R.I.P. The Death of Value as a Concept
So what ever happened to the concept of “Value”?
I know it has been a long time since I’ve been in the classroom, but when did the meaning of the word VALUE change? You’d think that Webster or someone would at least send out an email for goodness’ sake!!
When I went to engineering school, we were taught that “VALUE” meant:
Verb: - to calculate or reckon the amount of a specified item or material.
A few years later in MBA School, we learned a slightly different version of the meaning of the word “VALUE”:
Noun: - the relative worth of something in terms of the amount of other things for which it can be exchanged or in terms of some medium of exchange.
Verb: - to consider with respect to worth, excellence, usefulness, or importance.
The term “VALUE” used to mean to understand relative worth or to determine the worth of something with respect to something else. To me the term value implies a simple equation, with both a numerator and a denominator. Think about the following question:
“What is the value of a college education in today’s economy?”
The question implies both benefits and costs – which can be arrayed in a simple formula from which one can derive this magical trade-off that was once referred to as VALUE. Today the word VALUE seems to be a dead or dying concept, at least in terms of supply chain management and manufacturing services.
When was the last time you heard someone in operations use the term “VALUE” when it was NOT followed by the word “ADD”? I can’t even remember! Not only can I not remember, but I think I’ve even forgotten what the term Value-add is supposed to mean. I assume it is meant to represent the opposite of Value-subtract – whatever that might be.
Today we don’t use the word value in operations that much, we simply talk about price, price, price, and more price. Somehow the word price has replaced the word value in the lexicon of operations. Occasionally we will use the word cost somewhat interchangeably with the word price (and in some businesses today cost and price are perfectly interchangeable terms - although I refer to those business as hobbies, not businesses). But value in general is a dying word, and I for one would like to bring it back from the verge of extinction before it is too late.
Over the past few months I’ve worked with a number of OEM companies on various aspects of their EMS relationship and the word value has never once been uttered. I’ve seen OEMs bemoan the lack of resources the EMS provider has assigned to their account in one breathe and berate the supplier in the next for fact that their price is not falling fast enough. I’ve witnessed consumer product companies elaborate in great detail their urgent need for production schedule flexibility and reduced product lead times from their EMS provider, and then summarily reject the proposition that their supplier might charge them a few extra pennies to cover the extra cost associated with stocking additional long lead time components or providing VMI services for finished goods. Recently an OEM I know was desperately imploring their manufacturing partner to implement some fairly sophisticated supply chain management software for their specific account’s needs, while simultaneously questioning the 2% G & A cost that appears on the standard product quotes from that same EMS provider. And just last week I sat down with a small OEM to review a new product introduction plan that was so full of holes it would make any cheese maker in the Emme Valley proud. Yet the primary conversation that ensued was around the price the manufacturing service provider would charge for the Beta build and launch support activities. This fixation on price rather than value is not entirely unique to the OEM/EMS relationship, but it is in these relationships where the denominator of the equation is most often loss.
So what is the problem here?! Why does it appear that the concept of value is dead or dying? Why is price not only king, but the only subject in the entire kingdom? The answer, at least in our world, is deceptively simple: certainty and the power of the almighty purchase order. When a price for a product is entered on an OEM’s purchase order, it is certain, specific, known, assignable, and measureable. And perhaps most importantly – the certainty and specificity of a line item on a purchase order means it is easily used for calculating specific performance metrics and bonuses. The fact that the unit price for 10,000 widgets from Foxconn is $67.21 is indisputable. The fact that Acme products spends $141,000 a week managing Foxconn is not seen as a fact – but rather as one possible accounting treatment of the various costs incurred in managing the ongoing business of the company.
Matt Ryan, our CEO, recently elaborated in an article on www.emsnow.com that of the total cost of a specific OEM switching EMS suppliers, roughly only 1/5th of that cost was assigned by the OEM to product cost. Is this due to a lack of sophistication in the OEM’s accounting system, or is it related to the fact that COGS is the primary performance metric for the functional group making the decision to switch suppliers? And although the cost of switching suppliers was roughly known in total – nowhere was the cost evaluated in a more holistic approach to determine the relative value of the decision with respect to other options available.
Assessing value means understanding not only the costs, but the relative benefits of various alternatives – many of which cannot be fully known or perfectly calculated in advance to two decimal places of certainty. What is the VALUE to the consumer products company of reducing their product lead times – and how does this relate to the incremental costs being proposed by the EMS supplier? What is the value of instant supply chain visibility two or three levels down in the supply chain that the other OEM desired, and how do they go about determining that value? Why did the first OEM want the EMS provider to put additional resources on their account in the first place? Were their quality issues, delivery issues, responsiveness concerns? What was the cost of these issues to the OEM and what led them to feel that additional resources were the answer? And does the OEM with the NPI recognize that taking a bad NPI plan and adding the myriad of operational details necessary to ensure a successful build is not a small task – but a task that if done well offers value by saving the OEM a lot of scrap, rework, frustration, and most importantly, time to market? Why then is there so little recognition of the value of these much needed activities – and the value of many other services that are specifically requested or urgently needed?
The responses and actions witnessed from some of these OEMs might lead one to surmise that resolving the issues at hand created no value or benefit to be realized by the OEM - as the actions they took clearly placed the price they were willing to pay for these services at zero. Which begs the fundamental question – why go to all the trouble of asking for something that you place no value on? (Perhaps I missed that day in school because of the brew flu.) I submit that it is all in the semantics, (actually, it’s in the math). The OEMs did indeed recognize importance in their needs and requests, but failed to offer assessment of worth due to a lack of clearly defined parameters around which to base the worth. If “price” has certainty and measurability while the value of “value” leaves us wanting, in search of a definitive definition - then just how do we go about taking the steps to resuscitate “value” and return it to its rightful and necessary place in the equation of the OEM, EMS relationship?
Understanding the relative worth (value) of certain services, or specific varying levels of performance from service providers, is not an exact science. But understanding the trade-off between price and all of the various intangible and not perfectly quantifiable things that come with a price gets to the very heart of the art of management. If resources were unlimited, and all data was perfectly knowable – there would be an awful lot of managers out of work! Fortunately for me, resources are limited, data is imperfect, and decisions need to get made every day as to the underlying value of a great many things.
Given this imperfect and hard to quantify nature of many operations trade-offs to be evaluated, it is understandable that many OEMS today just do not have the skills, systems, and resources to undertake the first part of discerning the value equation – quantifying uncertain benefits and attempting to denominate these benefits in the ultimate common denominator – the mighty dollars. To my simple way of thinking about this problem, there is a very simple solution. Just give it a try! In a great many cases, the value of attempting to quantify the specific benefits of various operations decisions is fully 50% of the total value to be realized. Creating even the simplest of models to understand the value of reduced lead times for example, creates a thought process and a series of questions that have a real value separate from any actual solution they might precede. Evaluating complex trade-offs, and looking at optimizing a broader set of key metrics leads to a more holistic way of thinking about the intricacies of the OEM business and the inter-relatedness of all things in operations.
In an upcoming blog, I will discuss some simplistic ways of evaluating some of the various trade-offs that need to be managed between OEMs and their EMS providers – and hopefully breathe just a bit of life back into the concept of value.
