Value Analysis

A presentation by

Ahmad Tariq BhattiFCMA, FPA, MA (Economics), BSc

Dubai, United Arab Emirates

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Let us explore, how it works???

Cost reduction without

compromising on

quality???

Value Analysis, How???

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OriginValue Analysis was developed after WW-II in

USA at General Electric (GE) in 1947. Because 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 looked for acceptable substitutes. They noticed that these

substitutions often reduced costs, improved product, or both. This 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”.

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VA… How???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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Key ConceptsValue: 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 / CostNeed: Something that is necessary or desired by a customerFunction: The effect produced by a product or by one of its elements, in order to satisfy customer needs. Value Analysis: 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. VA team refers to a team/group/committee of cross-functional technicians who follow a stated workplan 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.

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Key ConceptsThe aim of VE is to obtain target cost without compromising on the quality of a product by:

Identifying improved product designs that reduce product’s costEliminating unnecessary functions that increase the product’s costs

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 consist of style, comfort, operability, reliability, quality and attractiveness etc., etc.

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An Illustrative Model

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? (transfer graphite to paper and 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, because, during the

analysis, the secondary functions may change. The group/committee/team may choose different secondary

functions to realize the main function.

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VA WorkabilityFor 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 major business returns.

The key to realizing these returns is 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.

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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,

customer satisfaction or market acceptability?”

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/processes give same results of adding value to products/services. Therefore, they are also

referred as Value Management Techniques (VMTs).

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.

Definitions

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ScopeOrganized 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.

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FunctionsFunctions 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’.

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ComponentsThe 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.

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ProcessVA process is based on the application of a systematic

workplan that may be divided into 7 steps as mentioned below:

Selection & Orientation, Analysis, Recording Ideas, Innovation/Creativity, Evaluation,Recommendations, and Implementation and monitoring.

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.

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Process Description# 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.

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Process Description# Stage Description

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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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 service.

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

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Advantages 8. VA process is, therefore, one of the key features of a business

that understands and seeks to achieve TQM in all that it does to satisfy customers.

9. VA process often allows to root 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 inefficiently 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.

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Disadvantages

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

Collect, determine and examine all costs involved – only when one is cost conscious, will it be possible to determine the value of the thing being assessed.

Make use of information from the best possible sources.

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

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Abbreviations# Abbreviation Description

1 FA Functional Analysis

2 GE General Electric

3 TQM Total Quality Management

4 VA Value Analysis

5 VE Value Engineering

6 VMTs Value Management Techniques

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References

1. Value Analysis and Engineering 3/e by Lawrence D. Miles 2. Management & Cost Accounting by Colin Drury 5/e (pg. 892)3. Cima Official Terminology4. Management Accounting Handbook by CIMA

(2/e, edited by Colin Drury)5. Cima – Kaplan Publishing for Paper P2 (pg. 205)6. www.businessdictionary.com

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Thank You!

Ahmad Tariq Bhatti

FCMA, FPA, MA (Economics), BScDubai, United Arab Emirates

Contact details:At.bhatty@gmail.com

The End.

Thank You!