Cost management and modular product design strategies

This chapter discusses the use of product modularity for cost management purposes. We consider the context of firms offering a wide assortment of end products to their customers and which need to manage their costs to be able to offer such diversity efficiently. For example, German car manufacturers sell many different car models and individual configurations to customers, and managing the costs of that diversity is a big challenge. Modular design of products is a key approach they employ to be able to utilize economies of scale in development, purchasing, and manufacturing. 1 As we will discuss in the following section, modularity essentially involves mechanisms for coordinating technical design decisions across a large portfolio of products, with the aim of reducing the total costs and maximizing the total profit of that portfolio. Thus, it goes beyond target costing, which typically focuses on costs within the scope of only one product.