Value Analysis and Materials Management

VALUE ANALYSIS AND COST REDUCTION

The materials manager is always in search of cost reduction tools. Value analysis is
synonymous with cost reduction and is a powerful practical cost reduction technique
available to the purchase executive. Since it attacks the basic design of the product, value
analysis is more effective than the basic design of the product, value analysis is more
effective than other cost control techniques. It is concerned with ascertaining whether the
material purchased is good value for the money, for the required purpose.
Value analysis is an organized creative approach aimed at identifying unnecessary
costs and eliminating the same from the system without affecting the functional
utility/guarantee/safety performance. The essence of value analysis is to identify the
function of the product, to examine alternative ways by which the function can be
accomplished and finally choosing that, which involves the least cost. Value analysis
correlates the cost of purchasing a product or services with its end use. It attempts to
examine critically the make-up of every item, which contributes towards the cost of the
product and whether this cost contributes towards the cost of the product and whether this
cost contributes to the function appropriately.
It is an approach of providing the required function of the product at the desired time and
place at the lowest cost. This approach is concerned with right quality, design,
specification, standards, methods of manufacture, etc., and involves the substitution of
material or component at a lesser price or better quality.
Several other techniques closely resembling value analysis are also used in the
industry with the different names, and these are mentioned in the following. The
application of the value analysis ideas during design and engineering stage of product
before its manufacture, is known as value engineering.

Some of the related techniques using the same logic are listed below:
PROFIT --- Product return opportunities by function investigation techniques;
FIRST --- functional idea system techniques;
FAST --- functional analysis system techniques;
FACTS --- functional analysis of components of total system;
VM/VI --- value management and value improvement. But value analysis is the generic
name for all the above techniques and the differences, if any, are negligible.
HISTORIC BACKGROUND
The concept of value analysis is as old as the human race and is practiced by all shrewd
purchase executives; the housewife often changes her menu and buys the low priced
seasonal vegetables, thereby satisfying the demand at a reduced cost. On the industrial
scene, immediately after World War II, the cost of production was going up in General
Electric, as in most other companies, due to inflation. For different civilian consumer
products, a desperate situation arose. Lawrence D. Miles was forced to turn to basics and
asked the suppliers to provide the desired function.
It was found that many war-time substitutes and methods were performing at least as
well as the original in many situations and at less cost. He established a research facility
in the central purchase department to study the new approach. He refined and developed
this cost reduction techniques and called it Value Analysis. Leaders like Robert
McNamara used this tool in Department of Defence in the USA and saved a reported $14
billion in five years. As a result, the Defence Department wrote an incentive clause
making Value Engineering an integral part of government contracts on projects above a
particular value.
The Society of American Value Engineers
---SAVE--- was formed in 1959 to give the new methodology confounded in 1978,
conducts annual conferences and brings out a quarterly journal Invest, wherein successful
Indian experiences have been shared.
CONCEPT OF VALUE

The English dictionary has several meanings of the word “value”, such as worth, a fair
equivalent, intrinsic worth, relative worth, that which renders something useful, etc. In
the field of purchasing, value can be defined as the lowest cost for reliably performing an
essential function and should be considered as the ratio of worth to cost. The
determination of value requires a combination of the following consideration:
(a) Functional or use value --- which helps in accomplishing a task; this may be
divided into primary secondary and tertiary.
(b) Esteem value --- associated with pride of possession and sentiment.
(c) Exchange value --- exchange value is the barter value expressed as the sum of use
and esteem value.
(d) Cost value --- depends upon the commercial value of the cost of production.
(e) Scrap value --- the money that can be recovered when the item is no longer needed.
The concept of value is dynamic and it changes with time. An item which has functional
value today will have esteem value after some time and finally as time and finally as time
passes, the item will have only scrap value.
ITEMS FOR VALUE ANALYSIS
The product life-cycle concept comes in handy for identifying the product for value
analysis. It is well known that any product like the human race, goes through the five
phases of the life-cycle, namely--- conception, development, growth, maturity and decay.
The return on investment also varies with the five phases. The life-cycle time for each
phase varies from one type of product to another. When the product stabilizes or reaches
the stage of maturity, the competitors enter the market with an improved version of the
product and this will force the organization to effect modifications in the product for
survival. These efforts for cost reduction start right from the design stage and is
continued in the production system through process modification, tool changes, materials
substitution, etc. Thus the product with decreasing return on investment, particularly in
the maturity stage is considered ideal for value analysis. In addition, products which
suffer from maximum overdesign can also be chosen for value analysis. Non-critical
items with high annual consumption value or A category items --- based on cost
criticality analysis, form the starting point for value analysis.
Many organizations have reduced packaging cost by adopting value analysis method on
packing materials. But, usually firms identify the product for value analysis by ABC
analysis, which ranks the components in relation to the annual turnover, production or
revenue generated. This ensures that any increase in value relative to costs would yield
maximum possible benefits.
ORGANIZATION FOR VALUE ANALYSIS
A common question arises as to who should carry out value analysis in a company.
Ideally, value analysis is basically, a team effect and requires interdisciplinary approach.
Interdisciplinary teams of four or five individuals are selected from all key departments
such as marketing, design, purchasing, cost accounting, research, quality, packaging,
safety, maintenance, and manufacturing. The methodology of value analysis is exposed to
the members by an expert in a workshop for a period of three or four days. Each team,
later, selects and works on a specific project and finally prepares a report. The value
engineering study also may require the aid and advice of specialists in various areas as
consultants.
In case of large industries, a separate department headed by a senior executive is
formed to devote their time for value analysis studies. These studies involve people at
two levels. The first level consist of senior managers to decide broad policies, such as
accepting proposals, procedures, budgets and accepting team recommendations. The
second level consists of operative executives to carry out value analysis studies. The
people working in value engineering department should have self-confidence, patience,
loyalty, curiosity, creativity and good human relations. It is necessary that the members
of the specific purpose of cost reduction. Some organization feel, the inclusion of
representatives of consumers and suppliers in the team would add a further dimension to
value improvement.
VALUE ANALYSIS APPLICATIONS
Several organizations in public, private, industrial service, large and small sectors have
used value analysis and are making sizeable savings every year.
It brings the much needed technique of plain common sense into the operations, by
bringing out on a voluntary basis, the best talent in people. It uses a confidence building
and creative process, that results in the generation of valuable ideas by tapping the
creative human power. It makes employees cost conscious and promotes team work.
Value analysis studies emphasize on total system concepts and the studies should be
carried out keeping the interests of producers, consumers, employees, traders and
industries have been reported in a large number of articles in different stages and some
are mentioned below:
The value analysis team in one steel plant in India found that many of the rigid
material and process specifications in some of the intermediate stages were not required,
for the tasks for which the steel products are ultimately expected to perform. This has
allowed the organization to reduce some were not required, for the tasks for which the
steel products are ultimately expected to perform. This has allowed the organization to
reduce some of the required processing of various steel items to offset the physical
overdesign. The electrical engineering industry has substituted the indigenously available
aluminium instead of imported copper, a major breakthrough resulting in substantial
savings.
The DGS&D --- a central buying organization catering for the needs of defence,
railways and P & T --- which buys above Rs 3000 crores per year, has through value
analysis saved substantially on just one supplier of inspection lamps. In one engineering
firm, value analysis was applied at the design stage of the machines and it was found that
a spring loaded stripper arm can do the same function by remaining stationary. This
resulted in considerable reduction in maintenance cost. Value analysis has been practiced
by many firms as a policy for import substitution. In the packaging of consumer goods
like tooth paste, instant coffee, soap, cigarettes, biscuits, etc, value analysis techniques
have been profitably used to bring about economy in packing. Thus value analysis helps
to maximize the conservation of scarce material resources in the country and helps to
achieve cost reduction.
TECHNIQUES FOR VALUE ANALYSIS
The sequential steps involved in carryingout a value analysis include the following:
(1) product selection,
(2) information gathering,
(3) definition of function of the product,
(4) identification of function,
(5) speculation of alternatives,
(6) evaluation of alternatives,
(7) reporting about recommendations and
(8) implementation and followup.

Darsiri means ‘to consider’ in Sanskrit and this also follows similar steps. Here Darsiri
method stands for data collection, analysis, record ideas, speculate, investigate,
recommend and implement. Other techniques include MISS --- modify, improve,
subdivide, substitude, and EXCHANGE --- Eliminate, keep, change. The given
specifications are challenged in the meeting, if necessary by assigning rupee value for the
tolerance. Simplification, diversification and standardization can also contribute to the
cost reduction and must be used in conjuction with value analysis. The team should be
familiar with the context of the chosen items.
In the value engineering approach, the definition of the value on the function should
be limited only two words, a verb and a noun. The two-worded definition must suggest
the function of the product or the item considered for value analysis. For example the
function of a ‘cigarette lighter’ can be defined as to ‘provide ignition’. After the
definition the functions are classified as primary and secondary functions. For any
product or part, there can be only one primary function and there can be any number of
secondary functions. The primary function of a shirt is to cover the body, while the
secondary function can be to appear elegant.
Sometimes the functions are also classified based on different disciplines such as
structural function, electrical function, mechanical function, etc. However, generally the
utility is usually classified as primary and secondary in value analysis. After defining the
functions for the main assembly, subassemblies, parts and components, a few of the main
assembly, sub-assemblies, parts and components, a few of the functions are selected by
the team for speculation of alternatives. Either the product as a whole, or a few of the
parts are selected for speculation of alternative. Speculation of alternatives emphasizes
creativity. Creativity means looking at problems from unconventional angles. There are
three stages in creativity, viz. --- imitation, innovation and invention. Creativity
emphasizes the principles of blast, create and refine the ideas.
BRAIN STORMING: A TO Z WAYS
Brain storming helps in creativity and speculation of alternatives. The philosophy of
brain storming sessions is no to judge the ideas as they come, as this inhibits the people in
coming out with creative ideas. Here the emphasis is on creation of as many ideas as
possible. The brain storming groups normally consist of five to seven people with
different backgrounds drawn from different departments of the organization. They meet
in a group to speculate the alternatives. The alternatives suggested by different members
of the group are listed on this step for evaluation in the subsequent step.
The following illustrative questions aid in creative thinking and in the speculation of
alternatives and finding answers to some questions in the committee to help reduce the
cost:
(a) What is the item and can we do without the item?
(b) Why is it this shape? How does it contribute to the value ?
(c) If it is flat, can it be round (vice versa)?
(d) Can two components be made into one (vice versa)?
(e) Why does it need to be so thick? Does it need all the features?
(f) Why does it need to be so thin?
(g) (If we make ) can we buy it cheaper (vice versa)?
(h) What new processes can we use? Can we use more of a less expensive material?
(i) Is the cost reasonable in terms of its contribution to the end products?
(j) Is the quantity purchased most economical on the ultimate cost?
(k) Does the item need all the features?
(l) Is the item made on proper tooling?
(m) Is any other organization buying less and if so from whom?
(n) Is it necessary to have such a finish?
(O) Is a material available which will eliminate finishing?
(p) Is any one buying for less cost?
(q) Have all basic processes been considered?
(r) What are the competitors doing?
(s) Can we get ideas from suppliers/ consumers on cost reduction?
(t) What are the alternatives possible?
(u) Is this item standard as regards specification, size, shape, type, etc.?
(v) If the item is imported, can it be indigenously made?
(w) Does the analysis of the reasonable cost of material production, and profits,
roughly equal to the price quoted, or is exhorbitant according to the analysis?
(x) Is it possible to put a rupee sign on all tolerances and would you use your own
money in this way?
(y) Is the cost proportional to the utility?
(z) How do you increase the worth to you and decrease the price of the item?
STEPS FOR VALUE ANALYSIS
The first and crucial question in value analysis is what is the function of the product,
process or service? The next question is, how to enhance the quality or value with
lowest cost? In this process, the following eight phases or sequential steps are
considered:
(a) Information phase --- In this phase all relevant facts/data about a particular
troublesome product/part/process/are gathered, organized and analyzed.
(b) Functional phase --- Here, a few items of poorest value (they cost far more than
they should) are identified, and the functions that must be performed by the
product are inspected, analyzed and classified.
(c) Creative phase --- A probing, far reaching collection of solutions, probable and
improbable, is gathered in an effort to generate ideas to perform the functions
identified for the poor value items.
(d) Judicial analysis phase --- The ideas generated in the creative phase are now
evaluated in a practical, pragmatic and analytical mode. Several ideas are
selected and ranked in order of importance.
(e) Development phase --- The best creative and practical ideas are now refined by
the team and brought into shape. The cost factor is added here and applied to
reality. This is a consolidation of what the team thinks.
(f) Presentation --- The proposed changes are put in final form to be presented to
the management decision makers. This proposal describes two or three ideas
for performing the function of the original, basic and very expensive item with
a workable alternative of better value.
(g) Implementation and follow-up phase --- After the ideas have been accepted by
the management, the changes are implemented, monitored and followed
through proper periodical reviews. While developing an idea is important,
selling it to top management is equally important. It has been noted that a
sizeable percentage of the proposals does not see the light of days. Only about
50 per cent of the valuable ideas generated in the team workshop are accepted
for practical implementation.
(h) The master phase --- In terms of salesmanship and communications, take one
new idea from the list of ideas that have been initially turned down by
management, and with additional sophisticated fine-tuning analysis and
description, and present it better in such a way that management can understand
and implement.