The concept of Value Management (VM) has emerged as a crucial strategy for organizations seeking to maximize their resources. As a procurement executive, my interest in value management is not just academic; it’s a practical tool that plays a significant role in decision-making processes, especially when it comes to supply chain analyses. In this blog post, I aim to demystify value management, tracing its history, explaining its core principles, and exploring its application in supply chain analyses, particularly in relation to suppliers and their activities. Join me in the first step into Value Management, maybe you even try EFFSO’s course and further enhance your understanding of Value Management?

The History of Value Management

Value Management, initially termed as “Value Analysis,” was developed during World War II by Lawrence Miles at General Electric. The scarcity of materials during the war necessitated a method to maintain functionality while reducing costs. Miles’ innovative approach was to identify and eliminate unnecessary expenditures, thus maximizing the value of each process and component.

Over time, this concept evolved into what we now know as Value Management, which extends beyond cost reduction to encompass optimizing the overall value proposition of products, services, or projects. This evolution signified a shift from a purely cost-centric perspective to a more holistic view that balances cost, quality, and functionality.

What is Value Management?

At its core, VM is a methodology focused on improving and sustaining a desirable balance between the wants and needs of stakeholders and the resources available. It involves a systematic and multi-disciplinary approach to analyze the functions of goods or services, with the goal of optimizing their value.

Value, in this context, is defined as the ratio of function to cost. By either improving the function or reducing the cost (or both), the value of an item or process can be increased. This approach is not about cutting costs blindly, but rather about making informed, strategic decisions that enhance the overall worth or efficiency of an operation.

Value Management in Supply Chain Analysis

In supply chain management, VM can be a transformative approach. It encourages a deep understanding of every component and process, thereby uncovering opportunities for improvement and innovation. Here’s how it can be applied:

1. Supplier Analysis

Applying VM to supplier analysis involves a detailed examination of the suppliers’ processes, costs, and outputs. By understanding the functions and costs associated with each supplier, procurement can identify areas where value can be enhanced. This might involve renegotiating contracts, seeking alternative materials, or collaborating with suppliers to streamline processes.

2. Total Cost of Ownership

VMgoes beyond the initial purchase price by considering the Total Cost of Ownership (TCO). This includes all costs associated with the procurement, use, maintenance, and disposal of a product or service. By analyzing these costs, procurement can make more informed decisions that may result in long-term savings and improved value.

3. Process Optimization

By applying Value Management principles to the supply chain processes, inefficiencies can be identified and eliminated. This might involve re-engineering logistics, optimizing inventory levels, or adopting new technologies to streamline operations.

4. Risk Management

VM also plays a crucial role in identifying and mitigating risks in the supply chain. By understanding the value contributions of different elements in the supply chain, procurement can prioritize risk management efforts where they are most needed, ensuring stability and continuity of supply.

5. Sustainability and CSR

Incorporating sustainability and corporate social responsibility (CSR) into VM ensures that the value assessment is not just about economic gains but also about social and environmental impacts. This holistic approach is increasingly important to stakeholders and can lead to a more sustainable and ethical supply chain.

Understanding of Value Management

Value Management is more than a cost-cutting exercise; it’s a strategic tool that enhances decision-making in procurement and supply chain management. By focusing on the value, rather than the cost, procurement professionals can drive innovation, efficiency, and sustainability throughout the supply chain. As businesses continue to navigate a rapidly changing world, the principles of Value Management will remain essential in creating and sustaining competitive advantage.

Hope you have enjoyed the post and now have a basic understanding of VM. Are you ready to take your understanding of VM from a buyer’s perspective one more step? EFFSO presents an engaging and introductory online course designed to unravel the complexities and immense possibilities of VM . This course is your gateway to understanding, implementing, and excelling in this critical aspect of procurement and supply chain management. To the course Value Management by EFFSO at Learn How to Source (LHTS).

Rgds Fredrik

Note: The illustration is created by CHAT-GPT on Januari 21, 2024.