Wednesday, December 15, 2010

Value Engineering:

Value engineering can take many forms:
            Eliminate the part, process  or service !
            Simplify it !
Alter it to make it more productive (Design for manufacturability, design for serviceability).
            Use standard parts or materials.
            Use lower cost materials.
            Use lower cost processes.
            Use higher cost material which can simplify in other ways.
            Use higher level assemblies.
            Consider alternative methods of production.
Increase quality at no added cost (process improvement not inspection).
            Seek uniqueness for price differentiation.
            Add features to create uniqueness for price differentiation
            Improve service or warranty offerings
            Improve reliability.
Provide delivery/flexibility capabilities allowing reduced inventory
            Be predicatable in delivery.
            Seek suggestions from all.
            Insure committed performance is in fact delivered.
Work performance improvements to 1st, 2nd, and 3rd tier suppliers).

To ensure that the supplier cooperates in value engineering, they need to have the right incentives to drive the right behavior. For example, if the supplier is paid a fee as a percentage of the work, if they reduce the cost of the work, they reduce their fee. That's a negative incentive. If the change reduces their profit, that's a negative incentive. If the salesperson is commissioned on gross sales, reducing the cost is a negative incentive. To get 100% of their attention and cooperation you need to structure your agreement of business in a way where there is a positive incentive to do value engineering. For example, for the supplier with a fee as a percentage of the work, offer to fix it at a specific level so they aren't penalized in helping you reduce cost. For changes which would reduce their profit, consider offering a sharing of the savings, which will drive their effective profit rate up. For salespeople who are commissioned on gross sales, offer more business to offset the loss, or meet with their management to create a different incentive program where they get compensated for the value enginnering savings.

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