Wired for value

Jeremy Kirsten, 16 January 2014, Supplymanagement.com

Value engineering is growing in importance in New Zealand as the drive for reduced cost and greater functionality intensifies – and famed Kiwi adaptability is essential, writes Jeremy Kirsten.

Let’s start with a definition. ‘Value engineering’ (VE) is a systematic method to improve the ‘value’ of goods or products and services. Value chain analysis, in my view, is looking at stages of a process like manufacturing, design and even logistics and procurement, and asking: “are all steps a value add?” The follow-on becomes, if it is not adding value, eliminate it.

Looking at it solely from a cost perspective, not all cost is bad and it follows that not all cost is value adding. An appraisal looks at costs (or efforts) and subjects them to a test, the outcome of which is whether or not it is adding value.

Let’s assume that the cost is determined not to be a value add so steps can be taken to engineer it out. For example, take a look at value engineering in a manufacturing environment. If we examine a supply chain, we may see that goods are staying in storage for a specified number of days yet we learn that two of those days is a cost that is not adding value to getting the products to our customers in the right time (or arriving late as the case may be).

Should this be the case, and the extra storage is a non-value adding cost then action needs to be taken.

Our initial definition further suggests that value is gained by increasing or improving ‘function’ – a simplistic way of looking at this is to strive to get more for less. Not so long ago in New Zealand and across Australasia, there was a drive to pitch suppliers against each other in bidding wars. This caused suppliers to cut their margins to the bone to win the order. Thank goodness we have moved on.

There are many ways of cost-cutting and increasing function. One of the ways is to approach our suppliers to help. I believe that the ‘us and them’ type of relationship belongs in the past. Our suppliers are an ideal place to look for value engineering action plans. There are probably many instances where savings gained can be shared between the parties. Sourcing events can also bring about many value add opportunities by building these expectations into the scope of the sourcing process. It invites initiatives from vendors in a sourcing process that can set their proposal ahead of someone who has not demonstrated the ability to provide value adds in their proposition.

Increasing ‘function’ is an ideal path to follow if you’re looking for increased revenue. It will, of course, also help if your customers’ needs are being properly met with an increased functional capability. Now, increased function may not be something a customer needs or wants. But if we are able to cut down manufacturing costs as a result of our plant machinery increasing production, and as long as this is quicker, cheaper and prone to fewer breakdowns, then the increased function option is something to look very closely at from a value engineering perspective.

A common platform

Let me share some examples of value added engineering I have been involved in. The first was a business process that migrated from a paper-based to an electronic form process. It was plain that this was an improvement – even on the most basic level of paper forms no longer going missing. Essentially, what the transition did was provide a common platform that all stakeholders bought into, in terms of format and authority levels – a huge plus that allowed a clear monetary value to be established.

A second related to free product training from our suppliers’ qualified engineers and the waste disposal of disused product. These were two categories of maintenance, repair and operation products so the value add was essentially free training by qualified engineering specialists on the use and application of their products as well as root cause analysis and stoppage management. The benefits were spread over multiple sites.

We took care to ensure that the training exercises did not degenerate into revenue generating exercises for these contracted vendors. After all, which vendor would resist that opportunity to sell when so many end users are gathered in one room?

Care also needed to be taken to vet the training material to ensure it was appropriate. As well as upfront discussions, we checked this regularly through post-training evaluations to establish whether the information was value adding from a knowledge-gained perspective.

On a similar note, I was involved at one of my previous companies with creating real added value through very focused training on the use and application of business tools. This provided some challenges in terms of value realisation. During the implementation and roll-out phase of the software, the budget was found to be very limiting in terms of end user training. We needed the training in order to ensure business continuity if the production line failed, which was a distinct possibility. So we paid for the extra training but managed to negotiate a reduced cost. The value add was that while a cost was incurred, there was a specific gain in terms of the cost that was very likely to be incurred had business continuity and specifically production 
been threatened – more specifically for maintenance and shutdown planning.

I agree that this exercise certainly stretches the definition of a value add. But the reality was that the expected cost of the production loss was dire, so averting this was indeed a real value add.

It’s been my experience that the top procurement professionals are always looking to identify new opportunities where value can be engineered. For example, at another company I was involved in evaluating steel fasteners. The opportunity here was created by examining the functional requirement and whether we could use either galvanised or mild steel. It was not a case of being right or wrong but there was a cost differential that was unnecessary.

New Zealanders have an expression that sums up our attitude to value engineering. It’s known as the No 8 Wire Approach, and it relates to a gauge of wire that was used for fencing around our many farms but which could be put to many other uses. It’s become a symbol of Kiwi adaptability, which is an essential quality for problem resolution and the creation of added value.

Value engineering as a concept has been around for some time, but it’s really come to the fore in this day and age where the spotlight is constantly on cost optimisation. Its importance can only increase, the more the squeeze goes onto costs. It is an essential weapon in the arsenal of many professions but particularly in procurement. Removing cost and increasing function goes further than mere cost cutting exercises; much of it has to do with successful stakeholder engagement and management.

Procurement practitioners are not engineers or designers but value engineers. And their enquiring minds and practical approach help identify many opportunities that result in verifiable gains.

Watch out for some very creative solutions 
and value add arenas coming out of New Zealand in 2014.

Value engineering is growing in importance in New Zealand as the drive for reduced cost and greater functionality intensifies – and famed Kiwi adaptability is essential, writes Jeremy Kirsten.