The two levers already in use to a wide extent in the companies are operational excellence and sourcing and procurement. We use lean, we measure OEE (Overall Equipment Effectiveness), we use Six Sigma, supply chain optimisation, etc. And we utilise category management, supplier optimisation, supplier negotiations, sourcing compliance, etc. All very good. All necessary. All effective.
It’s just that these initiatives never rarely question the actual product. Unfortunately, this is often regarded as a constant. What would happen if you started to ask ourselves if we could produce the product differently? Or if we allowed ourselves to ask if it is even the right product we produce? What would happen if we imagined a product which was optimised for the desired purpose as early as from the design phase, and which per definition enabled cheaper sourcing and cheaper and better production?
This is called value engineering. The value in value engineering can either be generated by enabling the product to provide improved functionality at the same cost or by maintaining the current functionality at a lower cost. It is by no means a new concept, but it is used far too little if you ask me. Our experience shows that you will typically gain savings of 10-20% and payback horizons of less than 12 months when executing well-designed value engineering initiatives such as Robust Design.
Yet, we rarely see value engineering and Robust Design used consistently by our clients. The question is why.
Originally published in Børsen Ledelse.
Why is value engineering not more common?
Our experience shows that there are three main reasons that companies do not use value engineering more frequently to optimise product profitability:
- Inability to challenge current product design
The CEO may not even be aware of the potential of value engineering and Robust Design. He has probably already asked the company’s Head of R&D whether the products are designed optimally. What do you think the answer will be? The poor CEO simply does not have metrics to evaluate the product design, and he cannot do much more about it than ask R&D if they have done their best. However, the competence gap is not only managerial. It is also technical. If you give two development engineers the same product development task, you will probably end up with two different solutions, and both parties will insist that their solution is the optimal. They can’t both be right! The quality of a design is often evaluated on the basis of relatively subjective parameters and gut feeling, but it doesn’t have to be that way. My recommendation is to find an objective third party with the competences and tools to solve this dilemma.
- Lack of accountability
Another barrier for the use of value engineering is of a structural nature. Initiatives for value engineering do not belong naturally to one or the other department, and perhaps this is why the initiatives sometimes fall flat. Who in your organisation is really responsible for cutting product costs using value engineering? And I mean really! How do you measure the effect of the value engineering initiatives? Where is the plan?
I am a management consultant. I have no problem selling lean and Six Sigma to the client’s production department. I have no problem selling services regarding R&D process optimisation to the R&D department. I have no problem selling category management services to the CPO.
However, it is far more challenging to create any interest in value engineering and Robust Design. Because no-one thinks it is their responsibility. It is easy to get them to acknowledge the potential in the company. But it is impossible to get anyone to do anything about it. Because it is not their job!
- Incentives are counterproductive
This leads me to the third barrier: Incentives. You get what you measure and reward. As long as you measure R&D on product introductions, lead times, budgets, etc., you won’t be able to make your department take much interest in value engineering. As long as the production department is only measured on process metrics (yield, OEE, etc.), they won’t care much either. And so it continues throughout the company. Each silo is measured on its own performance, but that needs to change. It is essential to introduce metrics which are cross-functional and shared to overcome a problem which is inherently cross-functional and shared.
It is self-evident that this is a cross-functional challenge, which is why the responsibility for doing something about it also begins with the CEO.
How do you get started?
Dear CEO, I would recommend that you do the following:
- Establish the potential
What is the potential of value engineering in your company? The first thing should be to define your baseline! Carry out a structured review of your current product portfolio. And how do you do that, you may ask. Ask someone without a vested interest in your product to assist in the initial screening of the technical aspects of the portfolio. You need to have someone on your side who is not biased towards the perfection of the current designs.
- Set targets
As soon as you have a baseline, it is relatively easy to set the targets. You will be (positively) surprised by the potential identified in step one, and it is tempting to set overly optimistic ambitions. But remember that you will have to allocate resources and not just in R&D. This is a cross-functional challenge, which requires allocation of resources in Procurement, Production and Quality and perhaps also in Sales. That should not stop you, but it is necessary to have realistic ambitions.
It is critical to overcome the organisational barriers previously mentioned. It is in other words essential that someone actually has the responsibility for the targets you have defined. This means that someone needs to have the mandate and the resources necessary to get the job done. It is your job as CEO to establish the prerequisites for success, so it is up to you to establish the KPIs and the governance structure for these initiatives.
Dear CEO: I would claim that you have a blind spot when it comes to the optimisation of your business. I would also claim that there is a massive untapped potential in your business. The responsibility for doing something about it unfortunately lies with you, but I promise you that you will not regret it. Good luck!
Originally published in Børsen Ledelse.