8 THE DISTRIBUTOR’S LINK Laurence Claus Laurence Claus is the President of NNi Training and Consulting, Inc. He has 25 years of experience with a medium sized automotive fastener manufacturer, holding positions including Vice President of Engineering, General Manager, Director of Quality, Director of New Business Development and Applications Engineer. In 2012 he formed NNi offering technical and business training courses as well as technical consulting, expert witness and consultation work. He can be reached at 847-867-7363 or by email: Lclaus@NNiTraining.com. You can learn more about NNi at www.NNiTraining.com. VALUE ENGINEERING ON EXISTING PARTS In 2008 as “The Great Recession” was wreaking havoc on the economy, organizations like the fastener manufacturer I worked for were not just exploring ways to cut costs but were in full out survival mode. We were cutting back on everything and leaving no stones unturned on possible savings. Although this was perhaps the most difficult stretch of its kind our company had ever experienced in its approximate seventy-five year history, it did result in some healthy cutbacks and institutionalizing some good common sense practices. One of these practices was a project that I would spearhead, to assess low margin parts and determine if we had an opportunity to bring them back to health. I don’t believe we gave it any fancy name (although I would later be referred to as the “Dog Catcher”) or any significant fanfare as organizations sometimes do with such things. We just rolled up our sleeves, got to work, and ultimately were successful in salvaging some parts that we might have otherwise “fired” or continued to lose money on. I generally found that parts fell into one of three categories. The first category, and fortunately for us the most common, were parts that had simply been entered into our system incorrectly and carried, in some way inaccurate information which skewed the part cost and triggered artificial reporting values. These were easy fixes as we simply had to correct our system. The second category, parts that were correctly routed but insufficiently priced, normally as a result of a costly secondary operation added after quoting, were the least common of the three categories. This is fortunate, as these were rarely fixable and could be attributed as a class as the biggest losers. Finally the third category consisted of parts that like the previous category had significant or complicated operations and, thus, a TECHNICAL ARTICLE losing cost structure, but could be successfully value engineered to shift them from losers to winners. In part two of this “Value Engineering Series”, we will explore the process one might use in value engineering existing parts. Although some of the same activities will apply, the process of value engineering existing parts is normally different than value engineering new parts. Advantages An organization often engages in value engineering on existing parts because it is threatened or cajoled by its customer to do so. For example, the customer might notify the supplier that they feel the price is too high so that they intend to engage in some sort of resourcing exercise. Just as intended, this often puts a scare into the supplier who wants to keep the part because it is profitable, it is for a key customer they do not want to disappoint, or any number of other reasons. It is important to remember that being the incumbent is a nice advantage. This rarely puts an organization in a position to tell their customer to pound sand, but it does shift the leverage position in favor of the supplier. Companies, like individuals, generally are not highly motivated to seek change. They realize that their suppliers, especially if the part is complicated, possess a level of specific expertise and tribal knowledge that a new supplier would have to completely repeat on their own. For this reason, customer organizations are highly motivated to make a supplier change, even if they seem to be “singing a different tune”. In addition to the expertise that would have to be replaced, revalidation costs and other sunk costs would have to be repeated. These costs can be high, making the overall business case to actually make a change a non-starter. CONTINUED ON PAGE 100
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