Three Key Steps To Reducing Material Costs For Top-Line Growth
“Our machines have more components than a Jumbo Jet,” said the CEO of a printer manufacturer in Europe.
It’s a common refrain from manufacturers around the globe. Their products are complex; margins are thin. Throughout the economic downturn, traditional cost-cutting initiatives have focused on improving labor productivity and sourcing product components from low-cost countries — a critical exercise, as sourcing can represent more than 50 percent of the cost structure of a company.
However, manufacturers have a huge opportunity to address the functionality of their products while simultaneously reducing material costs through a holistic, collaborative and pragmatic redesign process. The potential savings can be in the range of 15 percent of overall material costs.
Value analysis/value engineering (VaVe) is a method to avoid cost (when applied during the design phase) or to reduce cost (when applied after serial production) that enhances customer value by providing the same primary product functions at a lower cost through product redesign.
For manufacturers already using VaVe to address the role of product design, the overwhelming majority takes a piecemeal approach that doesn’t fully capitalize on the opportunity to cut costs and increase top-line growth.
In contrast, leaders in VaVe take a broader, holistic approach that drastically reduces their material costs while meeting customer needs.
Here’s one example. A $5 billion supplier to oil and gas companies that manufactures items such as valve components had already taken the usual steps to improve its bottom line before deciding to analyze the design of its valves.
A traditional VaVe process would have involved reviewing each valve component, describing its function and reducing its material content if possible. Instead, the supplier looked at the product holistically and found that the valve system's secondary functions (protecting the valve from oxidation, holding the valve in position, housing the valve) contributed to more than 75 percent of its total costs. Only 25 percent of costs were associated to its primary function (regulating the flow of oil).
The company designed a completely new intra-tube system, with the valve now housed inside the pipe. This eliminated the need for the secondary functions — and the associated costs of producing the necessary components to deliver them — while resulting in a simpler product less prone to damage, enhancing customer value and leading to top-line growth.
By taking a strategic, flexible approach to value analysis/value engineering, the supplier reduced the material costs associated with manufacturing valve components by 70 percent — and increased customer satisfaction by drastically reducing the valve’s market price.
Three Key Steps to Optimize Value Analysis/Value Engineering
VaVe initiatives should be holistic, collaborative and pragmatic to continuously optimize cost savings and increase value, with three key steps:
1. Define which products will generate the greatest results. Begin with an overall view of your products/product families and analyze which should be prioritized for improvement. The success of the first project will keep management and teams motivated to continue and sustain the initiative, so make sure stretch goals are clearly defined and understood.
As part of this definition process, conduct a supply chain analysis and establish process capabilities. Fine-tune data analysis with internal strategy to align stakeholders' objectives. The goal may not only be a reduction in material costs but also an improvement in functionality, faster delivery time, better vertical integration and other aspects that will have an impact on top-line growth.
2. Design a product that performs the essential functions at the lowest cost without sacrificing quality or delivery requirements.
Be consistent but flexible, actively challenging basic assumptions throughout the process. Rather than asking, "Can we produce this component using less plastic?", ask: "Is there a completely different way to achieve the product's primary function and improve customer satisfaction, while delivering the secondary function using the same or different components? Are all of these functions necessary?" Conduct a teardown of competitors' products to see how the same function can be achieved in different ways.
3. Deploy the redesign strategically. That means implementing not just ad-hoc VaVe workshops, but a management structure that ensures continuous redesign accountability and sustainability. Don't take short-cuts or use an overly theoretical approach that won't create real results in the end. A successful VaVe initiative may require engaging a resource with implementation expertise and experience in generating buy-in from senior leadership and front-line employees.
Throughout the process, it's critical to involve various stakeholders (including suppliers, select customers, engineering and production teams) who can offer different insights and ideas. These should be objective discussions, with participants challenged to look deeply and broadly for opportunities for improvement.
For example, a $10 billion food processing machine manufacturer was able to significantly reduce the overall cost of a meat processing machine after speaking with customers and performing a consistent product teardown that addressed several design criteria, including serviceability, manufacturability and purchasing.
The product design was aligned with customers' expressed needs. By eliminating, combining and transferring functions that weren't critical to customers and reducing the number of components, the manufacturer reduced the overall cost of the machine by 20 percent, and reduced delivery lead-time by 12 percent.
By taking a holistic, collaborative and pragmatic approach to value analysis/value engineering, manufacturers can decrease their material costs and simultaneously increase customer value, translating to top-line Ebitda growth.
VaVe should be performed on a continuous basis to stay competitive, and the success of the first few projects is critical to ensuring a workable, sustainable process. That may mean investing in resources to ensure success at the onset, and then transferring the capability internally.