Value Engineering – For the New Salesperson (and experienced hands)
New salespeople often get “stuck” in the purchasing department. We previously mentioned Value Engineering as a tool to break free from the purchasing trap. However, after visiting the topic with a few experienced hands, has become clear we needed to better outline what we have in mind as a selling tool. Without further ado, allow me to share the proper definition. Borrowing 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 for the solution-based salesperson is the review of existing purchases against new products and technologies. The process should also include a review of the specifications used in selecting existing products. Finally, and never (in my opinion) as the fundamental driver for Value Engineering, the process should be executed as an opportunity to “shop” the existing products for better prices. Let’s address each of these factors in detail.
Review of new products and technologies
New and improved products gush out of the development groups of manufactures. Part of this is driven by technology, anything with even a dash of electronics enclosed makes great year-over-year advancements. For example, a new AC Variable Frequency drive today may feature built-in intelligence to eliminate the need for PLC interfacing, sensors may include advanced communications capability allowing for the elimination of special interfaces and each new generation of a product comes with a lower price point. The list of examples doesn’t end there. Yesterday, I received an email announcing a new “smart” garage door opener designed to connect to the internet allowing remote control of garage doors from anywhere. Cool idea and it saves the cost of a remote.
It’s not uncommon for companies to design a system and then forget it. Years go by, yet the design never quite makes it to the point of reevaluation. By suggesting Value Engineering, the salesperson becomes the harbinger of change – the person who brings disruptive technology to their customer.
Review of specifications used to select the products
Engineers and those selecting products must often make assumptions; often erroneously. A product decision based on incorrect information can lead to costly issues. These might be categorized in two ways.
1. The product does not perform well in the application environment.
Let’s look at the common issue of water and humidity present in the environment. A product without the proper seals does not achieve the expected life. A suggestion to move to a product designed for water, washdown or otherwise damp applications expands the life cycle. Even though the replacement might be more expensive, the cost differential could easily be justified. The result is a better system.
While we used water as an easily understood example, the conversation could involve any number of other issues. Things like dust, dirt, electrical noise produced from other equipment, vibration, extremes in temperature or mounting angles could all be part of the discussion.
2. The product is over-engineered for the application.
System design issues, which “over-engineer” the application, are found everywhere. To illustrate the point, let’s talk about fans used in buildings. Engineers often design airflow for the hottest day of the year then add some extra factor into their specifications to cover unforeseen problems later in time. The system works well, but after 10 years of operation, it is noted the system virtually never operates at maximum capacity. The result of this idiosyncrasy is wasted energy as well as a higher than necessary replacement cost.
Again, a solutions-based salesperson might suggest downsizing the system to more closely match the “real world” characteristics. The customer saves money both in the replacement and in the operation. Again, a better system and real value created for the customer.
Price-driven Value Engineering
If dealing strictly with purchasing departments, this type of Value Engineering will be high on their wish list. In some ways, this runs the risk of turning into a reverse auction for sellers where the salesperson is promised business if they are willing to slice and dice their profit margins. If this is the situation, I don’t necessarily see it as a good investment of time. However, there are at least three very different situations that offer exceptions. As before, we will devote a few paragraphs to each.
1. Parts coming in on OEM built machinery
It’s not uncommon for new equipment purchased to come with a spare parts list. Many times, the OEM does not provide its source manufacturer’s part number. This is done for several reasons. First, the OEM may buy components from a wide variety of suppliers and since the parts are functionally identical, they choose to simply identify the part by function rather than catalog number. In other cases, the machine builder sees the sale of spare parts as a profit center.
In the previously mentioned cases, experience dictates the OEM machine builder places a rather high mark-up on parts sold on to their customers. Over the years we have seen mark-ups ranging from 200-300 percent. Supplying the customer with pricing on these spare parts can result in cost savings for them and strong profit-making opportunities for the seller.
2. Parts bearing well-known brand but with a mysterious catalog number
The product carries a well-known brand but bears a mysterious catalog number. It’s a common strategy, perhaps one you should be thinking about using. Here’s the scoop-- a local distributor and the OEM manufacturer work with the supplier to place a “mystery” number on a standard product. Why? Doing this naturally channels all replacement business back to the distributor who sold the original application. Further, if the OEM is monetizing their spare parts business, the strategy creates a part number which is price proof and both the distributor and manufacturer maximize profits by eliminating competition. But remember, it’s likely a standard product and the only thing special is the label.
If you can analyze the application and specifications, there is a good opportunity for you to save your customer money and create value. Before we move on, allow me to say, there are risks. You must be diligent in your analysis and be capable of “reverse engineering” the product back to a standard offering. This takes time and effort on your part, so be sure the opportunities for selling justify your efforts.
3. Parts from an obscure supplier
Back in the old days, before the internet and Google searches, it was common to discover parts made by companies without a North American presence. Some of these were virtually impossible to locate. Armed with the internet and an understanding of the product, you can probably find the parts. Purchasing the parts might involve overseas freight and since the foreign manufacturer is shipping them to an unknown entity, buying them is expensive (from a price and time standpoint). Again, we are looking at reverse engineering to develop a cross-reference. For some items this is easy; for others it’s time-consuming. Move ahead with caution.
Selling the customer with Value Engineering
This is an important section. For the established guy, you may already have the contacts to move into a Value Engineering type of sale. For the new salesperson stuck in the purchasing trap, Value Engineering can be a tool to open doors to the real buying influence.
I recommend creating a formalized plan for Value Engineering. It is not something to do without interacting with the engineering, maintenance and/or technical teams. More importantly, it is not a process to offer up without a solid commitment that you will be rewarded for the time devoted to making it happen.
Here might be the words used for one approach with purchasing:
End-User Based:
“Based on some of our conversations regarding new equipment coming into your plant, I suspect I might be able to assist with helping you get the best bang for your buck on spare parts. Our experience is that many OEMs sell spare parts at a very high price because they see it as a service some of their customers struggle to understand. Would you be interested in exploring some Value Engineering tied to this particular project?”
OEM Based:
“During one of our chats, you indicated many of your machines were designed several years ago. With the kind of stuff that goes into your machine, technology breakthroughs have changed the cost/benefit relationship of products. In other words, the new stuff is cheaper and better for less money. Would you be open to me assisting you with an exercise in Value Engineering with your design and making some suggestions?”
Let’s talk about assigning a fee to your efforts
 |
What if you include in your conversation something like this?
“Our company has the capabilities to do detailed Value Engineering on the items you use. Normally, we assign a fee to perform the work, but to demonstrate my commitment to you, I will offer it for free on this project as a show of good faith. We believe we can save you money and demonstrate our expertise.”
A final thought…
Why set the expectation that Value Engineering might come with a price tag? It’s simple, Value Engineering can save your customers money. And as an old boss used to say, “How much will you pay me to make you a million bucks?” We may not be talking a cool Million, but we need to ask our customers a similar question because we will be saving them money.
_____________________________________________
Comments