Value engineering: cutting supply chain costs not product quality

Cost reduction diagram

Value engineering seeks to reduce costs and increase the value of a product. Traditionally, teams have looked to cut costs during the design process, the NPI stage, and the production phase. This can lead to positive outcomes if done correctly together with function analysis. However, some engineers criticise value engineering as they feel it is an exercise to reduce product quality by slashing materials and production costs. 

And some of the criticism can be well-founded. It seems counterintuitive to cut the cost of the product when providing customers with value and quality is the way you grow your business. But value engineering does not have to mean reducing quality. 

Instead of focusing on the product and reducing quality, why not look at the whole supply chain to analyse what savings can be made and unnecessary costs reduced.

Focus on shipping

Shipping is in disarray and might take years to recover. Maximising space in shipping containers is, therefore, crucial. Consolidating shipments and sending full-container-loads is safer at sea and a more cost-effective approach than shipping with a less-than-a-container-load. 

Consolidating shipments means products will be loaded based on your specifications in a container you do not have to share with other goods. This can reduce the time it takes to get products through customs and the associated overheads.

However, sometimes filling less-than-a-container-load is preferable if multiple suppliers have relatively small loads to ship. In this case, various suppliers consolidating their shipments together could be the more economical option.

Additionally, although insurance is an extra cost that companies want to avoid, your shipping logistics strategy will count for nothing if something unexpected happens. 

Lastly, when optimising shipping logistics, choosing the right type and size of shipping container is the first place to make savings. Also, consider using lower-cost materials to transport your products. For example, instead of using the most expensive pallets, savings can be made by using recycled ones.

Plan operations ahead of time  

Thoroughly planned and well-timed operations will save you money and headaches. Planning well in advance allows you to account for holidays and have time to adjust in the event of an unforeseen event. In addition, considering your production schedule, the shipping routes, and end-to-end transit times will allow for smoother operations. 

Conversely, leaving decisions to the last minute or making rash choices is likely to lead only to delays, extra costs, and confusion. This will affect your bottom line, but it will also negatively affect your company’s image. 

Think long-term and analyse the data

In 2021, there’s no such thing as a short lead time. It now takes longer to ship products, so thinking long-term is necessary to get supplies. But the good news is that it can also save you money. Buying in higher quantities will allow you to make savings, which means you can buy more, consolidate shipments, pay for only one load to be transported, and get a discounted storage rate. 

Making larger purchases for repeatable items and storing is often more financially efficient than making repeat orders. Nowadays, committing to larger orders is also often a way to guarantee contracts with suppliers due to the shortage of many much-needed products. 

Until now, the norm has been to order on a project-by-project basis. However, thinking long-term should be part of a comprehensive strategy that has the foresight and oversight to identify common components and how many are used across all projects. 

For example, it’s common for hundreds of purchase orders to be issued for the same part in one year, driven by production planning being organised around customer projects. By identifying this and bulk ordering at a better price, businesses can reduce their costs.

Thinking about the following year (or even further ahead) is an effective way to identify areas where cost savings can be made.

Outsource transportation and storage

Around three-quarters of businesses choose to outsource transportation and storage. To obtain the most benefit from your outsourcing partner and before entering into a relationship, it is essential to agree on some fundamentals, including product handling, the frequency and size of shipments, and specifics regarding packaging.

Of course, there are risks to outsourcing, but the benefits can include the following:

Cost-saving: Large transportation companies use economies of scale; thus, they can offer attractive prices. They also have the expertise, resources, and efficient operations to streamline costs and the process.

Technology: Experienced transportation companies invest in software to make their operations efficient and provide customers with benefits, including track-and-trace, on-board cameras, and anti-theft systems. Advanced software also allows logistics companies to gather huge amounts of data and can provide you with accurate reports and business intelligence that will otherwise probably be inaccessible. 

Resource flexibility: People and equipment are expensive and are often sub-used. There are often annual fluctuations as well as unforeseen increases or decreases in demand. This can make operations difficult, but a good outsourcing partner will be able to take care of your scheduled transportation in addition to your on-demand needs.

Use technology and the IoT

The IoT (Internet of Things) comprises physical objects connected to the internet and powered by software. It is becoming increasingly important to support logistics supply chain operations. Adopting technology offers more oversight in operations and transportation.

Smart warehouses and fleets can be built using IoT technology. They will lead to more efficiency by improving warehouse management, fleet tracking, inventory control, and technological and mechanical maintenance.

IoT devices can be used together with existing technologies to improve processes. Data from warehouse sensors, for example, can be used to automate processes such as forecasting. The key is to integrate devices connected to the internet as part of a comprehensive supply chain digitisation strategy.

Implement automation

Logistics costs can be reduced by implementing automation processes using a Warehouse Execution System (WES), which combines a Warehouse Management System (WMS) and a Warehouse Control System (WCS). Regulating, automating, and optimising manual processes can reduce staff requirements, centralise production operations to lower-cost areas and create a more proactive approach to ensuring customer satisfaction. With an automated, cost-effective transportation and logistics system, a company can implement major strategic changes to provide visibility, reduce costs and increase customer service levels.

Optimise your whole supply chain

Supply chain optimisation uses tools and processes to streamline operations, reduce costs, and increase profit. The process usually starts with a detailed analysis based on forecast demand, followed by elaborating a production and inventory plan. 

The analysis includes a complete review of inbound raw materials or components, manufacturing, transportation, and distribution. What’s more, it is also the chance to think about embracing an omnichannel marketing strategy, which allows your business to meet consumers where they are, with the right message, and at the right time.

Optimising a supply chain involves making your supply chain highly efficient using key performance indicators and gross margin return on the inventory in which you have invested. Your objective should be to deliver high-quality products to customers at the best possible cost and with the highest profit level. To fulfil this objective, companies need to streamline their processes and balance the costs of manufacturing, transportation, fulfilment, and inventory. 

Working with a supply chain manager or consultant can help improve the optimisation process. 

They will implement the correct technology, make the right partnerships, and make the organisational changes to ensure results—deliver customer satisfaction at the lowest cost and highest overall profit to your business.

Conclusion

While teams have traditionally focused on cutting the cost of products as part of value engineering, a better philosophy would be to ‘follow the money’. This indicates where the potential for intelligent cost reductions lies rather than being a ‘slash and burn’ exercise.  Focusing on the supply chain rather than the product is an efficient way of decreasing spending and increasing profit.

The OEMs guide to implementing VA/VE

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