value analysis

VALUE ANALYSISBy Ahmad Tariq Bhatti, FCMA, FPA, BSc, MA (Economics)

Value Analysis (VA) of any product or service or process or design helps in reducing its cost without having any compromise on the quality of that product or service or process. It is highly useful tool in reviewing cost and for obtaining cost efficiencies in order to stay competitive in the market that is highly volatile because of rapid changes happening every day in production technologies across the world.

VA is a systematic analysis that identifies and selects the best value alternatives for designs, materials, processes, and systems. It proceeds by repeatedly asking, "Can the cost of an object be reduced or eliminated, without diminishing the effectiveness, required quality, and customer satisfaction or market acceptability?”

At the very heart of VA process review is a concern to identify and eliminate product and service features that add no true value to the customer or the product but incur cost to the process of manufacturing or provision of the service.

How was Value Analysis originated?

Value Analysis was developed after World War-II in USA at General Electric (GE) in 1947. Because of the destruction of WW-II, there were shortages of skilled labor, raw materials, and component parts at GE. Lawrence D. Miles, Jerry Leftow, and Harry Erlicher at GE were looking for acceptable substitutes. They noticed that these substitutions often reduced costs, improved product, or both. This efficiency effect led them to the discovery of a systematic process for cost reduction without compromising on the desired quality of products. They named their process as “VALUE ANALYSIS”.

How Value Analysis helps in reducing/eliminating un-necessary cost?

Techniques of Value Analysis and Engineering tells you why so much unnecessary cost exists in everything we do. . . how to identify, clarify, and separate costs which bear no relationship to customers' needs or desires. . . how to place a dollars-and-cents value on different customer functions. . . how to divide a problem into "mind-sized" steps, each one of which is solvable and the sum of which solves the major problem.

- Lawrence D. Miles [An excerpt from his book Value Analysis and Engineering 3/e, 1989]

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What are key concepts underlying a Value Analysis Process?

Value: The ratio between a function for customer satisfaction and the cost of that function. It is the least cost that can achieve reliably a function or a service.

Value of a product = Performance of the function / Cost

Need: Something that is necessary or desired by a customer

Function: The effect produced by a product or by one of its elements, in order to satisfy customer needs.

Value Analysis (VA): a systematic process that is used to increase the value of an object that is achieved by providing required functions of a product at lowest overall cost consistent with achieving the required quality, performance and market acceptance.

Value Engineering (VE) is an organized effort directed at analyzing designed product features, systems, equipment, and process for the purpose of achieving essential functions at design stages consistent with required performance, quality, reliability, and safety.

VA team refers to a team/group/committee of cross-functional technicians who follow a stated work plan to accomplish VA objectives.

The object can be a product, a system, a process, a procedure, a plan, a machine, equipment, tool, a service or a method of working.

What is the objective of VA process?

The aim of VA/VE is to obtain target cost without compromising on the quality of a product by:

Identifying improved product designs that reduce product’s cost

Eliminating unnecessary functions that increase the product’s cost

VE requires the use of Functional Analysis (FA). FA is an analysis of the relationships between product functions, their perceived value to the customer and their cost of provision. The process involves decomposing the product into its many elements or attributes.

For instance, in the case of automobiles, functions might be consisting of style, comfort, operability, reliability, quality and attractiveness etc., etc.

How can we illustrate VA process with the help of a simple example?

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What is it? (a pencil) What is it used for? (writing and making marks) What is the main function of this product? (making marks, writing) What is the method, material or procedure that was used to realize the main function?

(a graphite stick & wood) What are the corresponding secondary functions? (facilitate holding the graphite) What does the item cost and how can we distribute the cost of realizing the main

function into each secondary function? Comparing these costs to an item of a similar function, how much should each

function cost and what must be the total cost?

Important Note

Focus your VA on the main function of a product, service or process, because during Value Analysis, the secondary functions may be changed. The group/committee/team may choose different secondary functions to obtain the main function. Secondary functions are subservient, main function is the real product.

What is the credibility of VA throughout the world?

For many of the world’s leading companies including names like Hewlett Packard, Sony, Panasonic, Toyota, Nissan, and Ford, VA process of design review has provided remarkable business returns. This is widely used throughout the world and have proven a useful tool for cost cutting.

The key to realizing these returns was through using knowledge of:

the customer requirements, the costs of the product, manufacturing process & the costs associated with failures due to poor or inadequate product design.

All these inputs to VA process are vital if decisions regarding product and process re-design are to yield lower costs and enhanced customer value.

How is Value Analysis differentiated from Value Engineering (VE)?

VA is applied to the existing products whereas VE is applied to the products in the making at design stages. They are also alternatively used. Both techniques produce same results of adding value to products/services. Therefore, they are also referred as Value Management Techniques (VMTs).

What is the scope of work for a Value Analysis Assignment?

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Organized cost reduction analysis by which accountants analyze costs in products or procedures, the ranking of their elements/parts in a descending order of their magnitude and in informed challenge to each, starting with the most important.

Development, as practiced in many companies, where it follows the realization of a design and combining through the specifications to remove costs by substituting standards and relaxing tolerances and finishes.

Purchasing analysis which systematically searches for cheaper bought-out components or services, probably by seeking alternatives or a fresh basis for price negotiation.

Method study The part of work that examines and analyses work of any kind in a disciplined manner that leads to improvement in efficient, effective and economic methods.

What is the methodology suggested for completing a Value Analysis Assignment?

Functions may be broken down into a hierarchy, starting with a basic or main function, for which the customer believes they are paying, and then followed by secondary functions, which support that basic function. For example, a coat may have a use function of making you warm (i.e. basic or main function) and an aesthetic function of ‘looking smart, attractive and charming’.

The product or process may be broken down into components, which can be associated with the functions they support. The value of the product or process then may be increased by improving or replacing individual components. This also applies to the whole item being analyzed, which may be completely replaced with a more cost efficient and effective solution.

Although this is a simple-sounding process, it can be quite difficult in practice, as it requires both an in-depth analysis of a product or a process to be improved and an innovative/creative approach to finding the best alternatives.

What is the step by step process of Value Analysis?

VA process is based on the application of a systematic work plan that may be divided into 7 steps as mentioned below:

1. Selection & Orientation, 2. Analysis, 3. Recording Ideas, 4. Innovation/Creativity, 5. Evaluation,6. Recommendations, and 7. Implementation and monitoring.

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The application of VA process needs to make use of basic techniques such as Matrices, Pareto chart, PERT technique and Gantt diagrams, etc., in most of the VA stages.

How can each step of Value Analysis Process be described?

# Stage Description

1. SELECTION &ORIENTATION

To select those critical areas where a potential for cost reductions is expected.

Use the common Pareto’s ABC analysis. General scope, restrictions and aims of the study

is defined.

2. ANALYSIS

Examine the data at a VA group/team meeting. Record the minutes of each brainstorming

session. Apply the Tests for Value. Propose further action.

3. RECORDING IDEAS

Write down the minutes of analyses meetings and circulate them to group/team members for further queries.

It includes the agenda for the next meeting.

4. INNOVATION/CREATIVITY

Arrange team meetings in order to discuss the ideas analyzed and any new information obtained.

Think upon practical measures for reducing costs and increasing value.

5. EVALUATION

Investigate suggestions for reducing costs and to make them practical and acceptable to client management.

Obtain definite prices and costs in order to estimate cost reductions accurately.

6. RECOMMENDATIONS

Recommend cost reductions to client management.

Present the recommendations in a comprehensive report.

Recommend a member to act as an implementation consultant for VA recommendations.

7. IMPLEMENTATION& MONITORING

Implement the recommendations accepted by the company management. Monitor the results as suggested in VA report.

Jot down the feedback of the management upon completion of VA assignment.

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What are advantages of implementing VA Process?

Advantages

1. A high customer orientation, focusing on those aspects of the product/service that better satisfy customer needs.

2. Allows enormous cost reductions by eliminating functions that do not satisfy customer requirements/needs.

3. VA improves profitability of products.

4. New ideas that arise from the creativity/innovation phase, may add radical changes.

5. VA provides a process to systematically improve the existing goods and services. It builds value into a product or a service.

6. VA process is used to offer a higher performing product or service to a customer at a minimal cost.

8. VA process is, therefore, one of the key features of a business that seeks to achieve TQM in all that it does to satisfy customers.

9. VA process often allows rooting out practices that have grown out of date and can be replaced with more modern approaches.

10. VA can uncover design flaws that not only operate in-efficiently but also create problems. In the case of a product, this could mean a high rate of malfunctioning items, creating customer complaints and warranty claims that put a strain on personnel and inventory departments.

What are precautions required while doing an VA Assignment?

1. Avoid making over-generalizations and superficial statements – it is important to be precise at every moment.

2. Collect, determine and examine all costs involved – costing professionals and experts will be helpful to determine the value of the product.

3. Make use of information from the best possible sources. Use best bench marks for cost of product/service/process etc., etc.

4. It is possible that two different VA consultants may give different sets of recommendations still both are correct. There can be challenges in the selection of the best alternatives.

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ABBREVIATION USED

# Abbreviation Description

1 FA Functional Analysis

2 GE General Electric

3 PERT Program Evaluation & Review Technique

4 TQM Total Quality Management

5 VA Value Analysis

6 VE Value Engineering

7 VMTs Value Management Techniques

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value analysis

Economy & Finance