Value Engineering: An advanced and collaborative cost reduction approach

With short-term business targets under increasing prolonged cost pressures, companies now often focus on the savings realized through negotiations with incumbent suppliers and competitive tendering.

Over the last decade, this approach has enabled businesses to swiftly capture the low hanging fruit. However, now that the commercial levers have already been implemented, CPOs are cautious to commit to ambitious commercial savings targets. Instead, their focus has shifted to advanced cost reduction and value creation levers. 

Out with the old, in with Value Engineering 

A key method to achieve this is through Value Engineering (VE). VE is the process to optimize the value of a particular product or service in line with customer expectations and regulatory requirements. Leading organizations have fully embedded this activity within their operating models under set targets, both internally and externally. A successful VE activity requires a mature, cross-functional collaboration within the organization – and for best results, suppliers. 

How to approach Value Engineering

The usual approach to develop and capture a sustainable long-term pipeline of opportunities through VE is built around three themes:

1. Provide a systematic approach to improve value by evaluating trade-offs between features and cost
2. Promote substitution of materials and methods with cheaper alternatives to satisfy the product’s performance requirements at the lowest cost
3. Deploy cross-functional teams to identify and evaluate opportunities holistically

Complementary methodologies are then used to scrutinise data and highlight the links between costs, performance and value before organizing supplier workshops or product teardowns. Examples of such methodologies include: Specification Review, Linear Performance Pricing (LPP), Design for Manufacture & Assembly (DFMA), Should Cost and Benchmarking.

When implemented effectively, Value Engineering can unlock a number of benefits across the scope of the business.  

Commercial benefits

A well-orchestrated VE activity applied at the right time can deliver up to 30% - 40% cost improvement. The cost reduction depends on the stage of product life-cycle and the spend category it is applied to. Although an initial reaction is that VE activity is more appropriate for engineered products - most successful implementations involve various direct and indirect categories.

However, the commercial benefits realization won’t be immediate; it usually happens on an on-going basis and feeds into category management, sourcing and SRM activities.

Organizational benefits

Beyond the cost optimization benefit, VE can stimulate improved internal stakeholder engagement and supplier relationships. Internally, due to the cross-functional nature of the activity, collaboration is enhanced between different business functions. From an external point of view, VE activity acts as a catalyst to shift the supplier relationships from a pure commercial or transactional level to a strategic collaborative level. Ultimately, the activity supports a healthier supply base since the VE focuses on mutual benefits rather than cutting down suppliers’ profit margins.

Three essential success drivers

Through the wealth of experience we’ve gained over the last 20 years from global client projects, we’ve pinpointed three essential success drivers: 

1. Scope and target setting: Successful VE activity needs to start with setting the right scope, where the impact can be high and more feasible. Based on the scope, leading practices can adopt an overall VE target to set for the involved stakeholders to generate benefits. 
2. Shared commitment: In successful organizations, the procurement function often leads the VE activity. However, this is not adequate to achieve the results since activity requires cross-functional collaboration from R&D, Production Engineering, Quality and Manufacturing departments. Before the kick-off, a shared commitment should be reached between the heads of departments, which should then be cascaded down to their teams.
3. Incentivization: Ideas are the inputs for any VE activity. The ideas could be generated internally by the cross-functional teams, as well as externally by the suppliers in scope. To maintain a robust idea inflow, establish an incentivization scheme. Gainsharing with the suppliers is the most common, by which the idea is generated by the supplier. For an internally sourced idea, companies could adopt a bonus scheme in addition to performance review objectives.