Value Driven Six Sigma-So What's New?

Traditional Six Sigma Mantra
Six Sigma has always been about reducing variation. Traditional Six Sigma strove to reduce process variation and its success at doing so has been well documented. Traditional Design for Six Sigma (DFSS) strove to utilize quality tools in the design processes to yield products that meet customer expectations. DFSS successes have been less prevalent, which might be the case because it can be more difficult to quantify and demonstrate veritable results.

Criticisms of Traditional Six Sigma
The critics of traditional six sigma often cry: sure you've reduced process errors, but how has that influenced the customer perceptions of product/service value? Sometimes the influence on customer perceptions are direct as in the case of reductions in call center wait times or paper work cycle time (which makes the organization more responsive to customer requests), but is the customer really receiving more value when callers are routed through a complex call filtering system for the sole purpose of reducing variation of in-call handing times?

Then there's DFSS, with tools such as the Voice of the Customer (VOC), Quality Function Deployment (QFD), Analytical Hierarchical Process (AHP), etc. Well...., these tools as proposed and traditionally used are good in theory, but..., well..., they're difficult to use in practice and often collapse under their own weight, which ends up forcing managers to shoot from the hip anyway.

Value Driven Six Sigma
The mantra of Value Driven Product Management is to use product value, product cost, and pace of innovation to guide variation reduction decision making. Value Driven Six Sigma and Value Driven DFSS looks at variation reduction through a new lens: reduce process and product variation so long as the result is positive net-value creation. The net-value of any product management decision is the change in product value minus the change in product cost. The third fundamental metric of product management is pace of innovation, which is a measure of how fast the product/process changes can be made.

Further Reading:
Design for Six Sigma as Strategic Experimentation

B2B Value Capture: Are Your Salespeople Aligned?

Build Value Perception, then Harness It

In B2B, the interaction with salespeople should feel like a consultation because the sales folks should not only be familiar with their products (goods and/or services), but have intimate understanding of their customer's (think client's) business as well. The sales folks need to build up the customer's understanding of how their products deliver value and then capture as much of that value in negotiations as possible.

Salespeople As Customer Advocates?

What I've been hearing from executives is that they feel their salespeople all too often say they need to give price cuts instead of holding their ground and keep fighting for an equitable return on the value provided. Here's a list of behaviors to watch out for:

1. Sales folks sell by comparing prices with competitors
2. Throw-in services to close the deal
3. Say "Our prices are too high!" when they lose a deal
4. Close deals by lowering prices
5. Lower prices to get more business
6. Focus on revenue when making a sale

Optimal Sales Behavior

In order to make a sale, sales folks will have to look at how they are delivering customer value (product value minus price) as compared to the competition; but they also need to understand the businesses costs to ensure an equitable return for the sale (price - product cost). The following behaviors can help do this:

1. Sell by comparing cost-of-ownership with competitor products
2. Use supplementary services to generate additional revenue
3. Say "Our method of communicating value needs work!" when they lose a deal
4. If prices are lowered to close the deal, pieces of the product are taken out to lower cost
5. Consider profitability when making a sale

Ideas to Incentivize B2B Value Capture

In an ideal world, the salespeople will see that using value calculators should make the sales cycle easier. Selling as a value consultant is a different way to close deals for sure. So how do you transform your sales folks into value consultants? The answer of course is to make changes to their compensation plans...., which may not be easy. The weighting on profitability needs to be increased relative to volume and revenue. This can be difficult for management to accept because they might fear that this will affect market share. But ultimately, isn't it better for a business to have market share AND profitability?

Involve salespeople early in the development of value calculators to help them get comfortable with this methods of sale. Pilot the value calculators throughout a couple of sales cycles with "friendly" clients. After a few small wins, document the process and have new salespeople join the newly developed value consultants in the field to observe the process and continue the training by doing some role-playing. The business can also develop a small group of specialists who understand the value consulting model and who are trained to be able to find additional value that could be captured. The end goal.... a value capture culture.

Further Reading

"Value Merchants" by Anderson, Kumar and Narus

B2B Value Capture: Shattering the Commodity Perception

Lost Opportunity in the B2B Sale
Many suppliers make the mistake of believing they are selling only their core products in a B2B sale and use this as the basis for negotiating price. In today's world of complex products that contain multiple sub-systems, it is often the case that unknown interactions produce new performance issues or yield unintended consequences. What the supplier must do is unbundle the core product which might be interchangeable from the competition, from the supplementary services that are often given away without limit to the customer.

Value in Supplementary Services
Supplementary services are often seen as very valuable by the customer and could be used as the attributes of difference (differentiators) that could be used to capture more value in a B2B sale. The authors of "Value Merchants" (see link below) offer several examples of supplementary services that could be used to capture more value:

Services

• Fulfillment: availability assurance, emergency delivery, installation, training, maintenance, disposal/recycling
• Technical: specification, testing and analysis, troubleshooting, problem solving, calibration, customer productivity improvement

Programs

• Economic: terms and conditions--deals, discounts, allowances, rebates/bonuses; guaranteed cost savings
• Relationship: advice and consulting, design, process engineering, product and process design, analysis of cost and performance, joint marketing research, co-marketing and co-promotion.

Systems

• Supply Chain: order management intranet, automated replenishment and vendor-managed inventory, enterprise resource planning, computerized maintenance management
• Efficacy: information and design assistance intranet, expert systems, integrated logistics management, asset management

Think Naked Solutions and Supplementary Services

A naked solution is the basic out-of-the-box product and the supplementary services are the extra services that can be offered to make the customer's life more easy. Some customers won't need supplementary services, so don't give them and charge a lower price than the competition who still have these services bundled into their offer. Don't force customers to pay for services they don't need.

Before you can decouple supplementary services from the naked solutions, the supplier needs to unbundle the value and costs. The following table gives some direction on what to do next:

As you can see, we want to drive supplementary services to become options and let the customer decide what they value for themselves. What could be better than giving the customer what they want, for a price they're willing to pay, for a price that is profitable for the supplier?

Further Reading:

"Value Merchants" by Anderson, Kumar and Narus

Quantifying Value in B2B Transactions

Value, Value, Value
Value is a word that can have many meanings based on the conversation at hand. To clarify, I offer the following graphic representation of the different types of value from the supplier's perspective that are important in B2B transactions:

The way you capture value in B2B transactions is by calculating the value the customer puts on your product (good and/or service)--calculating the product value. When we create B2B value calculators through Economic Value Analysis, we systematically quantify the value drivers for a particular customer. This is the major difference between Value Driven Management in a B2B market versus a B2C market where a product value metric is calculated and used to represent the worth an entire market gives to a particular product.

As the chart shows, if you know product value and product cost, its easier to understand what price is equitable for both the supplier and customer. Ultimately, product value and price don't change much. Price is therefore changed to give more or less incentive to the customer to go forward with a purchase. This difference between Product Value and Price is called Customer Value and in B2B transactions Customer Value usually translates directly into economic value (profit) for the customer.

What to Expect

As you work with your customers to create the value calculation, each Critical-to-Value Attribute will fall into one of the following categories (see Value Merchants below):

1. Attribute of Parity
2. Attributes of Difference
3. Attributes of Contention

An attribute of parity is an attribute that performs essentially the same as a competing alternative. An attribute of difference is an attribute that performs either better or worse than a competing alternative. Alternatively, an attribute of contention is an attribute where it is not clear whether a the competing alternative is better or worse, so more data is required.

Value Propositions from Value Calculations

Value propositions might actually vary from customer to customer due to different product use situations. Nevertheless, value propositions become clear as the value consultant and customer develop a shared mental model of how value is delivered. The attributes that perform better than the competition form the basis for the value proposition and the two or three attributes that deliver the most value become the focus. These high value earners WILL likely be what sets the supplier's products apart from the competition and ultimately become the foundation for brand building.


Additional Reading:
"Value Merchants: Demonstrating and Documenting Superior Value in Business Markets"

Capturing Value in B2B Transactions

What is B2B Value Capture?

Sales guys often fall victim to price concessions because they can't communicate and/or quantify how their products and services will bring value to their client. In a business-to-business (B2B) transaction, "value" means economic value--dollars and cents. The goal of B2B Value Capture is to get an equitable return on the economic value products and services provide to clients.

The tools and methods used to quantify B2B value fall under a practice called Economic Value Analysis (EVA). EVA can be used in both a B2B context (widget A saves $X/yr. or with increase sales by $Y) and in a business-to-customer (B2C) context (car A will save the customer $X/yr. in fuel costs over car B).

Documenting Your Value Proposition

The result of an EVA exercise is a value calculator. Usually in spreadsheet form, these tools support a consultative type of sale, where the value consultant (salesperson) sits down with the potential client to quantify the savings and/or increased sales that could result from the use of products/services from the supplier. This exercise leads to four major benefits:

1. Increases the credibility of the sales pitch
2. Clients can quantify the value created and will be in a better position to convince upper management and those that have to sign of on the Capital Allocation Request that the purchase makes sense
3. Suppliers can show veritable cost savings and incremental sales to future potential clients
4. Suppliers can compare actual savings to forecasted savings and refine their value calculators

B2B Value Capture Works

Value Capture works because it helps the value consultants and clients conceptualize and verbalize value. By doing so, they create a common language and mental model, which is far more than most salespeople do for their clients. Most salespeople claim they provide superior value with a "trust us" for support.

B2B Value Capture Process

Step 1: Create list of Critical-to-Value Attributes (CVAs)
Step 2: Understand how CVAs provide value as their performance changes
Step 3: Translate value changes into value propositions
Step 4: Benchmark competitive offerings and compare to value propositions
Step 5: Transform salespeople into value consultants
Step 6: Profit from capturing value

In future blogs, I'll take you through these steps and find case studies in the news to demonstrate how it works.

Book Review: "Design for Six Sigma as Strategic Experimentation: Value, Cost, Pace of Innovation" by H.E. Cook

5 Stars (out of 5)

The following is a book review of "Design for Six Sigma as Strategic Experimentation" by Harry Cook. The book was first published in 2005 by the American Society for Quality, Quality Press.

Actually, the book gets 10 out of 5 stars. Don't be fooled by the title, this book is much more than traditional DFSS. "Value Driven Strategic Experimentation: Product Performance Optimization" might have been a better title because the methods and tools described in this book address the major criticisms of traditional DFSS (too much focus on cost, value to the customer is not quantified, the tools are not integrated). Unlike traditional DFSS, VDSE uses BOTH product value and product cost to find the optimum design variable settings to maximize net-value, make tradeoff decisions between product performance attributes, and minimize performance variation. VDSE is what DFSS was intended to be, but never could be because of its reliance on "old" tools that were shoehorned together.

This book, like Cooks other book "Product Management" is the result of  an academic collaboration with industry which strove to provide tools to guide product managers through decisions that involve both technical and commercial feasibility. The book is written for the scientifically minded and mathematically inclined audience and is a seminal work for other "Value Driven Product Management" books. The specific contributions to the domain of product management include: (1) explains the role of product value in product management decisions, (2) offers analytical models for calculating product value, (3) offers analytical models for calculating the value of continuous product attributes, (4) offers analytical models for calculating the value of qualitative product attributes, (5) includes a methodology for creating experiments to find optimal settings for design variables, and (6) provides rigorous support for models based in economics, econometrics, game theory, and psychology. The book is clearly written, has an excellent bibliography, and uses real-world examples to illustrate main points.

In summary, "Design for Six Sigma" is an excellent contribution to the area of Value Driven Management and is highly recommended for quality engineers interested in being on the cutting edge.

Book Review: "Product Management: Value, Quality, Cost, Price, Profit and Organization" by H.E. Cook

5 Stars (out of 5)

The following is a book review of "Product Management: Value, Quality, Cost, Price, Profit and Organization" by Harry Cook. The book was first published in 1997 by Chapman & Hall.

"Product Management" is the result of  an academic collaboration with industry which strove to provide tools to guide product managers through decisions that involve both technical and commercial feasibility. The book is written for the scientifically minded and mathematically inclined audience and is a seminal work for other "Value Driven Product Management" books. The specific contributions to the domain of product management include: (1) explains the role of product value in product management decisions, (2) offers analytical models for calculating product value, (3) offers analytical models for calculating the value of continuous product attributes, (4) offers analytical models for calculating the value of qualitative product attributes, and (5) provides rigorous support for models based in economics, econometrics, game theory, and psychology. The book is clearly written, has an excellent bibliography, and uses real-world examples to illustrate main points.

The models that Cook offers have been criticized for requiring large amounts of data. This is not the case however, as what makes the models so powerful is that they can be initially parameterized using best guesses and continuously

refined by investing in market research to reduce risk. The organization not only benefits from the model's predictive power, but also by going through the process of model parameterization as it focuses the team on the important variables and assumptions.

One area where the book is particularly unique is Cook's chapters on quality improvement. The product management models are tied together with concepts such as Taguchi's methods and Statistical Process Control (SPC) to show how value can be included in the product management decision calculus (traditionally the focus is on cost reduction in quality). 

In summary, "Product Management" is an excellent contribution to the area of Value Driven Management and is highly recommended for marketing and general managers of products with either high price tags (auto, computers, etc.) or high volume who compete in highly competitive markets. This book would also be a good addition to the library of quality managers because of the attention given to the link between product value and quality.