Three key steps to reducing material cost for top-line growth

Friday, November 18, 2016

Sr Vice President – Europe at Argo Consulting,

“Our machines have more components than a Jumbo Jet,” I recently heard the CEO of a printing machine company say.

This statement highlights a key manufacturing issue: the focus on labor cost reduction and cheaper component sourcing throughout the economic downturn has inadvertently increased the manufacturing complexity of certain products. And it would appear that this dynamic will not change in the short term.

Traditional cost-saving initiatives have concentrated on improving labor productivity and sourcing product components where they were cheaper. The latter is important, because it usually represents more than 50 percent of the cost structure of a manufacturing company. However, manufacturers have not addressed the actual design of their products. Manufacturers have a huge opportunity to address the functionality of their products, thereby reducing material costs through the redesign of the components.  Product redesign can reduce overall material costs up to 15 percent.

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).  Applying VaVe to a product redesign enhances customer value by assuring the same product functionality at a lower cost.

Experience shows, however, that for those manufacturers who are already addressing the role of product design through VaVe, an overwhelming majority is using a piecemeal approach that doesn’t fully capitalize on the opportunity to cut costs and increase top-line growth.

Leaders in VaVe take a broader, more holistic approach that drastically reduces their material costs while meeting customer needs.

Here’s one example. A five-billion-dollar supplier to oil and gas companies who manufactures valve components had already taken 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 (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 therefore the associated costs — while delivering a simpler product. Most of the components were actually eliminated, enhancing customer value and leading to top-line growth.

By taking 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

 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 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.
 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. 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. This means implementing VaVe workshops and implementing 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, including suppliers, select customers, and engineering and production teams who can offer different insights. 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.

The bottom line

By taking a holistic, collaborative and pragmatic approach to Va/Ve, manufacturers can decrease their material costs and simultaneously increase customer value. This translates to top-line EBITDA (Earnings before Interest, Tax, Depreciation and Amortization) 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. This may mean investing in resources to ensure success at the onset, and then transferring the capability internally.