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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.

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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.

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