abc and value analysis

7/30/2019 ABC and Value Analysis

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A Presentation on ABC andValue Analysis

By:

Neha Kumari (7)

Sr. Smita Parmar

(18)

Sarita Kumari (12)

Samar Vivek Tigga

(54)

Roushan Kumar (53)

Soni Tiru (19)

Faculty AdvisorProf. Mehul Chauhan

Group - 7

PGDM Semester II

Xavier Institute of Management

Jabalpur 5/21/2013 1Xavier Institute Of management


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ABC Analysis

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Introduction

ABC Analysis is a basic analytical materials management tool.ABC Analysis may be applied to any branch of management

with ease and success. It calls the top management to place its

efforts where the results will be the greatest. The ABC Analysis

goes by its name. it always controls the best, then better and

lastly the good. Its genesis lies in the characteristic distributionof anything which can be measured in monetary terms. Its

importance lies in the determination of priority which enables

the management to exercise control over the subjects according

to the priority fixed for the purpose.



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Cont.

In materials management as a tool ABC Analysis hasgained considerable importance and can be applied to

almost all the areas in the department needing selective

control.

ABC stands for activity-based costing. In inventory orstock management, it's a method of stock control. It's

basic assumption is that not all stock is equally valuable,

therefore doesn't need the same kind of attention.



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ABC ANALYSIS

One of the widely used technique for inventory control is

ABC(always better control) analysis.

It is an approach to inventory control that classes inventory by

its usage value.

Example: In Product Cost Controlling(CO-PC), you can use

ABC analysis to obtain an overview of the production orders

in a plant that incur the highest actual costs.

Example: the best customers who yield highest revenue are

given the 'A' rating, are usually serviced by the sales manager,

and receive most attention. 'B' and 'C' customers warrant

progressively less attention and are In accounting, 55/21/2013 Xavier Institute Of management


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Cont..

inventory items based on a user-specifiedvaluation criterion. "ABC" refers to the rankings

you assign your items as a result of this analysis,

where "A" items are ranked higher than "B"

items, and so on.

Generally, a relatively small proportion of the

total range of items contained in an inventory

will account for a large proportion of the totalusage value.

This phenomenon is known as the Pareto law.

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A general law found to operate in many situations that indicates

that 20 percent of something causes 80 per cent of something

else, often used in inventory management (20 per cent of

products produce 80 per cent of sales value).

Extending Paretos principle to inventory, it is always possible

and necessary to separate vitalfew from trivialmany of the

stock items for their effective controls.

ABC classification is done as follows:

Class A items are those 20 per cent or so of high-usage value

items which account foraround 80 per cent of the total usage

value.

Class Bitems are those of medium-usage value, usually the next

30 per cent of items which often account for around 10 per cent

of the total usage value.

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8

CATEGORY % OF ITEMS %OF ANNUAL

CONSUMPTION VALUE

A 10-20 70-80

B 20-30 10-25

C 60-70 5-15

Class C items are those low-usage value items which,

although comprising around 50 percent of the total types of

items stocked, probably account for only around 10 per cent of

the total usage value of the operation

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Advantages of ABC Analysis

1. Helps to concentrate all efforts.

2. Produces rewarding results.

3. A category items Careful attention is paid at every

step.

4. C category may be dispensed with in the record-keeping system as well.

5. Most effective method that helpful in many ways



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List each item carried in an inventory by number.

Calculate the annual volume of usage and per unit cost of each

item.

Multiply each items annual volume of usage with its per unit

cost.

(annual volume of usage ) x (Its Cost per unit)

Compute each items % of total inventory in terms of annual

usage(Rs).

DEVELOPING AN ABC ANALYSIS



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Cont..

Select the top 20 per cent of all items which havehighest rupee % and classify as class A items.

Select the next 30 per cent of all items which have next

highest % and classify as class B items.

The next 50 per cent of all items with lowest rupee %

are classified into class C items



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Inventory

costs



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A items B items C items

High consumption value Moderate value Low consumption value

Very strict control Moderate control Low control

No safety stock Low safety stock High safety stock

Frequent ordering Once in 3 weeks Bulk ordering once in 6

months

Rigorous value analysis Moderate value analysis Minimum value analysis

Accurate forecast in

materials planning

Estimate based on past

data on present plans

Rough estimates for

planning

Weekly control

statements

Monthly control reports Quarterly control reports

Maximum efforts to

reduce lead time

Moderate efforts Minimum clerical efforts



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LimitationsABC analysis of inventory control suffers with certain

limitations:

Proper standardization and codification is required for

effectively carrying out ABC analysis.

A periodic review and updating the inventory position is a

constant headache of a materials manager who if solely

depends of ABC Analysis for inventory control.

Sometimes C items become more important than even A

items requiring more, rather constant, attention.



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In such a situation the whole approach may get revised

defeating the very purpose of ABC Analysis which is

primarily based on monetary value of the item under

analysis ignoring other important factors.

The base of ABC Analysis is grading of the items The

gradation of items is obviously done on the basis of V.

(Vital) E. (Essential) and D. (Desirable) but sometimes even

items of negligible monetary value may be vital (V) or

essential.



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Value Engineering Or Value

Analysis



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VALUE AND VALUE ANALYSIS

Value is itself is some what difficult to define. It meansdifferent things to different people. Also, it is often

confused with the cost and price of a product or service.

Value is the least cost that can accomplish reliably a

function or a service. This implies that in achieving

reduced cost, the quality and performance of the item are

maintained. It follows, therefore, that value analysis is atechnique which builds Value into an item.



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Introduction

Value Analysis aims at a systematicidentification and elimination of unnecessary

costs resulting in the increased use of

alternatives, less expensive material, cheaper

designs, less costly methods of manufacturing

etc. to provide the same performance, quality

and efficiency and in a decrease of overall unit

costs and consequently greater profits.



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Contd..

Value Analysis is a cost reduction technique and perhapsthe most potent of all such techniques.

Value Analysis (VA) is also known as Value Engineering

(VE), Value Assurance and Value Management (VM).

It is an approach for improvement in the performance of

products, systems and reduction of costs without affecting

the function.



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Contd..

VALUE ANALYSIS is a systematic approach to segregatethe different parts of the VALUE, and eliminate by

gradual process those parts of UNNECESSARY COSTS,

which, neither.

a) increase the function,nor

b) provide esteem or ego satisfaction

nor

c) enable the resaleability

nor

d) provide sentimental attachment or urge to possess.



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Definition

Value Analysis is the organised and systematic study ofevery element of cost in a part, material or service to

make certain it fulfills its function at the lowest possible

cost; it employs techniques which identify the functions

the user wants from a product or service; it establishes by

comparison the appropriate cost for each function; then it

causes the required knowledge, creativity and initiative to

be used to provide each function for the lowest cost.



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History..

During the second world war, one of the most serious

problems faced by companies engaged in the war effort wasthe shortage of materials. This led to experimenting with

substitutes, quite often in very unorthodox ways. In many

cases. The experiments clicked and surprisingly there were a

large number of instances where the substitutes were much

cheaper and functioned more efficiently than the original

material.

After the war, Harry Erlicher, the vice president of

purchasing, general electric co. (U.S.A.) felt that this

problem of finding out substitute could be done in a more

scientific way and as a deliberate approach, rather than by an

ad-hoc crisis approach.



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Cont.

He entrusted this job to a team of engineers headed by

Lawrence mile

In fact it was miles who coined the term value analysis and

its synonym, value engineering. This team under his

stewardship pioneered this technique and perfected it and,it is said, saved their company 200 million over a period of

17 years. In America, the technique is very widely used and

is given a great deal of importance.



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Cont..

L.D. Miles, the father of this concept, wrote in 1961, abook, Techniques of Value Analysis and Engineering. Navy

Bureau of ships was the first organisation to use VA in 1954.

Society for American Value Engineers (SAVE) was

established in1959.

In India, now we have Indian Value Engineering Society

(INVEST) to create awareness of this approach and to

propagate this concept.



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APPLICATION OF VALUE

ANALYSIS

Value analysis can be applied universally, i.e., to everything

materials, methods, processes, services, etc., where it is

intended to bring about economics.

One should naturally start with items where the maximum

annual saving can be achieved. This immediately suggests that

items whose total annual consumption in Rupees is high should

receive top priorities in the application of Value Analysis. In the

same manner, scarce materials, imported materials, or thosedifficult to obtain should also receive the attention of the value

analyst.



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Bearing this in mind, Value Analysis can be systematically

applied to categories of items, such as those listed below in

order to bring about substantial cost reduction :

1. Capital goods plant, equipment, machinery, tools and

appliances;

2. Raw and semi-processed material, including fuel;

3. Sub-contracted parts, components, sub-assemblies, etc;

4. Purchased parts, components, sub-assemblies, etc.,

5. Maintenance, repairs, and operational items;



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6. Finishing items such as paints, oils, varnishes, etc.

7. Packing materials and packaging;

8. Printing and Stationery items;

9. Miscellaneous items of regular consumptions;

10. Power, water supply, compressed air, steam and otherutilities(services) and

11. Materials handling and transportation costs.

As mentioned earlier, items where the saving can be substantialshould obviously be taken up first. Also, items which are imported, ordifficult to obtain, and monopoly items, should receive high priority.



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However, even if no economy can be effected immediately by

Value Analysis on any particular item, then usefulness of the

technique should not be forgotten altogether. The item should

be taken up again for value analysis after six months or a year.



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VAVE is a generic name given to

this technique of VALUE

ANALYSIS and VALUEENGINEERING.



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The seven classes of value

propounded by Artistotle are1. Economic Value.

2. Political Value.

3. Social Value.

4. Aesthetic Value.

5. Ethical Value.

6. Religious Value.

7. Judicial Value.



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The following table shows acomparative analysis and

applicability of these different

classes


V l Cl T f A ti E l ti d C VAVE b


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Value Class Type of Actions

Examples

Explanation and

Analysis

Can VAVE be

Applied

Economic A product or

service bought ata given price

Within a given

framework andconditions

alternative

products or

services

can be found so

as to

serve the

required

function at a

much lesser cost

YES


Value Class Type of Actions Explanation and Can VAVE be


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a ue C ass ype o ct o s

Examples

p a at o a d

Analysis

Ca be

applied

Political People are

normallywedded to a

particular

philosophy

thereby have a

certain political

following and wayof thinking

People have been

to be changingtheir alliances and

philosophies so

as

to join others in

some cases even

with a diagonallyopposite view

point, just to gain

power.

Subjectivity is

involved to alarge extent

and exact

VALUE

cannot be

ascertained.



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Examples

Explanation and

Analysis

Can VAVE be

applied

Social Spending a

certain

amount to attend

own brothers

marriage (which

is a

major social

function)

If one is close by,

he might take

leave from work

and join the

occasion with

family. If the

distance is far

(butwithin the

country) he

decides to join

the

occasion along

because of travelcost and other

expenses

High

subjectivity is

involved and

the VALUE of

not joining the

function

cannot be

evaluated.



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Examples

Explanation and

Analysis

Can VAVE be

Applied

AESTHETIC Hobbies of

individuals are

involved. A

Picasso

painting is

purchased

at astronomical

Price one,

whereas a

diamond studded

gold ring is

bought by the

other

For the other

person the

painting may not

be worth that

amount and he

feels that the

decision was

foolish.

Value cannot

be judged as

the functional

requirement

cannot be

qualified in

general. The

individual has

spent his

money and

that is his lookout



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Value Class Type of Action

examples

Explanation and

Analysis

Can VAVE be

Applied

Ethical Secret

information

not to be

revealed

An employee of

one organization

should not work

simultaneouslyfor competitor,

etc.

It has been

observed

that there is a

class of

patriots who can

lay their life for

the nation ,but at

the same timethere are others

who pass on

secret security

information to

other countries ,

etc,

Highly

subjective

criteria hence

VALUE of

ethics cannot

be judged.



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Examples

Explanation

and

Analysis

Can VAVE be

Applied

Religious Communalism

and values

prevailing, A

person following

a particular

religion forces

other to convert

to his own

religion but he

does not want to

change his ownreligious

For gains some

people change

over to a

particular religion

(both for cash &

kind in return). It

is easy to convert

some but a bit

difficult to convert

some other.

Purely based

On individuals

own look and

his own value

system.



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examples

Explanation and

Analysis

Can VAVE be

Applied

Judicial Judges lay a

certain penalty forgiven crime like

Rs. 50,000/- or

three months R.I.

For the same

type of cases thepenalty amount

and the

equivalent R.I.

period changes.

The same person

committing thesame crime a

second

time will have a

more severe

punishment.

For case to se

the details aredifferent and

hence no fixed

amount



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From the above table, it can be clearly seen that Value

Analysis effort can be very effectively made when it

concerns the Economic Value. In other cases it should beleft to the individuals, who are the best judges in their

own cases. The only scope in these cases is that when it

concerns an organization's need, a better approach would

be that a team of experts decide about the VALUE ofthese decisions, wherever possible, so that the

subjectivity can be reduced, if not completely

eliminated.



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Why Use Value Analysis

In reality, a complex number of reasons exists thatnecessitate the structured approach of value analysis as a

means of logical cost reduction.

These reasons can be divided into two key sources:

1. those that lie within the business and

2. those that are stimulated by the market for the product

or service.



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Within the business: Design

related issues The major reasons why VA exercises are conducted actually

originate from the design process itself and the lack of

control systems concerning reviews of product performance

once the product has entered the production stage.

The VA process is also a means of learning from past

mistakes and constantly refining the ability to create right

first time designs in less time for the business which is a

source of competitive advantage.



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Market induced Reasons

There are many modern competitive trends and pressuresthat make the VA approach a valuable activity within

any business. These pressures include:

I. Pricing PracticeII. The Advent of E-Commerce

III. Reducing Complexity

IV. New Technology and Materials

V. Environmentalism


T f V l


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Types of Value1. Use Value: Properties which accomplish a use, a work or a

service.

2. Esteem Value: Properties which make the ownership of the

object very desirable.

3. Cost Value: Properties which are the sum of the labour,

materials, overheads and other costs required to produce that

object.

4. Exchange Value: Properties that make the object possible of

being trades for other items.



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Types of function

It is the use value of a product- its functional utility.

Functions can be of two types:

a) Basic functions

b) Secondary functions



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Value Engineering Job Plan

Value analysis (VA) process is also called VA job plan. Mudge proposes the job plan in the following seven steps:

1) General Phase

2) Information Phase

3) Function Phase

4) Creation Phase

5) Evaluation Phase

6) Investigation Phase

7) Recommendation Phase



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General Phase It is the most demanding phase of VA Job plan. Some typical

beliefs, habits and attitudes are given below:-

- it will set a nasty precedent

- it wont work

- cost too much

- The Public wont touch it

- It is impracticable

- The Production Dept. will have none of this

- Why change it-it works- There is no other source of supply

- That is not our responsibility

- Its company policy



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Information Phase

Here project is studied in detail and all important facts aregathered and considered.

In this phase, facts which are in the form of technical

specification or environmental specification are considered.

Also, the engineering drawings, production sample,production data are all kept in mind.

The cost data and work specifications are secured.

Consumer preference are jotted down.

Development and testing are studied.

Quantities and scraps are taken into account.



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Function Phase Here the product is defined in terms of its function, in terms of

its performance expectation.

These functions are co-related with costs and their worth.

Product Function

Tea Cup Hold Tea (liquid)

Light Bulb Emit Light

Gas Lighter Provide Ignition

Mirror Reflect Light

Brake Arrest motion



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Evaluation Phase

Creative ideas generated during the above phase arescreened for their feasibility, cost effectiveness and

practicability at this stage.

For this purpose, ideas are further refined or combinedtogether.

Cost of all ideas and savings resulting from their

implementations are studied.



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Investigation Phase

It is a virtual extension of the previous phase.

Ideas accepted are here converted into acceptable and

workable solutions to perform the desired functions at the

least cost.

It may be necessary to standardize, to consult vendors and

specialists ,and to use specialty products, processes and

procedures.



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Recommendation Phase It is the ultimate phase of VA.

Finally selected alternative here in presented for

implementation on acceptance.

Acceptance is the key to success of VA.

Sometimes acceptance is the result of presentation or


Functional Requirement


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Functional RequirementEstablishment The nerve center of Value Engineering approach is the

understanding of the FUNCTION of an item, Product or

Service.

Functional Analysis-

-An item is purchased only because it performs some

specific function. A customer need, to be fulfilled by

performance of functions is initially established. This may

come from the customers awareness or a need or the

development of a need in the customer by industry.


Cont


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Cont Thus, in every case, a product or operation will include

Primary (Basic Function) and Secondary Functions. As

related to Value Engineering, functions are described withonly two words, a VERB form and a Noun form e.g. Provide

Light, Cut Paper, Provide Energy etc.



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Organisatonal Aspect Of Value Analysis

Value analysis requires support from the top management,and it needs team work. The value analysis function can be

organized as per the needs of the organisation, its size,

operation ,product line etc. It can be administered by staff

at the corporate office or it may be run on decentralized

basis or a balanced combination of both.



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Cont..

This is effective when manufacturing units are set up onproduct basis and are autonomous cost and profit centers.

Value analysis also has some restr ictions too..

Its endorsement at top level leads to acceptance at lower

level.

It is also affected by the management level to which it

reports.


Benefit From The Value


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Benefit From The ValueAnalysis

There are several direct and indirect benefits which canaccrue from the introduction and practices of valueanalysis:

A reduction in cost of existing product or systems.

Prevention of unnecessary cost in new products or system.

The introduction of value analysis leads to overall costconsciousness and a general attitude change towards cost

Products value get improved and quest for new materialand processes get encouraged



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Cont.

System relating to cost and estimating usually benefitfrom reorganisation necessitated by the wider use of cost

information.

A greater profit can accrue by a greater return ofinvestment.

It is very important tool in contrasts and it is good to

have a value engineering Clause to encourage acontractor to reduce the cost.



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CONCLUSION

Value analysis is a technique with immense possibilities,and systematically employed, it can achieve great

economies and increased efficiency. Although good

results have been obtained in several individual cases in

some industries, only a large scale and systematic

application of this technique in all industries, and in

defence production, can result in substantial economies

on a national scale.



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Cont.

This valuable technique, if systematically employed,promises rich dividends,and, among other things,

enables greater use of indigenous raw materials and

equipment by import substitution. It is, therefore, of

special significance to a developing country like India

which has adopted a programme of rapid

industrialization in the face of paucity of foreign

exchange and other handicaps.



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Cases..

A manufacturer of domestic water heaters conducted a VAanalysis. It found that the customer derived value from the

cost efficiency and reliability of the product. In addition,

the company found that the largest source of failures

resulted from internal moving parts that failed frequently.

The VA exercise resulted in a decrease in these moving

parts (valves etc.) and a replacement of other problem items

with more cost-effective alternatives. The reliability of the

product has resulted in no complaints from customers and a

reduction of moving parts to only three parts.



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Cont.. A lighting company has achieved savings of 6 times the

costs of its value analysis exercises. One product has

achieved a 250% increase in sales over its predecessor.

Now the company has trained over 15% of its workforce in

VA techniques.

Toy Company redesigned a model product, as a result of a

VA exercise, and reduced the many different metal

fasteners with just one type creating a saving for thecompany and the supplier.



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Reference

S.A. Chunawalla, D.R Patel (2005), Production andOperation management, Himalaya Publication,

Mumbai.

http://www.productivity.in/knowledgebase/Value%20An

alysis/g.%20Value%20analysis%20and%20Value%20engineering.pdf

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