Maximizing Manufacturing Margins with Value Engineering

Manufacturers large and small all hope to achieve the same thing: manufacture more products, with higher margins. Of course, in order to build a lasting business, you need to keep customers satisfied, meaning the quality of products must remain high when you make moves to reduce costs. The best way to reduce costs and improve processes without diminishing the quality of your product is through a process called Value Engineering.

Value Engineering is a process used by companies across the globe to ensure product functionality is maximized while costs are minimized. By incorporating Value Engineering into your product development process, you’ll reduce costs, increase margins, and establish a smarter way to determine which new products justify the investment to bring them to market.

FortéOne has been helping middle market companies conduct a value analysis and implement Value Engineering in their organizations for 20 years. By leveraging the experience of our people, who have installed Value Engineering in companies across many industries, we have developed a four-step process for incorporating Value Engineering into middle market organizations that avoids the most common challenges companies face during its implementation. Explained below are the lessons we have learned.

What is Value Engineering?

Value Engineering starts with product value. Product value is the ratio of product function to product cost (including the purchase of raw materials and packaging, logistics and shipping costs, overhead and manpower, and line efficiency). Product function is the work a product is designed to perform. For instance, the function of a shelving bracket is to hold up the shelf while looking aesthetically pleasing. While your product may be able to do more than its original function, it’s important to zero in on what it needs to accomplish in order to sell.

To increase your product value, you either need to increase the product’s function (driving up the price) or decrease the cost to manufacture it. Value Engineering refers to a set of processes and methodologies for increasing the product value as it’s being developed whereas Value Analysis describes these same processes applied to an existing product. Together, these disciplines are referred to as VA/VE.

VA/VE is the process of making cost-saving changes to the product design, raw materials used, and manufacturing processes that don’t reduce product quality or functionality. Ideally a company would invest in Value Engineering that takes place during the initial product design process. In fact, many organizations use this process to make decisions on material sourcing, manufacturing processes, and to determine which new products are ready for launch. But if the product has already launched, and Value Engineering was not employed in the design, running a value analysis will still allow you deliver more for less. And by producing more with less, you add value for your company and your end user.

Value Engineering in the Middle Market

Many middle market manufacturing companies aren’t aware of the Value Engineering process or don’t have the manpower to make it part of their day-to-day operations. In many cases, their engineers and product designers have not been exposed to VA/VE processes or training. But Value Engineering is a necessary part of the product development processes to ensure your business remains competitive.

Value Engineering also helps you bring manufacturing processes back to the United States. It has historically been considered “cheaper” to outsource manufacturing processes to Mexico, China, and India. But with Value Engineering and some basic automation, it if often more cost-effective to manufacture products domestically, which has the added benefit of faster response to changes in demand.= Keeping manufacturing processes close to home is also beneficial in the event of a recession, a global pandemic, or any international issue that disrupts supply—as it allows you to be more agile.

The good news is, conducting a value analysis or incorporating Value Engineering isn’t a huge investment. Here are the four areas you should be looking at during the process as well as the  step-by-step process for VA/VE.

The four components of Value Engineering

One of the ways to increase product value is to reduce the costs associated with manufacturing and delivering a product. This requires you to examine four things: product design, raw materials, processes, and your bookkeeping. Whether you’re working on a new design or analyzing an old one, here’s where to start.

Optimize the design

The most substantial way to bring costs down is to optimize the design of the product. When engineers are designing a product, they often do not have insight into component costs, so costs are not a consideration. However, it’s important for your team to analyze the initial design to determine if it can be simplified, designed to be manufactured in a more economical way, or if there are any components that aren’t necessary. By removing any component that doesn’t directly serve the product’s function, you’ll save on manufacturing costs and raw material purchases.

Find cost-efficient materials

The second biggest lever for cost reduction is to examine the materials used to manufacture the product. Just remember, the goal is to lower the material costs without sacrificing product quality, so the objective is not to cut corners. As long as the product function isn’t affected, material swaps are a great way to increase your margins. For example, you may find that you can substitute ferritic stainless steel for austenitic stainless steel or use steel that is pre-galvanized to cut costs.

Know your costs

When working with middle market companies, FortéOne first looks at the company’s assumed product cost. Almost 90 percent of the time, the cost in the system doesn’t match the actual product cost. Too often, guesses are made or processes are altered without noting the cost adjustment and companies are operating under the assumption that their products are much less expensive to manufacture than they really are. If you’re selling a product for $10 and assume it costs $5 to make, the product is delivering a great profit margin. However, if you learn that it actually costs $8 to make, you either need to bring down costs or reconsider if it’s worth your time to manufacture this product—especially if it’s a high-volume item.

FortéOne consultants have helped companies across many industries identify the actual costs related to manufacturing each product. The process involves reviewing market rates to determine pricing, examining in detail the material and component costs, determining actual production rates and spoilage, and then computing overhead and salaries. Once we identify how much it truly costs to produce an item—and what price you can realistically obtain in the market—you’ll have a better understanding of whether the product needs to be redesigned or pulled off the line. But more on this later.

Improve processes

You also need to look carefully at the manufacturing, assembly, packaging, and logistics associated with each product to determine if there are unnecessary steps that can be streamlined, eliminated, or improved. This may include combining roles for operators on the line, increasing production rate, laying out the line in a different way, or incorporating basic automation into the manufacturing process. Even a slight adjustment to the manufacturing process could result in substantial savings for your company.

The VA/VE process at middle market companies

At FortéOne, we have developed a four-step process with our clients that ensures they “learn by doing” and are set up for future success. Though the process can be customized to your organization, the first step is always object selection.

Step 1: Object selection

Before finding ways to increase product value, you need to determine which product is most in need of improvement. You may already have a product in mind, but it’s important to ask a number of questions and run diagnostics to ensure you’re focusing your time and energy on the right product—especially if you’re analyzing a product that is already being manufactured.

Start by looking at the general state of the business. Are you profitable, and are there some products that have been under margin pressure? What are the stressors on the business? Identify your business segments and make a list of all the products within those segments. What are your high-volume products? Are you experiencing the 80/20 rule wherein 80% of sales come from 20% of your business? How do margins look on each of your products?

Much like a medical diagnosis, it’s vital to ask detailed questions during this phase to ensure you are narrowing the product options for the VA/VE analysis. The chosen product needs to have a high enough production volume and ample room for improvement to really move the value needle.

Step 2: Workshop preparation

Once you have selected the product for VA/VE analysis, it’s time to assemble a cross-functional team to be part of the Value Analysis. The team should include representatives from your engineering, procurement, manufacturing, sales, marketing, and customer service teams.

You will also need to establish a detailed scorecard to be used for the functional analysis at the VA/VE workshop. This scorecard is used to record all the details currently associated with the product, as well as the alternated identified throughout the process by the Team. A few weeks prior to the VA/VE workshop, the Value Engineering team lead (frequently an outside consultant) should gather all the sales and marketing data, engineering drawings, material purchase orders, and competitive analysis information from the various team members. They should also spend time on the production floor, filming the manufacturing process to get the clearest picture of what current operations look like across multiple shifts/days. It’s up to this team leader to assemble all the data and information to identify gaps in the process that can be tightened.

Step 3: The VA/VE workshop

During the VA/VE workshop, your interdisciplinary team (sales, manufacturing, marketing, finance, engineering, quality, product development) will gather to complete four tasks: agree on the product’s function, conduct a functional analysis, generate a product redesign hypothesis, and develop a business case.

1. Before conducting a functional analysis, your team needs to determine the order of product functions and agree on the most important. This will be used as the basis for all decisions moving forward.
2. Next, use your scorecard to conduct a functional analysis. Using the data collected, the team lead will walk the team through the product; customers; cost; price; all product components; the cost of each component; and the engineering, manufacturing, and shipping processes to get everyone on the same page. Break down every step of the process to see how actual costs line up with assumed costs. Look at the function of each component in the product and add it to a matrix that sorts critical functions and nice to have functions. Through this process, you should be able to identify a number of problem areas ripe for improvement.
3. Following this analysis, you will generate a product redesign hypothesis. Look at the problem areas on your scorecard and determine where you think you can do more for less. If you had all the time and money in the world, how would you re-engineer the product? Go through each product component and generate ideas for how to improve it. This step should function like a brainstorming session, so list every idea that pops up. At this point, it’s a good idea to step away and take a break, allowing your team to ruminate overnight. On day two, spend an hour recapturing ideas, then start filtering them down. What are the top priority items? Where will you see the biggest returns? Which of these process improvements can realistically be implemented in a timely manner? Of the 50 to 100 ideas you generated, which are the best 10 to 20?
4. When you have your top ideas, it’s time to conduct the cost analysis and develop a business case to present to senior management. Knowing that product redesigns or process improvements are going to be an investment, you need look at cash flow one and two years out. Decompose the cost structure of the existing product and each iteration of the future product to show the cost savings. (We typically find that with the new product changes, our clients are cash flow positive in about six months.) Then present your business case to leadership for approval.

Step 4: Implementation

The final step, of course, is to implement the desired changes identified in the VA/VE workshop. This requires creating a list of action items that must be completed in order to realize a cost savings. The team lead should assign each task to the appropriate departments and create a timeline for implementation. Since this will involve personnel in departments throughout the company and may require several weeks to implement, project management experience with weekly reviews is highly recommended. Though step four includes the implementation of 1^st round / highest priority improvements, it is prudent to create a list of next round improvements, compiled from the lower priority items that were generated in the workshop, that can be implemented at a later date to further increase the product value.

Four most common challenges in implementing Value Engineering

Though the processes of Value Engineering and Value Analysis are fairly straightforward, there are a few challenges that can arise, especially in companies that are not familiar with the VA/VE process.

Lack of awareness

The biggest reason companies fail to implement Value Engineering is a lack of awareness. Many middle market businesses are focused on growth and staying lean, so Value Engineering isn’t on their radar. Though it may seem like a concept meant only for larger organizations, Value Engineering is important for companies of all sizes and will only help you scale faster.  Our experience has shown cost savings of 10-20% for high volume products in several middle market manufacturing companies.

Lack of resources

Due to resource constraints, many middle market companies struggle to find the bandwidth to take a step back and alter the manufacturing process to include Value Engineering. Leaders of product and engineering teams are often focused full-time on managing their teams and don’t have the time to focus on another project.

Lack of follow-through

Some companies conduct a VA/VE workshop, but don’t take the time to implement the suggested design or process changes in a timely manner. To achieve commitment and buy-in from leadership to invest in Value Engineering long-term, the Value Analysis needs to deliver tangible benefits in six months. Without measurable results—delivered quickly—leadership may be hesitant to continue their investment in the process.

Lack of customer feedback systems

Even for companies who regularly practice Value Engineering, the process can be challenging to execute because the needs and priorities of the customer can get distorted as it moves through the company. Customer feedback is often filtered through an employee and opinions or criticisms can get lost in translation. Without a system in place that provides accurate customer feedback on products in the field, the product and engineering teams may be fielding contrasting requests from various account teams without an understanding of which requests take priority. The result is a battle of egos and opinion, and progress stalls. It is important to have account personnel, sales, and/or customer service act as the proxy for the customer to ensure their position is relayed to the VA/VE team.

Call in the experts

New product development and current product improvement are some of the most complex processes in manufacturing. It can be challenging in the best of times to carve out the time and resources to establish a VA/VE process and stick to it. Even some of the world’s most innovative companies struggle with the concept. One of the best ways to reduce friction and create lasting changes is to bring in an outside consultant to lead the charge and teach personnel within the company how to perform and integrate these processes.

FortéOne has been helping middle market companies conduct Value Analysis and establish a Value Engineering process across many manufacturing industries. When it comes to increasing product value through a VA/VE workshop, our customers have achieved success with every workshop.

If you need help maximizing margins by establishing a culture that incorporates Value Engineering, contact the experts at FortéOne.

Contributor: Christopher Chiles