Procurement Transformation Blog

Procurement Transformation Blog

Opinions expressed on this blog reflect the writer’s views and not the position of the Capgemini Group

Value Engineering & Procurement – how to reveal significant cost saving potentials

Ever shorter development and product lifecycles require even faster and more targeted decisions from procurement organizations. Especially under difficult economic conditions, procurement is required to intensify its differentiated communication with suppliers, service providers and professionals within the own company.

Hence, the Value Engineering approach is becoming increasingly important by enabling companies to sustainably influence costs ideally at a very early stage. At the same time, quality, reliability and marketability of the goods produced are not adversely affected. By deploying the Value Engineering approach, the procurement department extends its possibilities to implement not only effective short-term optimization levers, but also medium and long-term measures.

Within Value Engineering projects, procurement departments and their decision makers have to face the challenges resulting from previously untouched business processes, particularly in departments such as production and technical product design. These processes have to be redesigned and improved. Throughout these projects, procurement decision makers gradually evolve to become process designers and facilitators within value chains. This applies to the participation in development projects as well as to the improvement of existing materials or purchased parts involving engineering.

Successful Value Engineering operations moreover require the right organizational set up. The objectives of effectiveness and impartiality are central to the design of the organizational set up. Another key success factor lies in the access to resources. Binding definitions who and which departments are enabled or allowed to influence procurement decisions as well as decisions made by development, product design and manufacturing, have to be in place.

An optimum degree of efficiency is achieved when recommendations are based on the fulfillment of the corporate objectives. In order to prevent conflicts of interest, the Value Engineering function should be allocated within the top management, but be at least on the second level of management.

Successful Value Engineering is an approach that requires cross-functional teams. These teams should consist of experts from procurement as well as from R&D, production, quality assurance, controlling, technical planning and finance as well as marketing or sales. Not infrequently, it is also advisable to involve suppliers right from the beginning.

Most often, significant potential savings justify the implementation costs for value engineering projects. Ideally, the savings can be achieved quickly and the costs do not exceed the expected benefits during the first year of the implementation. Of course there are also additional drivers to initiate Value Engineering projects. For example, the objective could be to reduce the existing supplier dependency, as the starting point for a Value Engineering project.

Within the cross functional teams, different skills must be available in order to initiate and conduct a Value Engineering project successfully. In particular, technical, commercial and analytical skills, as well as soft skills such as assertiveness, teamwork, presentation and negotiation skills are required. In addition, detailed product knowledge and manufacturing know how, as well as a strong knowledge in the global procurement markets is needed. A compelling factor for success is decision making authority. To develop and implement saving opportunities, the Value Engineering team requires access to resources and the ability to influence decisions mainly in procurement, research & development, product design and production.

A Value Engineering initiative very often begins with a concrete overall cost reduction target. The target development is normally based on top-down targets in terms of e.g. market prices and/or bottom-up targets defined within the target costing. These overall targets are broken down to departments and individual employees. Targets and the achievement of the objectives are very often tracked and controlled by group controlling where all initiatives to optimize costs are consolidated and communicated to the management.

As already mentioned, the supplier is an important interface within Value Engineering initiatives. Therefore, suppliers are very often integrated in these projects by conducting supplier workshops. Supplier workshops serve the common development of strategies for raising the potential identified. They normally follow a modular multi-step procedure. When selecting products and suppliers to be included in a value engineering project, there are a number of causes and drivers or analysis tools to identify a need for action:

  • ABC analysis related to purchasing volume
  • Definition of strategic products under annual plan
  • Requirements from different departments, e.g. sales, production, R & D
  • Customers that require further price decreases 
  • Price demands of suppliers
  • Design alternatives: products are adapted regularly due to market changes, such as new materials, and possible cost reductions are examined
  • Results of a make-or-buy analysis
  • Competitive comparisons
  • Gap to Target

This contradicts often with reasons which can make it difficult to carry out a project such as the market power of the supplier or difficult access to supplier expertise and information. Accordingly, it is important to invest sufficient time into the preparation of supplier workshops. The expected value for both sides has to be shown and communicated in a very structured way. Even a monopolist can benefit as long as the total gain of the project minus project cost results in an increased gain. For the company itself the project is a worthwhile investment if the cost of the product after the change plus cost for adaptation is lower than before.

Value Engineering projects require sound economic, commercial and technical information. This information can be obtained from different sources. Regarding suppliers, a lot of information is available within annual and supplier audit reports. In addition, commodity or technology specific portals, benchmarks or purchase prices from alternative suppliers as well as from customers can be leveraged.

The workshop planning is executed by cost analysts that are supported by specialized departments such as procurement for specific purposes, for instance for communication towards suppliers.

In the team, aspects such as objectives and goals of the workshop, supplier selection and advantages for the supplier should be prepared up front. Similarly, a team structure has to be decided upon. Usually, the workshop team consists of procurement specialists, e.g. commodity management, and cost analysts, supported by product design and engineering specialists. Furthermore, the team can be extended if needed depending on the respective workshop objective. Controlling should be integrated in any case to reach a high degree of documentation of the changes. Depending on the product or part, the sales department should be involved as well.

The workshop regularly contains the following modules:

  • Introduction 
  • Visit of the production facility of the supplier
  • Open run brainstorming / improvement discussion 
  • Idea finding and documentation
  • Check feasibility
  • Adjust previous cost analysis with new findings
  • Presentation of analysis results with respect to the potential savings
  • Review ideas and implementation planning
  • Set responsibilities for implementing the savings
  • Price negotiation with regard to the potential / calculation deviations
  • Clarification of further procedures and next steps

An exemplary result of such workshops is shown in the figure below in excerpts.

Following a consistent and structured activity tracking is imperative. The project team should adequately plan project management capacity even after the Supplier Workshop has taken place.

Looking at the acceptance of the Value Engineering in total, the early communication of the results obtained in terms of a successful external presentation and the creation of acceptance should also be ensured by procurement.

About the author

Christian Michalak
Christian Michalak
Christian Michalak is Head of Procurement Transformation DACH. He has got 15 years of consulting experience in the field of procurement. He worked within various industries and is expert in supplier-& material group management, analysis and redesign of procurement operating models and performance management.

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