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a p p l i c a t i o n n o t e

Reducing Cost of Goods Sold (COGS)

Company: Fortune 100 Industrial Equipment OEM

Location: Midwestern United States
Implemented: 2003

project objective

This project was initiated by the Company to assess aPriori’s direct impact on reducing

Cost of Goods Sold (COGS). The ultimate goal was to assess the hard savings, both

quantifiable and verifiable, that aPriori could deliver if implemented at a project,

product, or program level.

w w w . a p r i o r i . c o m
a p p l i c a t i o n n o t e

Reducing Cost of Goods Sold (COGS)

Results of traditional post-production cost reduction exercise.

project descr iption Result:

Cost knowledge before it matters
The Company had introduced to the market a newer version of
a $1 billion product line, and was experiencing significant profit As a result of this exercise, using aPriori the Company was able
loss because the product costs exceeded the Company’s projected to estimate the amount of savings they could have netted
cost target. As is common practice after a product has been had they been able to make these cost-saving changes before
delivered to the market, the Company initiated extensive the manufacturing process commenced. By this Company’s
post-launch cost reduction activities. For a period of the next
estimation, had aPriori been implemented at the beginning of
three years, the Company’s design engineers, manufacturing
the product program, they could have saved more than $18
engineers, and procurement professionals diligently generated
million by identifying upfront which parts and assemblies
and implemented cost reduction initiatives, sacrificing new
exceeded cost targets prior to the product launch. The
product designs. The project’s case team collected data which
Company’s Chief Information Officer stated that when used
showed the incremental savings by year during the 3-year
cost reduction exercise is shown in the table above. At the at a corporate level, aPriori could effectively reduce COGS by a
end of production year 3, the Company’s cost reduction team minimum of 1%, equating to a savings of $136 million annu-
had reduced the annual COGS on the income statement by ally, which in turn would provide an 11% increase to the
$17.9 million—a huge savings when compared to the COGS Company’s net income.
at the time of product launch. However, during the 3-year
hiatus that the company was preoccupied with implementing
cost-saving revisions to the product design, production strategy,
and supply chain, the company realized a loss of $31 million due
200 Baker Avenue
to its inability to remain competitive with new product offerings.
Concord, MA 01742
Tel: 978-371-2006
Fax: 978-371-2008
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