Wednesday, March 5, 2014

The Lost Art of Value Engineering

As featured in Industrial Supply Magazine online this month. 



I would like to suggest a new term to the lexicon of selling: value engineering. Today, many of the worst and some of the very best salespeople touch up against value engineering for completely different reasons. Let me elaborate.

The worst of sales guys use a low-end form of value engineering. With no real eye for adding new value for the customer, price is their crutch. Armed with the customer’s bill of materials, the price seller searches for discount opportunities. Sacrificing their own margin and that of their suppliers, they look for ways to provide the same stuff at discount prices. Basically, the customer gets a minor discount at the expense of those who actually came to the party with ideas in the first place. In extreme cases, these low-skill sellers suggest lower quality parts without regard to customer application, life cycle needs or improved performance.

The high-end sellers take a completely different approach. Instead of low-quality, low-end part substitution, they take a whole new look at their customer’s efforts. They weigh labor costs against product costs. They take life cycle needs, cost of installation, speed of deployment, ease of making field changes and other points into their equation. They focus more on function than on acquisition costs.

Real value engineering brings more to the customer. Better designs, easier assembly, faster shipping, easier support, quicker set up, smaller investments in engineering, lower cost of ownership and, quite often, lower cost on some of the parts purchased. And, the value can be measured in real terms, like dollars and cents. All of this easily trumps low-end parts at discount prices.




To put this in perspective, here is the definition of Value Engineering from Wikipedia:

Value engineering (VE) is a systematic method to improve the "value" of goods or products and services by using an examination of function. Value, as defined, is the ratio of function to cost. Value can therefore be increased by either improving the function or reducing the cost. It is a primary tenet of value engineering that basic functions be preserved and not be reduced as a consequence of pursuing value improvements.

Value Engineering as a Service
The activities being carried out by some of the worst of our selling colleagues (the substitution of cheaper parts) is purely a sales related activity. And, in my mind, it is a bad one. However, real value engineering is a service; a top-of-the-line service at that.

I believe distributors need to be paid for their services, not only in terms of extra sales and expanded gross margins, but in cash. (If you don’t believe me, read my book, The Distributor's Fee-Based Services Manifesto.) The first step is in professionalizing your service. Talk about your Value Engineering, often. Be able to explain the difference in the service you provide and the parts switching offered by low-end competitors. Measure the effect of your Value Engineering efforts in monetary terms. Share the financial impact of your work to the customer’s management team.

When we work with distributor clients, I am constantly amazed at the real financial impact they bring to their customers (and their supply partners). What’s more, most have convinced themselves that this financial impact is just part of their job. When you build a track record of generating proven results, it’s easier to make a case for being paid for the activity.

A final thought…
Years ago, my boss used to say, “How much will you pay me to make you a million bucks?” We need to ask our customers the same question.

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