International Journal of Information Systems for Logistics and Management

Vol. 5, No. 2 (2010) 39-46

http://www.knu.edu.tw/academe/englishweb/web/ijislmweb/index.html

Sustainable Value Engineering Model: A Case Study in Energy Cost Saving

Supphachai Nathaphan*1 and Sarayut Nathaphan2
1Department

of Industrial Engineering, Mahidol University, Nakhon Pathom 73170 Thailand 2Business Administration (Finance), Mahidol University, Nakhon Pathom 73170 Thailand
Received 30 March 2009; received in revised form 18 December 2009; accepted 7 June 2010

ABSTRACT
The aim of this study is to develop a mechanism for using energy more efficiently namely Sustainable Development Model of Value Engineering. The sustainable development model has been developed by integrating the Value Engineering concept, the Deming Cycle concept, and the Juran Trilogy concept and will lead to sustainable value in its engineering application. By gathering facts and information from those working in the industry, actual problems and the authority of each party are defined. Following which, solutions to a particular problem are recommended via brainstorming under the premise that what can be done or replaced in order to enhance or retain a level of efficiency at a lower life-cycle cost? The major costs of production in any industry are the energy costs. Higher values could be obtained by the firm from generating net positive cash flows, which can be achieved by increasing the firms revenue and/or reducing production costs. This study explores and suggests ways to reduce the major costs of production based on an activity called energy cost saving. Results from an experimental study applying the sustainable development model of value engineering in energy saving, indicates that our suggested mechanism help to reduce energy costs drastically. Furthermore our proposal has been approved for implementation by the Administrative Committee. As expressed by one of the Administrative Committee members the thinking and analytical processes are sound and valid due to each responsible party being clearly assigned with their roles. Keywords: value engineering, value management and energy cost saving.

1. INTRODUCTION Value Engineering (VE) is a procedure that eliminates any redundant or unnecessary processes from the manufacturing scheme, and retains the necessary process at its minimum cost. In other words, VE is the process that determines the needs and defines the appropriate duties and responsibilities of each user prior to implementing the real manufacturing processes in order to maximize firms values. According to Lawrence D. Miles, value can be stated as shown below:

Value = Function Cost

(1)

From equation (1), we may have the same, or a higher function, at the lower production cost by incorporating the process of Deming cycle and the Juran Trilogy, which yields higher efficiency in applying value engineering. The integrating process above is called the Value Engineering Model. Applying the Value Engineering Model could result in a higher value to the firm due to higher operating cash flows. The value of a firm is stated in equation (2).

*Corresponding author: egsnh@mahidol.ac.th

40

International Journal of the Information Systems for Logistics and Management (IJISLM), Vol. 5, No. 2 (2010)

VF =

t=1

E OCFt(1 T ) (1 + k) t

(2)

where: VF = Value of a firm E(OCFt(1 T )) = Expected Operating Cash Flows after tax k = appropriate cost of capital of a firm The value of a firm increases due to three factors. The first factor is a reduction in the appropriate cost of capital, based on the firms optimal capital structure. The second factor is the increase in the firms revenue due to a higher output from an efficient production process. The third factor is the reduction of the life-cycle costs in the manufacturing process. This paper focuses on the proper treatment of the second and third factor; to promote values in equation (1), by increasing efficiency (higher revenue) and reducing life-cycle costs. Although the VE concept can increase the value of a product by promoting the effectiveness of the function and on the costs, there are three weak points occur that occur with this concept: (1) The concept of VE does not represent the notion of continuous improvement. (2) The assigning of the responsibilities of each individual process is not defined to each person involved in specified work. (3) There are no strategies or goals of the projects that appear to support the success of the project, and show how to conduct it as well. The objective of this study is to show the adaptation model of the VE framework can lead to be continuous improvement, and develop the concept of VE to Sustainable Value Engineering (SVE). We have conducted a case study which applies the Sustainable Value Engineering Model to save energy costs in an animal food processor. 2. MODEL DEVELOPMENT Based on the conceptual framework of model management integrating VE, Deming Cycle and Juran Trilogy, SVE Model1 is proposed as shown in Fig. 1. A brief elaboration regarding the processes of sustainable value engineering model is as follow. The stages of the SVE start from dividing participants horizontally into three teams, which are the administrator and the expert teams; the value engineering
1The

teams; and the shop floor teams. Each team will have the responsibilities as shown in Fig. 1. The duties and responsibilities of each group (Chen and Lu, 1998) are as follows. (1) The administrator and expert teams must play a crucial role of motivating and guiding the VE teams and the shop floor teams. (2) VE teams should undergo extensive training and encourage their subordinates to do likewise in accordance with the firms strategies. (3) Shop floor teams or Quality Control Circles (QCCs) focus on improvement. A shop floor team is a small group of staff, who contribute to the improvement of the organization by brain-storming systematically and analyzing the problems critically, until these problems are completely solved. A brief elaboration regarding the processes of the sustainable value engineering model is as follow. Problems in the production processes are raised by the shop floor team, in order to find solutions by proposing improvements and operational plans to the administrator for approval. After approval, the selected plans are executed, together with the validation processes, by the value engineering team. If the problems are solved, the value engineering team will write a report of the executed processes called the execution plan standardization. If the problems are partly solved, the value engineering team along with the shop floor team will figure out the real cause of the problem by redefining the problems and suggesting new improvements and operational plans to the administrator for further approval. These processes are repeated until the entire problems are solved. Value Engineering (VE) can be viewed as a special case of the generic discipline of Value Management (VM), as suggested by Shen and Liu (2004). VE methodologies, set up value engineering team to define the problem, propose operational plans to the administrative team, and validate the executed plan of the value engineering team, and are a subset of the activities of VM. VM is synonymous with such terms as value engineering and value analysis (Ibusuki and Kaminski, 2007; Male et al., 1998). The VM process (Webb, 1993a, 1993b) consists of identifying the project focused on, developing the project team, gathering information, performing function analysis, generating alternative ideas through brainstorming, selecting the best idea, and planning for change and implementing the change. Growing competition in the marketplace has forced firms to improve the quality of products and services,

first team, on the top of the model in Fig. 1, is the administrator and the expert team responsible for the quality planning process, the second team, in the middle of the model in Fig. 1, is the value engineering team responsible for the quality planning and the quality improvement processes, and the third team, at the bottom of the model in Fig. 1, is the shop floor team responsible for the quality control and quality improvement processes.

S. Nathaphan and S. Nathaphan: Sustainable Value Engineering Model: A Case Study in Energy Cost Saving

41

1. Determining strategy Administrator and Expert Teams Quality Planning 2. Setting up VE teams Quality Control 3. Training technique of VE 10. Approving the best plan Quality Improvement 11. Planning execution and follow up processes s 12. Standardization of the successful plan

Value Engineering Teams

4. Forming shop floor teams

Shop Floor Teams

5. Defining problems and energy lost

9. Proposing suggested plans to administrator 7. Suggesting and proposing improvement plan 8. Conducting a Feasibility study and operation plan

6. Prioritizing problems and determining causes of problems

Fig. 1. Sustainable value engineering model

establishing an organization of quality. 2.1 The Principle From the previous information, we have shown the VE concept and the SVE concept that comes from the integrating of the VE, the Juran Trilogy and the Deming Cycle. This section will answer the question Why did we integrate the Juran and Deming concepts in order to fulfill the VE in terms of theory. The Juran Trilogy is a systematic and comprehensive system of break-through quality improvements to meet customer needs. The components of the Trilogy (Juran, 1989) are Quality Planning which develops and puts in place the strategic and tactical goals that must be achieved in order to attain financial, operational, and quality results. Setting organizational goals are called the strategic goals: discovering customer needs and designing adequate processes, Quality Control is comparing actual performance and taking action on the differences, and Quality Improvement is the attainment of unprecedented levels of performance in order to make sure that

the problems have already solved. The Deming Cycle is a method that can aid management in the pursuit of a continuous and never-ending process of improvements by forming groups of volunteer employees or QCCs to solve the problems. The Deming Cycle composes of four basic stages: a plan stage, a do stage, a check stage and an act stage. Hence, the Deming Cycle is sometime referred to as the PDCA cycle. Stage 1. Planning the collection of data about process variables is critical when determining a plan of action on what must be accomplished in order to decrease the difference between customer needs and actual process performance. Stage 2. Carry out the plan, established in stage1 and set into motion a trial basis known as the Do stage. The trail plan should be conducted in a laboratory, production setting, office setting, or on a small scale with customers (both internal and external). Stage 3. Check the trail plan, which was set into motion in stage 2, is monitored to answer two questions.

42

International Journal of the Information Systems for Logistics and Management (IJISLM), Vol. 5, No. 2 (2010)

First, are the manipulated process variables behaving according to plan and causing a decrease in the difference between customer needs and actual performance? And second, are the downstream effects of the plan creating problems or improvements? Stage 4. The purpose of the Act stage is to implement the modifications to the plan discovered in the Check stage, or to implement the process improvements. If, at the Act stage, we learn that the manipulated process variables have not diminished the difference between customer needs and process performance, the PDCA cycle returns to the plan stage to search for other process variables. To maintain the sustainability in certain processes or states, we integrate the Deming Cycle and the Juran Trilogy to the VE to make a feedback loop of the SVE framework, to ensure continuous improvement and also use the Quality Planning of the Juran Trilogy for setting the strategies or goals of the projects in order to conduct and measure their success. Responsibility will be defined to the administrator and the expert terms as shown in Fig. 1. We also set the QCCs team to define the problems, and suggest improvement plans by following the concept of Deming Cycle. From the integrating of these theorems the SVE was developed. 2.1.1 Quality planning Quality planning is the planning process which will be used in determining strategy and goals, training, the setting up of value engineering teams, and forming shop floor teams. Details are discussed below. (1) Determining strategy by identifying 8 stages for benchmarking (Fong et al., 2001) in which VE must determine how to maximize value, as shown in equation (1); that can remove unnecessary costs whilst ensuring that quality, reliability, performance, and other critical factors will meet or exceed the customers expectation (DellIsola, 1982), given production costs associated with a thorough understanding of the function. As a result, the strategy plan with objectives and goals is defined. (2) Setting up value engineering teams by selecting representatives from each division to support the shop floor teams and assist in coordinating the project. From this a list of the value engineering team members is obtained. (3) A training process for each team based on an integrating process amongst procedures/applications and specific techniques of value engineering. After the training process, participants will understand the four foundations which are determining the problem,

planning, making improvements, and the follow up processes. (4) Forming shop floor teams for specific tasks to create and develop alternative solutions. Duties and responsibilities for each of the work force have to be clearly identified by the value engineering team. The head of each work force is selected by a member of the value engineering team or selected by a member of the particular work force. The scope of the operation has to be specified. 2.1.2 Quality control Quality control is the investigation and follows up process under a specific standard as set by each manufacturer. (1) Define the problem and energy loss in the production process (as stated in the objective and the goal) by investigating possible problem and cause of the energy loss. (2) Prioritize problems and determine the cause of these problems. This process is suggested by the work force and is aimed at selecting problems that need to be resolved. Problem prioritization can be done by applying a Pareto Flow Chart. After the problems are determined, a brain storming process within the work force is conducted. 2.1.3 Quality improvement Quality improvement is a continuous process which aims to increase standards suggested by the work force. A feasibility study of each suggestion is conducted. Quality Improvement plans will then be proposed to the administrator for approval. (1) Suggestions and proposed improvement plans are the processes that create more alternatives, in order to get to the root of the problem, and are based on brain storming by the shop floor team. Four subprocesses are discussed below: Efficiency Improvement by studying technology advancements, emphasizes on better performance given the same or lower production costs. This process should be conducted before the final investment decision. Good design and concept is a procedure that takes into account value increments in order to reduce operating costs. This process includes organization extensions and creation which may cover the concept of replacement. Appropriate equipment usage and maintenance processes as suggested in equipment manuals, together with an appropriate maintenance program that would result in maximum efficiency of the equip-

S. Nathaphan and S. Nathaphan: Sustainable Value Engineering Model: A Case Study in Energy Cost Saving

43

ments utilization. New investment in machinery and equipment. This process requires a long-term decision regarding whether to undertake such a large investment. After the shop floor team has suggested improvement plans, the next step is to conduct a feasibility study. (2) The feasibility study and operational plan are divided into two parts. Firstly, an economic evaluation analysis emphasizes on the energy cost savings. Secondly, a technical analysis, which can be divided into an evaluation of the efficiency analysis, reliability, ease of maintenance, user friendly attributes, safeness, and other criteria as suggested by members of the shop floor team. After the appropriate plan has been approved based on both economic and technical analysis, the operational plan with outlining the responsible party and the time frame of the suggested plan are determined. (3) The shop floor team proposes suggested plans to the administrator for approval. Details regarding procedures, time frames, cost of the plans, net savings, and payback periods are provided for the administrator to choose from. (4) The best plan will be approved by the administrator based on cost and break-even analysis, return on investment, and sensitivity analysis. (5) The plan is execution and follow up processes are exercised to ensure that the objectives and goals have been met, by assigning a responsible person or a project manager. (6) Standardization of the successful plans future improvement is achieved after applying a quality system, namely quality planning, quality control and quality improvement. After all 12 procedures, as shown in Fig. 1, have been executed, each shop floor team must revisit step 5 in order to ascertain whether the suggested plan has helped solve the problems and the write up a proposal of any problems found to the administrator and the expert team. 2.2 Sustainable Value Engineering Model: A Case Study in Energy Cost Saving The two largest sectors of energy usage in Thailand are transportation (36.4%) and manufacturing (36.3%) during the year 2007 and 20082. Energy usage for transportation purposes are difficult to control and manage. This is because various projects regarding energy saving, such as the gasoline saving project, promoting mass transportation to the public, etc. are hard to control due to many

factors (such as consumer behavior and preference) and are difficult to identify and manage. However, energy usage for manufacturing can be dealt with because most decisions an energy usage are made by the administrators of each entity. For example, the administrator may announce an energy saving program in his/her own factory aiming at reducing production cost caused by higher costs of energy. To use energy effectively and efficiently, the administrator may switch from the existing system, an inefficient system, to the suggested system namely the valued engineering system. This implies that a group or a committee incorporating related stakeholders (the value engineering team) is set up to study the root causes of the problem, such as high energy costs in the production process. After the causes of problem are clearly defined, recommendations to solve such problem via brainstorming are carried out. For example, root causes of high energy cost in a manufacturing process could be due to inefficient equipment in the production process, or a poor floor plan at the production site. Suggested solutions could be incorporated by acquiring more efficient equipment and better management techniques leading to higher quality in the production process. In other words, by applying the valued engineering process, manufacturing value increases whist either costs reduce or the function increases. The major issue is how to create an appropriate mechanism that drives the whole energy saving program to its full efficiency. Therefore, the motivation of this study is to propose a sustainable development model of value engineering. An animal food processor was selected for our experiment. The objective was to suggest an energy saving plan which is also one of the policies of the administrator. An evaluation form based on the value engineering concept was created to set the direction for the problems that needed solving. The production capacity of the selected food processor manufacturer is 10,000 tons per day. Each production process is controlled and monitored by integrated computer systems. Products are distributed to the market under four brands. Five value engineering teams were assigned to investigate the working processes and define problems of both the office and production units. This study reports the results from the first value engineering team, namely the logistic group since it has shown the largest energy savings amongst the five teams. The proposals of the logistics group called Energy savings by using forklifts in the raw material logistics implementation processes are discussed below. 2.2.1 Quality planning (1) Setting goals and a strategic plan aimed at maximiz-

2Figures

are form annual reports of Thailand Energy Situation 2007 and 2008 by Ministry of Energy.

44

International Journal of the Information Systems for Logistics and Management (IJISLM), Vol. 5, No. 2 (2010)

50 45 40 35 30 25 20

THAI BAHT TO US $ (GTIS)

4/3/09

Propane, Mt.Belvieu Cents/Gallon 450 400 350 300 250 200 150

4/3/09

Propane, Mt.Belvieu Cents/Gallon Diesel, Low Sulphur FOB USG C ts/Gal

THAI BAHT TO US $ (GTIS) - EXCHANGE RATE 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

100 50 0 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Source: Thomson Datastream

Source: Thomson Datastream

Fig. 2. Exchange Rate: Thai Baht to USD

Fig. 3. The different between LPG and diesel price per gallon, Jan. 2006 to Feb 2009

ing value of energy usage given the same route of raw material transportation within the warehouse. The objective is clearly defined as minimizing the energy cost of the logistic process within the warehouse. (2) Forming value engineering teams in which the administrator and expert teams will assign a chief or director of each department to be a member of the value engineering team, with 4 to 6 members for each team. (3) The training program will be delivered to the value engineering teams. The expert team conducts the training program on the topic of action plan formation, heat energy conservation, and electricity conservation. The training program is designed to be completed within two days. (4) Subgroups namely Shop Floor teams are formed. In each group job descriptions and responsibilities are clearly defined. The logistic group consists of the head of the value engineering team, the secretary, and group members. Members of subgroups are selected from officers of departments that relate to logistics activities. For example, warehouse and silo, production, premix, engineering, and the quality control department. 2.2.2 Quality control (1) Based on historical data regarding past energy usage, we found that the factory utilized 65 million Mega Jules per year, which can be divided into energy from electricity 16 million Mega Jules and energy from heat

48 million Mega Jules. Fifteen forklifts, using heat energy from diesel to transfer raw materials and finished goods, consumed 64,944 liters of diesel. The cost of energy usage based on diesel is estimated to be 1,587,171.84 Baht per year or 46,109.97 USD at the average exchange rate 34.42144 Thai Baht per USD3 as shown in Fig. 2. Results from the problem analysis indicate that there are two possible major problems. Firstly, the cost of diesel rising dramatically caused the energy cost to increase. The diesel price is more volatile than the LPG price as shown in Fig. 3. Moreover, the diesel price has soared above 100 cents per gallon since 2004 and reached its highest point at 406.63 cents per gallon in July 2008. The LPG price reached its highest point at 197.94 cents per gallon. Table 1 depicts the differences in diesel price and LPG price during the year 2000 to 2009. The distribution of diesel price is more volatile than that of LPG, as indicated by their standard deviations and ranges. Secondly, it should be noted that finished products are not categorized into their appropriate area. (2) The logistic group has prioritized and selected problems to be solved in order to reach their goals as indicated in the strategic plan, and indicated that the rising cost of diesel has priority over every other problem. This is because diesel prices have soared by 60 percent since 2004, which caused a 15 percent increase in the energy costs of the factory.

3The

average exchange rate of Thai Baht per USD is calculated based on the daily exchange rate from January 2nd, 2006 to February 27th, 2009. The data is obtained from DataStream.

S. Nathaphan and S. Nathaphan: Sustainable Value Engineering Model: A Case Study in Energy Cost Saving

45

Table 1. Comparison of price behavior between diesel and LPG prices during 2000 to 2009 Diesel Costs per Gallon Average Price Standard Deviation Max Min Price Range 141.56 79.12 406.63 45.63 361.00 LPG Costs per Gallon 81.03 36.71 197.94 26.75 171.19

Table 2. Cost comparison of fifteen forklifts before and after implementing the SVE model Before Implementing SVE Diesel Usage Average Diesel Price 1.90 litre/hour 23.36 Baht/litre After Implementing SVE Diesel Usage Average Diesel Price LPG Usage Average LPG Price Cost/Forklift/hour 0.93 liter/hour 23.36 Baht/liter 1.07 kg/hour 18.54 Baht/hour 40.27 Baht/hour

Cost/Forklift/hour

44.38 Baht/hour

2.2.3 Quality improvement (1) Four steps are proposed to solve the high energy cost problem. The first step is to switch from diesel to biodiesel, due to its lower cost per unit. The second step is to relocate finished products in order to reduce the distance of transportation within the warehouse. The third step is to increase the size and layout of the terminal for finished products, and scrap from the production process in order to shorten the distance of transportation. The fourth step is to increase LPG usage in order to reduce energy costs. (2) Conduct a feasibility study and determine an action plan. Results from the feasibility study, based on technical and economic principles indicate that increased LPG usage would meet the objective set in the strategic plan. From Table 2, SVE helps reduce energy costs by 4.11 Baht/hour/forklift or 9,798.24 Baht per year per forklift. Total energy cost savings per year are 146,973.60 Baht with a 555,000 Baht initial investment and payback period of 3.7 years. The next step is to assign a responsible person and come up with time frame for the project. (3) Propose the SVE project to the administrator, advising the modification of the forklifts from using solely diesel to using LPG only. The suggested proposal, which requires modifying costs of 555,000 Baht, generated net energy cost savings of 146,973.60 annually. The payback period of the proposed project is 3 years and 9 months. (4) The decision making and project approval was done

by the administrator. The administrator approved the SVE project since it is the highest cost savings project, with a shorter payback period when compared with other projects. (5) Implementation and feedback are necessary in order to ensure that results from the SVE project have met the goals as stated in the strategic plan. Therefore, the head of the logistics group will be responsible for this task. (6) The standardization of the SVE project after the results of implementing the SVE showed that using the same route in the warehouse, SVE has decreased energy usage. After implement the Sustainable Development Model of Value Engineering, the logistic group will investigate the fifth step as shown in Fig. 1 in order to solve the next important problem by submitting the next SVE project to the administrator for approval. 3. CONCLUSION The Value Engineering Model is developed by the integration of the Value Engineering concept, the Deming Cycle concept and the Juran Trilogy concept for the manufacturing industry where tremendous energy cost savings were achieved by using it. As shown in Fig. 1, there are 12 steps from the 3 main processes of the Juran Trilogy which are planning; controlling; and the improvement process. After the solution has been ascertained for to the most important problem, and all the processes under the SVE model have been implemented, each shop floor team has to conduct a feedback loop by suggesting possible solutions to further problems to the administrator for

46

International Journal of the Information Systems for Logistics and Management (IJISLM), Vol. 5, No. 2 (2010)

approval. Such feedback loops are implemented based on the Deming Cycle. By implementing the Sustainable Development Model of Value Engineering, sustainable value engineering could be obtained. REFERENCES
Chen, W. H. and Lu, R. S. Y. (1998) A Chinese approach to quality transformation. International Journal of Quality & Reliability Management, 15(1), 72-84. DellIsola, A. J. (1982) Value Engineering in the Construction Industry (3rd ed.). Van Nostrand Reinhold Company, New York. Dooley, K., Anderson, J. and Liu, X. (1999) Process Quality Knowledge Bases. Journal of Quality Management, 4(2), 207-224. Fong, P. S. W., Shen, Q. and Cheng, E. W. L. (2001) A framework for benchmarking the value management process. Benchmarking: An International Journal, 8(4), 306-316. Ibusuki, U. and Kaminski, P. C. (2007) Product development process with focus on value engineering and target-costing: A case study in an automotive company. International Journal of Production Economics, 105(2), 459-474. Juran, J. M. (1989) Juran on Leadership for Quality. Free Press,

New York. Male, S., Kelly, J. and Fernie, S. (1998) The Value Management Benchmark: Research Results of an International Benchmarking Study . Thomas Telford Publishing, London. Miles, L. D. (1972) Techniques of Value Analysis and Engineering (2nd ed.). McGraw-Hill, New York. Nathaphan, S. (2000) Risk Analysis for Capital Budgeting of Businesses in Thailand. Proceedings in the first Academic Business Conference. Nathaphan, S. (2002) The Evidence on the existence of the capital structure: Evidence from the Energy and Food industry in Thailand. Proceedings in The Twelfth International Conference, Asia: Survival Strategies in the Global Economy. Ross, S. A., Westerfield, R. W. and Jaffe, J. (2007) Modern Financial Management (8th ed.). McGraw-Hill, New York. Shen, Q. and Liu, G. (2004) Applications of value management in the construction industry in China. Engineering, Construction and Architectural Management, 11(1), 9-19. Webb, A. (1993a) Value engineering. I. Engineering Management Journal, 3(4), 171-175. Webb, A. (1993b) Value engineering. II. Engineering Management Journal, 3(5), 231-235.