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4/25/2018 Value Analysis: Meaning Steps and Advantages

Business Management Ideas

Value Analysis:
Meaning Steps
and Advantages
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After reading this article you will learn


about value analysis as the best cost
reduction technique:- 1. Definition of
Value Analysis 2. Types of Values 3.
Functions of a Product in Value
Analysis 4. Steps 5. Un-Necessary
Costs and Value Analysis 6. Value and
Cost 6. Team Approach 7. Objectives 8.
Stages 9. Requirements of a Product
10. Questionnaire 11. Advantages.

Definition of Value Analysis:


Value Analysis is a tool of management
which attempts the question of saving
cost from the point of view of, ‘Value’
or in other words the main aim is to
study the relationship between the
design function and cost of a part,
keeping in view to reduce part and cost
through change in design, modification
in specification of the material used by
changing the source of supply and so

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4/25/2018 Value Analysis: Meaning Steps and Advantages

on. The Value Engineering is also


known as value analysis.

Value engineering identifies the areas


of excessive or unnecessary expenses
and attempts to improve the value of
the product. It provides the base for
better performance at a lower cost
while reducing neither necessary
quality, reliability nor maintainability.

Value Analysis is a technique of cost


reduction based on systematic and
organised examination of every item of
cost which goes into the manufacture
of the industrial product in terms of
the value or customer satisfaction it
adds to the product.

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Another definition of Value Analysis is


“the systematic examination of

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4/25/2018 Value Analysis: Meaning Steps and Advantages

all factors which contribute to the


cost of a product, part or a
material with the object of
uncovering these possibilities of
cost reduction which will not in
any way reduce the quality,
performance or any other
attribute of the product which is
sought by the customer.”

Value Analysis means the organised


and exhaustively critical study of a
product in terms of the design,
functions and costs with the object of
cost reduction.

Types of Values:
1. Cost Value:

It is the cost of manufacturing a


product or component.

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2. Use Value:

It considers work done, functions


performed or service rendered and effi-
ciency/effectiveness of the product.

3. Esteem Value:

It involves the qualities and


appearance of the product which
attracts persons and creates a desire in
them to posses the product.

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4. Exchange Value:

It considers the properties or qualities


which will remain attractive enough to
other people to permit market resale in
the future.

Maximum value is obtained when


essential function is achieved for
minimum cost.

This statement can be expressed


mathematically as follows:

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Vmax = F/ Cmin

where, Vmax = Maximum value, F =


Functions, Cmin = Minimum cost

Functions of a Product in Value


Analysis:

Functions of a product can be


classified into following two
categories:

1. Basic (or Primary) Functions:

These are the functions without which


the product would virtually lose all of
its value, and in some cases even its
identity. For example, if lead is
removed from an ordinary wooden
lead pencil, it would not only eliminate
its basic function of pencil but will
leave us with not more than a stick.

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4/25/2018 Value Analysis: Meaning Steps and Advantages

2. Secondary Functions:

These functions support the basic


functions, although they may or may
not be essential functions. For
example, pencil without lead may still
remain the esteem value by just being
seen in the pocket.

Steps in Value Analysis


Approach:

Sequence of steps for systematic


approach of value analysis is:

1. Orientation:

Familiarization with needs,


specifications and customer desire.

2. Information:

All those facts which have bearing on


the problem should be gathered.

A typical list of information


gathered is given hereunder:

a. Engineering information

b. Procurement information

c. Reliability

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d. Materials information

e. Cost information

f. Tooling

g. Manufacturing information

h. Quality control—rejection, tolerance.

i. Customers experience

j. Packaging and preservation

k. Testing

l. Scheduling

3. Creativity:

Use of imagination and brain storming.


Adopt the process of blast, create and
then refine.

4. Evaluation (Analysis):

Estimate value of ideas and explore


best.

5. Planning:

After selecting few alternatives or


combination of alternatives, each of
them investigated thoroughly. On the
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basis of final outcome, detailed


planning is carried out and a report is
prepared for approval.

6. Execution (Implementation):

After approval of the proposals, its


recommendations are implemented.
Value engineers are expected to see
that the approved recommendations
are implemented and hindrances, if
any can be sorted out.

Un-Necessary Costs and Value


Analysis:

Un-necessary costs are those costs


which neither contributes to function
nor the appearance of the product.
Value engineering/analysis attacks un-
necessary costs to overcome or
minimize them.

Some of the important reasons


for such costs are:

1. Poor design of the product.

2. Over design of the product by


providing it with features that the user
just does not use.

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3. Unrealistic or too tight


specifications.

4. Lack of standardization.

5. Advances in technology not


considered, and old practices
continued,

6. New cheaper and better sources not


considered.

7. Lack of production control.

8. Non-consideration of changed
circumstances.

9. Inability to utilize specialist


knowledge/available talent.

10. Wrong belief, habits and attitudes.

Value and Cost:

Normally selling price depends upon


the benefit which the customers expect
to drive by using the product. This
benefit is translated by the customer in
terms of money which he can pay or in
other words, this is the value which the
customer places on the article for its
purchase.

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This amount is entirely based on the


wishes of the customer and has
nothing to do with the money spent on
producing the article. In some
products, we usually observe that,
price paid by the customer is very high
even if the cost of production is small.
The reason behind this is that he is
very anxious to purchase it and has
rated its value very high.

Thus it is necessary for the


manufacturer to incur costs in such a
way so as to get good response from
the customers and the product will be
appreciated by them. So as to ascertain
the value of the product, the
businessmen make the systematic
efforts. The process of making the
systematic efforts to evaluate the value
of the product is known as ‘value
analysis’.

In the manufacture of industrial


products cost is incurred to create
value, costs and values have input-
output relationships. The scope to
optimise the input of costs in order to
produce a given set of values is always
there. Value is what the product is
worth to the customer or user.

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Value differs both from price and cost.


It can be defined as the cost
proportionate to the utility, i.e.

Value = Utility/Cost

Thus the value of a product can he


increased either by increasing its utility
with the same cost or by decreasing its
cost for the same utility. Users have
different concepts of value depending
upon time, place and availability of
substitute items. Value is adjudged by
cost value, use value, esteem value and
exchange (re-sale) value.

The price at which the product sells or


can sell on the market is a measure of
its value to the customer or user.

Cost comprises of the:

(i) Money value represented by the


material used to make the product,

(ii) Wages of the workers and

(iii) Other indirect costs attributable to


its manufacture.

The excess of value or market price


over the costs incurred in producing
the product represents the margin of
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profit of the manufacturer. In order to


make his product more profitable, the
manufacturer should make a constant
search for reducing the manufacturing
costs.

Reduced manufacturing costs


means one or more of the
following advantages:

(i) Increase the margin of profit.

(ii) Reduce the loss.

(iii) Enable a reduction in selling price


and thus achieve a greater demand for
the product.

Customer or user pays the assigned


price for the product because he
considers the satisfaction derived from
its use worth that price. He is generally
unconcerned about what it costs the
manufacturer to produce the product.

Team Approach for Value


Analysis:

Value Analysis requires the


cooperation of all the functional deptts
in an enterprise. As all deliberations
must be based on the ultimate
satisfaction which the customer wants

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from the product, the sales and market


research deptt. should be intimately
connected with value analysis
exercises.

The design deptt. and engg. deptt.


which translates the Customer
requirements into the physical
embodiment of the product must also
be intimately concerned as they alone
would be in a position to know as to
why certain parts with certain
properties must be assembled to make
the product.

As a major portion of the product cost


is accountable by materials, the
purchase deptt. which translates the
design into reality and the costing
deptt. which possesses the factual data
about the different cost elements as
also their interaction with the others
which must necessarily be associated
with Value Analysis.

This organised exercise is unlikely to


succeed without the enlightened
cooperation from all the functional
areas. The team must be consisting of
senior representatives of the above 5
functional deptts and they should
possess special expertise in their own
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area which they represent so as to


enable to influence the changes
consequent to the recommendations of
the Value Analysis team.

In large enterprises, Value Analysis


should be a full time job for the team
members. The Value Analysis team
must have a position directly reporting
to the top management. It is only,
when an enlightened support from the
top is assured than only the Value
Analysis team will be able to
implement its suggestions to the
advantage of the enterprise.

Value Analysis team must keep an


open mind to any suggestion, and all
the suggestions should be noted down
in writing and should not be rejected
without consideration even if they
appear prima facie unworkable.

Subcontractors and suppliers of


material can come forward with
reliable suggestions as regards
alternative materials and their advice
must be explored. Representatives of
other deptts like those from the
inspection, packing, shipping and store
keeping can be associated when points

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pertaining to their specialised areas


being discussed.

The actual explorations in cost


reduction are based on the familiar
method of questioning.

Following are these questions:

1. Can the part be eliminated?

2. Can you combine it with other parts?

3. Can you separate it into simpler


parts?

4. Can you use a standard part?


Generally standard parts are
economical.

5. Can you use standard materials?

6. Can you use cheap materials?


Cheaper materials need not always
mean inferior materials.

7. Can you use less materials? There is


scope for considerable saving in
materials, particularly in sheet and
plate work by preplanning the jobs.

8. Can you buy more cheaply?

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9. Can you reduce rejects?

10. Can you ease limits? Unnecessary


tight tolerances are costly to obtain and
many times, they serve no useful
purpose.

11. Can you save on finish? Critical


examination often reveals possibilities
of saving on surface finish, which
includes, paintings, electroplating etc.

12. Can you use better methods? This


question is particularly important for
parts having high labour cost content.

13. Can you reduce the risk of error?


Could the reliability of the process be
improved.

14. Can you do anything else? Any


other possibility of cost reduction in
the peculiar circumstances of the best-
usage may occur to the team.

Objectives of Value Analysis:

(i) To simplify the product

(ii) To use cheaper and better material

(iii) To use efficient and economical


process

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(iv) To reduce the cost of the product

(v) To improve the product design

(vi) To increase the utility of the


product

(vii) To increase the profits.

Stages in Value Analysis:

Value analysis is carried out in


the following stages:

1. What the Customer Wants:

In first stage customer’s requirements


are recognised.

2. Finding Out the Best Method of


Performing the Work to be Done:

Full use should be made of modern


knowledge relating to production.
Standardisation, simplification, work
study, operation research, network
analysis and other techniques should
be employed to determine the most
economic methods.

3. To have the ‘appropriate cost’ for the


‘appropriate performance’, i.e. to have
the correct relationship between cost
and performance.
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4. Search for better ways of performing


work and consider the functional use of
each part of a product. The vital parts
of value analysis are to eliminate the
unnecessary function.

Requirements of a Product in
Value Analysis:

Generally there are two requirements,


namely functional or aesthetic, i.e. a
product should be useful and should be
pleasing in appearance.

Thus Value Engineers look them


in the following ways:

1. Use:

It is the function for which the part is


manufactured. For example, what is a
pen supposed to do? The answer is that
it should write and hold ink.

2. Esteem:

Actually this is something wider than


the aesthetic side of design. The fact
that a product is pleasing to look at,
may induce people to buy but there are
other factors. In short, the esteem
aspect is concerned with getting the
customer to buy.

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For example, if the pen has gold plated


body or other features, the customer is
tempted to purchase more readily.

When value analysis is done, then it is


clear that the use function cannot be
avoided because it is a main function.
But it is not necessary in the case of
esteem function. Any benefit added on
to a product, over and above those
required to meet the use function,
must add to the cost causing a higher
price.

When analysing, it is essential to


consider how much be added in order
to sell the part. The esteem function
cannot be eliminated altogether, but it
should not be over emphasised. Now
suppose the cost of gold plated pen is
Rs.1000.

This cost is further divided as:

Use = Rs.15

Esteem = Rs.985

Now the question is whether Rs.985 is


justified for esteem purpose. Do the
additional features add to the value?

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This matter is closely related with the


profit making.

The reasonable price of a product can


be obtained by comparing with a
competitive product. When this
comparison is done the possibility of
substitution is examined, e.g. whether
a pen with a plastic body? Can the
method of filling be simplified? Does
the cap have to be made of expensive
material and so on?

Value Analysis Questionnaire:

Advantages of Value Analysis:

There are many advantages beside the


normal advantages of cost reduction-
lower cost, lower prices and higher
profits.

Further, the following advantages


may be possible when value
analysis is employed in the
business:

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4/25/2018 Value Analysis: Meaning Steps and Advantages

1. The most suitable products are


manufactured because a careful study
is made to determine the desirable
feature of each product in terms of
customer’s requirement.

2. Each product should be


manufactured at the lowest possible
cost because special attention is paid
for simplification, standardisation and
improved methods of production.

3. Quality is maintained at desired


level because there is no question to
reduce cost at the expense of quality.

4. Value Engineering is based on the


principle that management
effectiveness can be measured in terms
of cost saving. Any saving in cost is
treated as increase in efficiency.

5. The constant search for


improvement will lead to greater all-
round efficiency.

6. Suggestion box method may be


employed and any idea can be looked
into by the Value Engineers.

7. Easy to repair or replace any part of


the product.

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8. Lighter in weight.

9. Easy in packaging to protect the


product till it reaches to the user.

Related Articles:

Standard Cost: Meaning, Determination and

Advantages
Systems Concept & Value Analysis
|Industrial Engineering

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