Value Analysis

1
Value Analysis

• A presentation by
• Ahmad Tariq Bhatti
• FCMA, FPA, MA (Economics), BSc
• Dubai, United Arab Emirates

2
Cost reduction without compromising on quality???
Value Analysis, How???
Let us explore, how it works???
3
Origin
Value 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.
4
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
5
Key Concepts

• 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 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.

6
Key Concepts

• The aim of VE is to obtain target cost without
  compromising on the quality of a product by
• Identifying improved product designs that reduce
  products cost
• Eliminating unnecessary functions that increase
  the products 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.

7
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.

8
VA Workability

• For many of the worlds 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.

9
Definitions
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 qu
ality, 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.
10
Scope

• 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.

11
Functions
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.
12
Components
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.
13
Process

• VA 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.

14
Process Description
Stage Description
1. SELECTION ORIENTATION To select those critical areas where a potential for cost reductions is expected. Use the common Paretos 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.
15
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.
16
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/innovatio
   n 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.

17
Advantages

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  that have grown out of date and can be replaced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

18
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.

19
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
20
References

• Value Analysis and Engineering 3/e by Lawrence D.
  Miles
• Management Cost Accounting by Colin Drury 5/e
  (pg. 892)
• Cima Official Terminology
• Management Accounting Handbook by CIMA
• (2/e, edited by Colin Drury)
• Cima Kaplan Publishing for Paper P2 (pg. 205)
• www.businessdictionary.com

21
Thank You!
Thank You!

• Ahmad Tariq Bhatti
• FCMA, FPA, MA (Economics), BSc
• Dubai, United Arab Emirates
• Contact details
• At.bhatty_at_gmail.com

The End.