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Improving Business Results Through Value Engineering

Medical device manufacturers are constantly challenged to drive down product costs for a variety of reasons—lower cost targets aligned with emerging markets, competitive need to improve product margins, or a desire to extend the life of legacy products experiencing parts obsolescence. OEMs also face pressure to improve product quality and performance. The opportunity to meet both of these goals lies in the fact that pressure to deliver the first product nearly always leads to short-cuts and trade-offs during the development effort.

Medical device manufacturers are constantly challenged to drive down product costs for a variety of reasons—lower cost targets aligned with emerging markets, competitive need to improve product margins, or a desire to extend the life of legacy products experiencing parts obsolescence. OEMs also face pressure to improve product quality and performance. The opportunity to meet both of these goals lies in the fact that pressure to deliver the first product nearly always leads to short-cuts and trade-offs during the development effort. Due to constraints in engineering resources, these same short-cuts and trade-offs are never resolved after first shipment. However, both of these goals can be addressed by well-run value engineering (VE) projects with a proper focus on upfront assessment and return on investment (ROI) analysis aligned with business goals. VE is a common methodology for assessing product costs, quality, and performance requirements, and establishing programs for improvement. 

Along with ongoing R&D needs and constrained engineering budgets, the effort and expertise it takes to implement a VE project sometimes leads companies to decide to work with an outsource partner to provide these services. It is imperative for OEMs to select a company with established experience in the area of VE and deep domain understanding to ensure the resulting components meet all business and technical needs. 
 
Assign a Crossfunctional Team
Companies often assign a team from design engineering to carry out VE projects. Synergy across multidisciplinary teams nearly always produces superior results because poor assumptions are avoided by clear communication across engineering disciplines and various functions of the company. Without this collaborative approach, VE results can do more harm than good by missing dependencies that can result in poor performance or quality problems. A crossfunctional VE team usually has representation from the following:
 
? R&D design engineering. Brings in expertise and experience in the product technical domain and often contributes the most cost reduction ideas.
? Production engineering. Understands issues that production is facing and often has insight into quality problems, as problems customers find are related to difficult production steps. Also brings insight into production cost and lead times.
? Field service. Knows about installation and product service difficulties, and is often acutely aware of the most important customer satisfaction issues.
? Supply chain. Understands current material costs and lead times and is needed to acquire cost information for existing and proposed designs.
? Marketing and product management. Provides voice-of-the-customer insight for any proposed functional or appearance changes.
 
Defined Business Goals and a Phased Approach
The first task of any VE program is to clearly define the goals of the project, be it cost reduction, feature adjustment for new products or markets, or quality improvements. Once the overall goals of a VE project are clearly defined, using a phased approach provides the best results while avoiding program risk. There should be a stage gate at the end of each phase wherein management decides whether the return on investment (ROI) is sufficient to proceed to the next phase.
 
Phase I: Analysis and Idea Generation and Selection. This phase involves detailing specific project goals, current cost structures, and functionality. Whatever the goals, they must be clearly stated and understood by the project team.The goals for a product change may solely be cost reduction, or they may include functionality or quality improvements. There may also be a desire to adjust the cost and functionality of an existing product to fit a new market. 
 
While companies tend to know their product’s overall cost, the data are not often in a form that can readily be used at a detailed level. If there is high labor cost associated with assembly or test that needs to be addressed, a breakdown of these costs is also needed. The important thing is that the team has a Pareto diagram of all costs involved. Without this baseline information, project stakeholders could waste significant energy and time reducing costs that bear little benefit to the bottom line.
 
Once the goals and costs are understood, brainstorming by the crossfunctional team on potential solutions should generate a wealth of known and new ideas. Assessing the ideas will provide estimates of the costs and ROI, as well as assessments of technical and market acceptance risk. The final deliverable of this phase is a list of projects the team feels have sufficient ROI to present to management for approval.
 
Phase II: Detailed Design. Detailed design must be done to complete the approved product changes. It is important to realize that the engineering effort involved is often no less complex than the initial development effort, and strong design and verification experience is required. The advantage gained with this degree of experience is the ability to extract information from the initial design to ease the development effort.
 
For critical parts, it is crucial that the supply chain organization facilitates interaction with suppliers to validate cost analyses that have been performed. Deliverables for this phase include engineering analyses, detailed design models, production documents, and an update to the cost and ROI predictions from phase I. These data should be presented to management as a stage gate review, with management approval required before moving to the next stage.
An outsource engineering firm can be a valuable partner during this phase by taking most of the engineering load. The internal engineering team can act as consultants and reviewers as the detailed design is performed, ensuring that the product and domain knowledge built up over years is thoroughly integrated into the new effort without requiring the team to perform all the detailed work involved. This frees the team to also contribute to the company’s product development initiatives.
 
Phase III: Implementation. The implementation phase should follow the usual product development process. Much of the development engineering content (technical interaction with suppliers, correcting design defects, developing assembly and test fixtures, and helping solve production problems) can be borne by the engineering services provider. Again, such a system prevents dilution of key internal R&D efforts. It is important to remember that any outsource partner should stay engaged through alpha and beta testing and pilot production, and in some cases, through the first few installations and first rounds of customer feedback.
 
 

Figure 1. This is an example of an analysis of ROI based on a value engineering assessment. Total savings are estimated based on opportunity, or existing costs minus proposed forecasted change.  The breakeven point is shown as the number of units shipped for the savings to equal the nonrecurring engineering cost (NRE) expended


Let ROI Be Your Guide
Throughout the project, it is important to closely monitor the project goals and continually assess the expected ROI generated in phase I and refined in phase II. This includes directly balancing production cost reduction against R&D costs and risks for all proposed changes.
However, the process must also include other business functions. For example, software control may need to be altered to support new hardware and functionality. The service organization may have to develop new service tools or implement new training courses. Production implementation will have some cost implications.
Impact to production and spare parts inventories should be considered. For VE projects that change functionality, any market size impact estimates should be revisited periodically for validation and updates.
 
Engaging an Outside Company with VE and Systems Engineering Experience
Engaging the right engineering services partner can greatly enhance the value and lower the costs and risks associated with VE projects in the following ways:
 
? An experienced partner will bring lessons learned from performing many VE projects across a wide range of products and technologies.
? A partner with a pedigree that includes systems engineering can add an extra dimension to generating and evaluating options.
? The fresh eyes of outsiders can question long-held internal beliefs, which can result in innovative ideas.
? Eliminates the risk of lost productivity—your team stays focused on building pipeline products while outside experts focus on VE.
? Alleviates the burden of assuming long-term fixed costs—you don’t have to add permanent staff to handle this process.
? The company has an exit option at the end of each stage.
? If sufficient ROI at low technical risk is not demonstrated.
? If the market or budgetary environment has changed.
 
Conclusion
In today’s highly competitive marketplace, it is imperative that VE be a weapon in the business arsenal of all medical device companies. With a solid approach to VE, a company can attack cost and quality improvements, or even adjust a product for entering new markets. Clearly engaging an outside company with VE and systems engineering experience can have a positive impact on these types of programs. The range of experience and variable staffing structure can allow for a broad variety of VE projects, resulting in more and faster cost savings, with lower risk. A strong partnership with such a firm can also bring a fresh look at the source of your product cost, apply past experience running VE projects, and allow you to focus key resources on valuable next-generation products.
 
John Carey leads the new business development team at Foliage (Burlington, MA) in creating new client business opportunities and ensuring the growth of established accounts. He has also provided corporate guidance to the medical and life sciences practice since he joined Foliage in 1996. Before joining Foliage, Carey held direct sales and sales management positions with several companies that offer hospital and clinical information software to the healthcare industry, including Cerner Corp., MEDITECH, and Versyss. He holds a bachelor's degree in business administration from Northeastern University and served four years in the U.S. Navy. Carey can be reached at [email protected]
 
An inventor and innovator, Sree Iyer has more than 25 years of experience in the fields of systems and storage. Currently, he has more than 40 U.S and foreign patents—and more than 50 pending applications—in the areas of flash media. He is also a primary inventor in another patent portfolio around storage and cryptography, whose patents have just started to issue. Most recently, Iyer was involved in cloud computing, specifically in the areas of performance and storage. His current interest is in controls and performance of extreme ultraviolet-based sources. Some of his design collaborations have shipped more than a million apiece, establishing themselves as market leaders. Iyer has a master’s degree in computer engineering from Colorado State University.
 
Myron Pugh is vice president of Foliage and has more than 30 years of experience gleaned from various technology and product development companies. He began his career as a design engineer and assumed positions of greater responsibility in engineering, operations, and general management with Silicon Valley companies. His business experience encompasses contract R&D and product companies, and his areas of focus include crossfunctional team development and leadership in product development and operations. Pugh was instrumental in the start-up and development of Vignani Technologies Pvt. Ltd., an engineering service company headquartered in India and acquired by Foliage in 2011. Pugh can be reached at [email protected] 
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