
Design-to-cost makes cost a design requirement, checked at every project gate like weight or performance:
- Concept gate: a cost target for each system, and the architecture that can meet it.
- Design reviews: a should-cost of every significant part, tracked against its target, with a value engineering workshop on anything over.
- Before tooling: the last cheap moment to change. Any part still over target gets a decision: fix it, accept it and save elsewhere, or escalate.
Practitioners report that design-to-cost targets alone stop 10–20% of the cost creep that otherwise builds up between concept and launch.
The tools that make it practical
- Should-cost software estimates a part's cost from its CAD model before any supplier quotes, so designers see the cost of a choice while they make it.
- Cost tables and cleansheet models give agreed rates for materials, machines and labour, so estimates are comparable across projects.
- Digital teardown libraries show what competitors' parts weigh and cost.
- AI tools help with first estimates, idea generation and spend analysis. They speed up the work but don't replace the checks: every AI estimate still needs a person who understands the cost.
More detail: should-cost software and cost engineering tools.
Running it as a programme
One optimised product helps once. A programme makes it the way every product is designed:
- A rhythm: a target cost on every new project, value engineering at set gates, and value analysis every year on high-volume products already on sale.
- A savings funnel: every idea tracked from suggestion to approved to in production. Only savings that reach production and are checked by finance count.
- A few KPIs: products launched at or under target cost, ideas implemented, and audited savings against the starting cost.
How to set it up: value engineering programme, savings funnel and KPIs.
Frequently asked questions
What is product cost optimisation?
Designing a product so it meets its cost target from the start, using target costing, design-to-cost reviews and should-cost estimates while the design can still change.
What is the difference between cost optimisation and cost reduction?
Cost reduction lowers the cost of a product that already exists. Cost optimisation designs the cost in before the product is made, which is when most of the cost is decided and changes are cheapest.
What is target costing?
A method that starts from the market price, takes off the margin the business needs to get the allowable cost, and then designs the product to meet it. The target cost is never exceeded.
What is design to cost?
Treating cost as a design requirement, with a target for each system that is checked at every project gate, just like weight or performance.
What is the difference between allowable cost and target cost?
The allowable cost comes from the market price minus the required margin. If no known design can reach it, an achievable target cost is set and the shortfall is recorded openly as a challenge for the next generation.