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Randall S. Newton,
March 24, 2008
Manufacturing
firms have an average Cost of Goods Sold (COGS) of between 70% and 90%.
Medical device makers (50%) and automobile manufacturers (95%) are at
the extremes. The overall industry average for manufacturing profit runs
between 5% and 8%. If a manufacturer can save 1% on COGS, the impact on
net profit can be a boost of 10% or more.
aPriori co-founder Eric Hiller
Thinking about costs and profits seemed to be more interesting than
design to Eric Hiller, a graduate student in mechanical engineering at
the University of Illinois. While he was there, nearby manufacturer John
Deere released a product that was 30% over projected cost. Armed with a
National Science Foundation grant and the help of a supportive faculty
member, Hiller pitched the idea of researching how to use CAD geometry
as a proxy for the part to analyze costs. Eight months of work led to a
technology that impressed John Deere enough to fund continued
development.
Hiller moved on to the Harvard Business School, to continue
researching the design issues surrounding COGS. John Deere wanted to
continue to use the technology Hiller created while at the U of I, but
they “wanted more technical support than two grad students could
provide,” Hiller says. He won a business competition based on the idea,
attracted venture capital, and launched a company with fellow grad
student Sebastian Schrader and U of I faculty member Dr. Michael
Philpott. Today aPriori is
racking up success stories with Fortune 1000 manufacturers and growing
at what it says is a rapid rate; as a private firm with venture capital
(Bain Capital, Sigma Capital) it is keeping mum about its numbers.
Bringing the Fourth "F" to Engineering
Hiller loves to talk about some of their first customers. Using
aPriori a design engineer at a Fortune 100 Industrial Equipment OEM was
able to produce a redesign with 37% less stress than the old design and
a much higher resonant frequency. He predicted redesign costs per unit
to be $17.75. Months later when the design was in production, the
manufacturing engineering team calculated the factory-routed cost at
$19.75 per unit -- a number substantially below management’s cost target
of $25 per machine.
The aPriori process (Click to enlarge image)
With an annual production volume of 6000 units and a four-year
production life, the company saved $150,000 as a result of this single
redesign. At the same time, the changes resolved a potentially serious
customer satisfaction problem that had already incurred thousands of
dollars in annual warranty expenses.
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