What is a product-by-value analysis and what type of decisions does it help managers make

Value Analysis is one of the major techniques of cost reduction and control. It is a disciplined approach which ensures the necessary functions for the minimum cost without diminishing quality, reliability, performance and appearance.

It is a creative approach to eliminate the unnecessary costs which add neither to quality nor to the appearance of the product. It is a systematic application of techniques to identify the functions of a product or a component and to provide the desired function at the lowest total cost.

These are the days of providing the customer with really best quality products at least cost which is possible through value analysis which proves wrong rightly “Best and Cheap” or “Best is never cheap” or “Cheap is Costly”.

What is Value Analysis?

Before understanding the meaning of phrase “value analysis” or “value engineering”, let us know about value. ‘Value’ is one of those terms having good many connotations and even contradictory definitions.

‘Value’ is a word that is very often used by individuals without being clearly understood. Forget about common people. Even different departments of the same organisation have different opinions of the ‘value’ of the product that the company manufactures.

The designer equates value with reliability; purchase people with price paid for them; production personnel with that of cost from the angle of manufacture; sales people with what customer is willing to pay.

In the field of value investigation, value refers to economic value, which itself can be sub-divided into four types as cost value, exchange value, use value and esteem value.

“Cost Value” is the measure of sum of all costs incurred in producing the product. The ‘cost value’, therefore is the sum of raw-material cost, labour cost, tool cost and overheads expended to produce the product.

“Exchange Value” is the measure of all the properties, qualities and features of the product which make the product possible of being traded for another product or for money. In a conventional sense, ‘exchange value’ refers to the price that a purchaser will offer for the product, the price being dependent upon the satisfaction value which derives from the product.

Value derived from the product consists of two components namely (a) value due to reliability of performance of the product and the value which the possession bestows upon the buyer. These are often referred to as “value in value” and “esteem in value”.

“Use Value” is the measure of properties, qualities and features which make the product accomplish a use, work or service. Use value, therefore, is the price paid by the buyer or the cost incurred by the manufacturer in order to ensure that the product performs its intended function efficiently.

Use value in the fundamental form of economic value. An item without use value can have neither exchange value nor esteem value. “Esteem Value” is the measure of properties, features, attractiveness graphic packaging and the like which increases sales appeal or which attracts customers and create in them a strong desire to own the product.

“Esteem value”, therefore, is the price paid by the buyer or the cost incurred by the manufacturer beyond the use value. It is the perception value.

Value Analysis Proper:

Value analysis is an organised approach to identify unnecessary costs associated with any product, material, part, component, system or service by analysis of function and efficiently eliminating them without impairing the quality functional reliability or its capacity to give service.

According to Society of American Value Engineers (SAVE) “Value analysis is the systematic application of recognised techniques which identify the function of a product or services establish a monetary value for the function and provide the necessary function reliability at that lowest overall cost.”

Mr. Lorry D. Miles production engineer working at General Electricals of USA defined it as “Value analysis is the study of the relationship of design, function and cost of any material or service with an object of reducing its cost through modification of design or material specifications, manufacture by more efficient process, changes in sources of supply, elimination or incorporation into another item.”

Thus, value analysis is a systematic application of established techniques to identify the functions of a product or component and to provide the desired functions at the lowest total cost. It is a creative approach to eliminate unnecessary costs which add neither to quality no to the appearance of the product.

It is a rational and structured process consisting of:

(a) Functional analysis to define the reason for the existence of a product or its components,

(b) Creatively analysis for generating new and better alternatives and

(c) Measurement for evaluating the value of present and future concepts.

The phrase value analysis can be defined as a technique which examines the facts of a function and cost of a product in order to determine whether the cost can be reduced or altogether eliminated, while retaining all the features of performance and quality of a product or both.

Therefore, logically, VA is an organised approach of exposing and eliminating unnecessary costs. The method has logical foundation in its fundamental approach to cost reduction and profit improvement and in this objective approach, the VA techniques has to analyse the functional cost of an item and recommend a change.

Put alternatively, VA is a team approach to think functionally about a component as to “what it does” rather than “what it is”. This approach is the real test of understanding problems under study.

Value Analysis and Value Engineering:

‘VA’ and ‘VE’ are closely related terms so much so that many people use them interchangeably. Though the philosophy understanding the two is the same the identification of unnecessary costs yet they are different. The difference lies in the time and stage at which the technique is applied.

“Value Analysis” is the application of a set of techniques to an existing product with a view to improve its value. Thus, it is remedial process. “Value Engineering” is the application of exactly the same set of techniques to a new product at the design stage project concept or preliminary design when no hardware exists to ensure that bad features not added. Thus, it is a ‘preventive’ measure. In that sense, ‘VE’ is fundamental and VA is collateral because ‘prevention is better than cure.”

Value Analysis versus Other Conventional Approaches:

Speaking in terms of “cost reduction” value analysis is an effective tool of cost reduction which differs from established conventional approaches such as industrial engineering, production engineering, methods engineering and the like.

The “traditional” or “conventional” approaches differ from this non- conventional or modern technique of VA as under:

First:

Traditional approaches concern “post-production” stage but V.A. can be the ‘pre-production’ as well as “post production stage” technique.

Second:

Traditional approaches are “methods concerned”. They accept the drawing of the part “as is” and, therefore, set to improve the part through analysis of manufacturing methods, machines, materials, tools, jigs and fixtures and the like.

On the other hand, ‘VA’ does not accept the designed product and its components “as is” but advocates cost reduction through identification of the function and subsequent redesign of the product so as to make it perform its functions at the lowest possible cost.

‘VA’, therefore, challenges the very design specifications, design requirements and the design itself.

Third:

Traditional methods are mere “cost centered” while VA, in addition to cost improvement, usually seeks to improve quality, reliability, maintainability, safety, performance and alluring features.

Fourth:

VA is more potent than traditional cost reduction techniques. Instances can be brought to surface to demonstrate that VA can remove ten to twenty percent of cost after the traditional methods of cost reduction have applied.

Award of warning is essential at this stage, lnspite of VA’s better potential and greater effectiveness, it is not a substitute nor is it intended to replace effective cost reduction techniques which have been in use for many years and have proved effective and valuable in their areas of application. What can be said is that VA can augment or strengthen the process of cost reduction and quality improvement.

Phases of Value Analysis:

As an exercise, the phases of value analysis are:

1. Phase of Origination:

In the first phase, a value analysis study team is constituted. The project is selected and clearly defined. The team examines in detail the product and its components to understand thoroughly their nature.

2. Phase of Information:

After familiarisation, a functional analysis is carried out to determine the functions and uses of the product and its components. The cost and importance of each function are identified. A value index is calculated on the basis of cost benefit ratio for each function. A list is being prepared in which the items of functions are arranged in decreasing order of value.

3. Phase of Innovation:

This is the creative phase concerned with the generation of new alternatives to replace or removing the existing ones.

4. Phase of Evaluation:

Each and every alternative is analysed and the most promising alternatives are selected. These alternatives are further examined for economic and technical feasibility.

The alternatives finally selected must be capable of performances the desired functions satisfactorily. These must meet the standards of accuracy, reliability, safety, maintenance and repairs, environmental effects and so on.

5. Phase of Choice:

In this phase, report is prepared. This report contains a summary of the study, conclusions and specific proposals. The decision makers choose the alternative. The programs and action places are then developed to implement the chosen alternative.

6. Phase of Implementation:

The chosen alternative is put to the actual use with the help of the programs and action plans so developed in advance.

7. Phase of Review:

The progress of analysis changes in continuously monitored and followed up in order to provide assistance, to clarify any misconceptions and to ensure that the desired results are achieved.

Merits of Value Analysis:

Value analysis is really a very valuable technique of cost reduction and quality improvement. The specific merits of its are:

1. Improvement in Product Design:

It leads to improvements in the product design so that more useful products are given shape. Now in case of ball points, we do not have clogging, there is easy and even flow of ink and rubber pad is surrounding that reduces figures fatigue.

2. High Quality is maintained:

High quality implies higher value. Thus, dry cells were leaking; now they are leak proof; they are pen size with same power. Latest is that they are rechargeable.

3. Elimination of Wastage:

Value analysis improves the overall efficiency by eliminating the wastages of various types. It was a problem to correct the mistakes. It was done by pasting a paper. Now, pens are there and liquid paper is developed which dries fast and can write back.

4. Savings in Costs:

The main aim of value analysis is to cut the unwanted costs by retaining all the features of performance or even bettering the performance. Good deal of research and development has taken place. Now milk, oils, purees pulp can be packed in tetra packing presuming the qualities and the tetra pack is degradable unlike plastic packs.

5. Generation of New Ideas and Products:

In case of took brushes, those in 1930’s were flat and hard, over 60 to 70 years brushes have come making brushing teeth easy, cosy and dosy as it glides and massages gums.

6. Encourages Team-Spirit and Morale:

Value analysis is a tool which is not handled by one, but groups or teams and an organisation itself is a team of personnel having specification. A product is the product of all team efforts. Therefore, it fosters team spirit and manures employee morale as they are pulling together for greater success.

7. Neglected Areas are brought under Focus:

The organisational areas which need attention and improvement are brought under the spot-light and even the weakest gets a chance of getting stronger and more useful finally join’s the main strain.

8. Qualification of Intangibles:

The whole process of value analysis is an exercise of converting the intangibles to tangible for decision making purpose. It is really difficult to make decisions on the issues where the things are (variables) not quantifiable.

However, value analysis does it. The decision makers are provided with qualified data and on the basis of decisions are made. Such decisions are bound to be sound.

9. Wide Spectrum of Application:

The principles and techniques of value analysis can be applied to all areas-man be purchasing, hardware, products, systems, procedures and so on.

10. Building and Improving Company Image:

The company’s status or image or personality is built up or improved to a great extent. Improvement in quality and reduction in cost means competitive product and good name in product market; it is a good pay master as sales and profits higher and labour market it enjoys reputation; it capital market, nobody hesitates to invest as it is a quality company.

Limitations:

Like any other cost reduction technique, value analysis has its own limitations. The most common limitations are that the man made excuses are the blocks in implementing these plans of value analysis.

The most common excuses given are:

(a) Lack of motivation

(b) Resistive to change

(c) Inertia

(d) Lack of knowledge and patience

(e) Attitude of ‘It will not work in India

(f) We are very small or very big

(g) This has been tried earlier and failed

(h) The change is too big

(i) ‘Let competitors try before we try’

(j) Difficulty of teams meeting or team meeting for getting consensus.

These limitations are man-made and can be over-come one the company divides to implement. However, they should be educated of the plus and minus points and the main beneficiaries are those that are to be told and they are to be taken into confidence.