The three major business problems that have battered organizations the last two years are employee shortages, the supply chain and inflation. While inflation may be a consolation prize to the other two, sweeping inflation rates under the rug is not a sensible option.
What are organizations to do when it comes to the challenges of keeping the products and services competitive, while still maintaining high quality, appeal and profitability? They take actionable steps in preventing or reducing costs at the source. These sources are not what the customers are willing to pay for. We consider what the organization is not willing to pay for as not value-added.
Enter value management.
Value management is a problem-solving system that uses specific techniques, knowledge and skills to provide a decreased cost while increasing quality, function and aesthetics of a product and/or service. Value management seeks to improve and promote progressive changes by identifying and removing not value-added designs, parts, processes and subassemblies.
I first learned about value management during the Great Recession. Working for an aluminum boat manufacturer, we were challenged to just keep our doors open. The solution was to not pass on inflation rates to customers, so prices would not increase over a two-year period. We focused on materials that were high in cost. Of course, aluminum was the first item analyzed. The process in value management was to determine what alternatives were available and, if they were acceptable in quality and customer standards, then apply the changes as needed in the production of the boats.
When a product or service goes through a value management process, the functions will increase in the form of higher quality, deliverability and value. Eliminating or replacing activities and products that aren’t adding value with less costly alternatives decreases costs. Using a cost-effective system is important to the organization to be competitive and sustainable, gain market share and above average profit margins, and apply innovation. By identifying, analyzing and understanding the customer requirements, you will be able to determine what the customer is and is not willing to pay.
An example is Indian car manufacturer Tata Motors. Tata is known for producing a car at a price point affordable to the residents of India – using value management to produce a car a little above the price point of a two-wheel scooter while still meeting customer expectations.
When an organization passes on the cost of inflation to its customers, it not only causes prices to increase but also the demand for the product or service to decrease. When we look at inflation, we must not only look at the cost but also how it affects demand. With any organization, we do not think much about how yearly inflation will affect what and how we produce our products and services. When demand decreases and there is no action taken upon this change, there will be an increase in inventory, and slower production and services. Eventually, employees lose work and profits decrease.
Every year, if there is inflation, the organization will have to work toward removing not value-added materials, parts, products, processes and services to increase the demand and offset increasing inflation rates. When we remove the components that don’t add value, the organization is allowed to maximize profits at a higher rate than competitors that are struggling to adapt to the changes in inflation.
Every organization is different. Not everyone wants to create more demand, like say in the luxury markets. However, if your organization is wanting to optimize profit margins and demand, it should take an approach toward removing not value-added costs.
Cost reduction is not just for the tangible materials and parts. Value management also can reduce indirect costs, such as labor, energy and machinery. Companies need the benefits of creating quality and functional products and services at low costs to stay competitive in their market.
Another year of higher costs to the organization will diminish profits and/or force the organization to pass on those costs to the consumer. However, using an active cost-reduction system will provide a substantial appreciation of your products and services from your customers to your shareholders.
Consider these two questions: How much impact is inflation having on your profit margin? What would your profit margin look like if you took the initiative toward reducing overall inflation?
Valorie Hendrix is the owner of Dynamic Empire Consulting. She can be reached at firstname.lastname@example.org.
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