Engineering the value chain

By Evan Davis

If you’ve ever stayed at a Travelodge Hotel, you might have noticed they don’t have shampoo in the bathroom. Read original article.

See also Travelodge to create 10,000 jobs

They must be doing something right!

Well, that’s “value engineering”. It is a phrase you might want to remember, as it governs your life more than you know. The concept is perhaps best described by the company’s own website:

Pay for things you don't want? That's crazy! Our research shows that most people staying in a hotel simply want a clean, comfortable place to get a good night's sleep, and are happy to forgo the unnecessary "frills" offered in other stuffy, over-priced establishments. So we make sure we provide good quality essentials such as a comfortable bed and a decent quality shower, but get rid of unnecessary extras.

It’s worth reading the whole page, and their justification for not having various specific items in rooms, from hairdryers (answer: most customers don’t need one) to bathmats (answer: the floors have enhanced slip resistance).

Similarly, if you ever buy a kitchen at Ikea, you might find the cupboard doors a millimetre or two thinner than the doors at the more expensive kitchen suppliers. That’s also value engineering.

If you’ve sat at a pizza restaurant and found the service a little too efficient, that’s value engineering of sorts too.

In none of these examples, has the product or service level arisen by chance. In each case, someone has thought carefully about it. They’ve engaged in an exercise – formal or informal – called value management to optimise their processes, trim costs and enhance quality.

In big companies they do this in a structured way, engaging consultants in a fairly scientific process using so-called FAST diagrams. In small companies, they do it more haphazardly, maybe sitting in a VE workshop, with key designers and contributors throwing in ideas.

The whole concept of value engineering itself emerged from the American giant, General Electric, during the second world war. Since then it has been dressed up, supplemented and rediscovered in different forms. But at its most ambitious, the broad discipline of value analysis is the task of asking what a company is really trying to achieve, and how it best gets there.

A good example (provided to me by Professor John Roberts, an expert in this area) is that of meeting the objective, “to increase profitable capacity in a manufacturing operation”. You don’t just ask, “how do we build more capacity most efficiently”; you also ask whether the best way to increase profitable capacity is to stop wasting existing production time on unprofitable lines.

But at its narrowest, value engineering is about paring costs. And that probably remains its most common everyday application: thinking about every aspect of a process and a product to deliver an objective as cost-effectively as possible.

It’s the Travelodge shampoo experience.

I have never sat in a VE meeting, but I know people who have, and it is amazing how much you can save, if you just think about it in a systematic and open-minded way. Indeed, try it yourself next time you want to do some big work around the house: come up with a plan for that new bathroom, and then have a VE workshop with yourself. Ask yourself about all the materials you are using and what they are for. Ask about the schedule of work and whether it minimises costs; ask yourself whether you really need a full length bath, a shorter bath or a shower? Could you save money on tiles by getting a bigger mirror? Do you need tiles or could you paint the wall?

You’ll probably find there are lots of options for saving money – and some for spending money.

And even if you reject them (the full length bath is much nicer) the exercise may have been instructive. Thinking about big projects constructively is rarely a waste of time.

Note that value engineering is not (in principle) just about delivering the cheap and cheerful.

Upmarket hotel chains will always decide to offer shampoo, but they also need to think about value. Should the bathroom walls be in marble or tile. VE is about delivering the best customer experience for a given cost, so it only involves reducing costs where the saving is bigger than the reduction in value for the customer.

Business loves these kinds of concepts. It can take them, give them initials, and read books about them.

But in truth, value engineering is only a means of implementing a very basic concept of economic welfare: that you improve welfare when what you do costs less than the value someone derives from it. Should a hotel supply shampoo? Yes, if it costs 10p and the hotel customer values it at 11p. No, if it costs 10p and the customer values it at 9p.

This basic intuition is in practice obviously very complicated to implement. We don’t know what value the customer puts on the shampoo. Not all customers value it, but some value it a lot. If a few value it, couldn’t we sell it them (which is what Travelodge do)? Or give it to them at the desk? Or can we re-use it so that the cost is actually less than 10p?

But the idea is simple. Cost versus benefit. It should run through every business decision.

Now a lot of people recoil at businesses making things cheaper. They assume that when a hotel cancels the shampoo, or makes the kitchen wood thinner, it allows them to make more profit at the expense of the customer.

But that’s rarely the case.

It is in the interest of a hotel chain to offer customers all those things they really value. After all, Travelodge would be silly not to offer us shampoo if we valued it at 11p, because they could make more profit and get more satisfied customers by offering it and raising their price by 10.5p.

Similarly, it is in the interests of the hotel chain to offer customers only those things that customers value. After all, they would be silly to offer us shampoo we valued at 9p, if they could make more profit and get more satisfied customers by dropping it, and cutting their price by 9.5p.

In other words, Travelodge has just the right incentive to offer shampoo if customers value it. And removing the shampoo may be a favour to customers rather than a rip-off.

Indeed, often when service is annoyingly low-grade, it is not because a company is incapable of offering high grade service, it is because they have worked out just what their customers really value and want to pay.

And that’s value engineering for you.

Since I was reminded of the phrase fairly recently, I have found myself muttering it under my breath quite lot; either when I encounter something that has obviously been value engineered – from an airline meal to the packaging for an electronic device.

Or (less often in fact) where it seems to me something could benefit from value engineering if only they bothered to pursue it.

But be grateful for the modern companies that think carefully about what they’re doing, even if it sometimes means you can’t wash your hair when you want to.