Three Key Steps To Reducing Material Cost For Top-Line Growth

The following explains three key steps for optimizing value analysis/value engineering.

I recently heard the CEO of a printing machine company say, “our machines have more components than a jumbo jet.” This highlights a key manufacturing issue: with more focus on labor cost reduction and cheaper component sourcing due to the economic downturn, the manufacturing complexity of certain products has inadvertently increased as well. It doesn’t look like this dynamic will change in the short term — but there are ways for manufacturers to adapt. One method is value analysis/value engineering (VaVe). The following explains three key steps for optimizing VaVe.

The Goal: Reduce Costs

Traditional cost-saving initiatives include improving labor productivity and sourcing product components where they were cheaper. The latter is important — it usually represents more than 50 percent of the cost structure of a manufacturing company.

However, manufacturers have not yet capitalized on the huge opportunity to reduce material costs simply by addressing the functionality of their products: product redesign can reduce overall material costs up to 15 percent!

The Approach: Product Redesign

The method of VaVe enhances customer value by assuring the same product functionality, but at a lower cost. VaVe helps avoid cost — when applied during the design phase — or reduce cost — when applied after serial production.

However, the success of VaVe depends on its implementation. Experience shows that an overwhelming majority of manufacturers who are already addressing product design through VaVe is using a piecemeal approach, which doesn’t fully capitalize on the opportunity to cut costs and increase top-line growth. By contrast, leaders in VaVe take a broader, more holistic approach that drastically reduces their material costs while meeting customer needs.

An Example of a Successful VaVe Approach:

A five-billion-dollar supplier to oil and gas companies who manufactures valve components had already gone through the usual steps to improve his bottom line before deciding to analyze the design of his 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 75 percent of the valve system’s total costs were secondary functions  — protecting the valve from oxidation, holding the valve in position, housing the valve — and only 25 percent of the costs were associated with its primary function â€” regulating the flow of oil. 

The solution? 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 — while delivering a simpler product. Most of the components were actually eliminated, which enhanced customer value and led to top-line growth. Thus, through a strategic, flexible approach to VaVe, the supplier reduced the material costs associated with manufacturing valve components by 70 percent and increased customer satisfaction by drastically reducing the market price of the valve.

Three Key Steps for Optimizing VaVe

No. 1-Define which products generate the greatest results. 
Start with an overall view of your products and product families, and analyze which should be prioritized for improvement. The success of the first project will keep management and teams motivated to continue the initiative, so make sure 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 the 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.

​​No. 2 - Design a product that performs the essential functions at the lowest cost without sacrificing quality or delivery requirements. 

Be consistent but flexible. Actively challenge basic assumptions throughout the process. Instead of 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?” 

Also, conduct a teardown of competitors’ products to see how the same function can be achieved in different ways.

No.3 - Deploy the redesign strategically. 

This means implementing VaVe workshops and management structures that ensure continuous redesign accountability and sustainability. Don’t take short-cuts or use an overly theoretical approach that won’t create real results. A successful VaVe initiative may require engaging a resource with implementation expertise and/or experience in generating buy-in from senior leadership and front-line employees.

Throughout the process, it’s critical to involve various stakeholders — from suppliers to select customers and engineering and production teams — who can offer various insights. In objective discussions, participants should be challenged to look deeply and broadly for opportunities for improvement. 

Here’s another example: a $10-billion food processing machine manufacturer significantly reduced the cost of a meat processing machine after speaking with customers and performing a product teardown that addressed several design criteria, including serviceability, manufacturability and purchasing. 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. The product design was aligned with customers’ expressed needs. 

The Bottom Line

Manufacturers can decrease their material costs, increase customer value and generate top-line EBITDA (Earnings before Interest, Tax, Depreciation and Amortization) growth through a holistic, collaborative and pragmatic approach to VaVe. In order to stay competitive, VaVe should be performed on a continuous basis; the success of the first few projects is critical to ensuring a workable, sustainable process.

Andreas Doerken is a Senior Vice President – Europe at Argo Consulting.

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