VALUE ENGINEERING

INTRODUCTION:
 Value analysis is one of the major techniques of cost
reduction and cost prevention.

Value analysis is an approach to improving the value of a

product.

In value engineering, the cost related to production, design,

maintenance, and replacement are included in the analysis.

It is a disciplined approach that ensures necessary functions

for minimum cost without sacrificing quality, reliability,
performance, and appearance.

Value engineering is used to solve problems, identify and

eliminate unwanted costs and improve function and quality. 

High Cost High Cost

Cost -----

Low Value High Value

Low Cost Low Cost

Our
Low Value High Value Target
Value ---------

Definition:
According to the Society of American Value Engineers (SAVE):
“Value Analysis is the systematic application of recognized
techniques which identify the function of a product or service, establish
a monetary value for the function and provide the necessary function
reliably at the lowest overall cost”.

It is an organized approach to identify unnecessary costs associated

with any product, material part, component, system or service by
analysing the function and eliminating such costs without impairing the
quality, functional reliability, or the capacity of the product to give
service.

VALUE:
Function+Quality
Value=
Cost

Function: The Specific worth that a design / Item must perform.

 A function is a goal that can be accomplished with
a product, service, process, practice, system,
application, document, component, machine or
environment.
Quality: The owner’s or Desire’s needs and Expectation
Cost: The life of the product / Project
Value: The most cost effective way to reliable accomplish a
function that will meet the user needs, desire and expectation.

Value Engineering Approaches:

( F ) +(Q)
Value (V )=
(C)
 Cost
Function Compoun Expand
Reductio
Approaches Increase d Growth
n
Approach Approach Approach
Approach

Four Phases of Value Engineering:

Cost

Value Function
Quality
Engineering

Reliability

WHEN TO APPLY VALUE ANALYSIS

1. Company’s products show decline in sales.

2. Company’s prices are higher than those of its competitors.
3. Raw materials cost has grown disproportionate to the
volume of production.
4. New designs are being introduced.
5. The cost of manufacture is rising disproportionate to the
volume of production.
 6. Rate of return on investment has a falling trend.
7. Inability of the firm to meet its delivery commitments.
8. Assessing Customer Needs & Affordability
9. Capturing Customer Needs and Priorities
10. Obtaining Customer Feedback on Value
11. Product Planning
12. Reduced waste
13. Improved Profit Margins
14. Increased Customer Satisfaction

Types of Value

Value, in value investigation, refers to “economic value”,

which itself can be divided into four types
1. Cost value
2. Exchange value
3. Use value, and
4. Esteem value.

Cost value:
It is the summation of the labour, material, overhead and all
other elements of cost required to produce an item or provide a
service compared to a base.

Exchange value
It 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.

Use value
 It is known as the function value. The use value is equal to
the value of the functions performed.
The use value is the fundamental form of economic value.
An item without “use value” can have neither “exchange
value” nor “esteem value”.

Esteem value
It involves the qualities and appearance of a product (like a
TV set), which attract persons and create in them a desire to
possess the product.

FUNCTION
Function is the purpose for which the product is made.
Identification of the basic functions and determination of the
cost
-------------Two major considerations of value analysis

Examples:
o Steering wheel - Control Direction
o Gear box - Change Speed
o Brake system - Stop Vehicle
o Wiper - Clear Water
o Horn -Make Sound
o Side mirror - Show Side traffic

Classification of the functions

Rarely do all functions assume equal importance. Usually,
some functions are more important than others. Functions can be
classified into the following three categories:
1. Primary function
 2. Secondary function
3. Tertiary function

Primary functions
The basic functions for which the product is specially designed
to achieve.
If its fail, the product worthless.
Examples: A chair supports weight,
Fluorescent tube gives light.
Mobile Phone uses to communicate with others

Secondary functions
It is supporting Function.
Secondary functions are usually related to convenience.
Examples: Arms of a chair provide support for hands
Cushion of a chair provides comfortless to the person
for sitting

Tertiary functions
Tertiary functions are usually related to esteem appearance.
Example: Sun mica top of a table gives esteem appearance for
the table.

Let us consider a single example of painting a company bus to

explain all the above three functions.
The primary function of painting is to avoid corrosion.
The secondary function is to identify the company to which the
bus belongs by the colour of the paint (e.g. blue colour for Ashok
Leyland Ltd.).
 The tertiary function is to impart a very good appearance to the
bus by using brilliant colors.

AIMS of value engineering:

The aims of value engineering are as follows:
1. Simplify the product.
2. Use (new) cheaper and better materials.
3. Modify and improve product design.
4. Use efficient processes.
5. Reduce the product cost.
6. Increase the utility of the product by economical means.
7. Save money or increase the profits.

VALUE ENGINEERING PROCEDURE

The basic steps of value engineering are as follows:
(a) Blast
(i) Identify the product.
 (ii) Collect relevant information.
(iii) Define different functions.
(b) Create
(iv) Different alternatives.
(v) Critically evaluate the alternatives.
(c) Refine
(vi) Develop the best alternative.
(vii) Implement the alternative.

Step 1: Identify the product.

o First, identify the component for study.
o In future, any design change should add value and it
should not make the product as obsolete one.
o Value engineering can be applied to a product as a
whole or to sub-units.

Step 2: Collect relevant information. Information relevant to the

following must be collected:
o Technical specifications with drawings
o Production processes, machine layout and instruction
sheet
o Time study details and manufacturing capacity
o Complete cost data and marketing details
o Latest development in related products

Step 3: Define different functions.

o Identify and define the primary, secondary and tertiary
functions of the product or parts of interest.
o Also, specify the value content of each function and
identify the high cost areas.
Step 4: Different alternatives.
o Generate the ideas and create different alternatives so
as to increase the value of the product.
o Value engineering should be done after a brain
storming session.
o All feasible or non-feasible suggestions are recorded
without any criticism.

Step 5: Critically evaluate the alternatives.

o Different ideas recorded under step 4 are compared,
evaluated and critically assessed for their virtues,
validity and feasibility as regards their financial and
technical requirements.
o The ideas technically found and involving lower costs
are further developed.

Step 6: Develop the best alternative.

o Detailed development plans are made for those ideas
which emerged during step 5 and appear most suitable
and promising.
o Development plans comprise drawing the sketches,
building of models, conducting discussions with the
purchase section, finance section, marketing division,
etc.

Step 7: Implement the alternative.

o The best alternative is converted into a proto-type
manufacturing model which ultimately goes into
operation and its results are recorded.
Advantages:
The advantages of value engineering are as follows:
1. It is a much faster cost reduction technique.
2. It is a less expensive technique.
3. It reduces production costs and adds value to sales income
of the product.
Applications:
The various application areas of value engineering are
machine tool industries, industries making accessories for
machine tools, auto industries, import substitutes, etc.

MAKE OR BUY DECISION

In the process of carrying out business activities of an

organization, a component/product can be made within the organization
or bought from a subcontractor.
Each decision involves its own costs.
So, in a given situation, the organization should evaluate each of
the above make or buy alternatives and then select the alternative which
results in the lowest cost.
 In the long run, the make or buy decision is not static. The make
option of a component/product may be economical today; but after some
time, it may turn out to be uneconomical to make the same.
Thus, the make or buy decision should be reviewed periodically,
say, every 1 to 3 years.
This is mainly to cope with the changes in the level of competition
and various other environmental factors.

CRITERIA FOR MAKE OR BUY:

1. The finished product can be made cheaper by the firm than by
outside suppliers.
2. The finished product is being manufactured only by a limited
number of outside firms which are unable to meet the demand.
3. The part has an importance for the firm and requires extremely
close quality control.
4. The part can be manufactured with the firm’s existing facilities and
similar to other items in which the company has manufacturing
experience.

CRITERIA FOR BUY:

1. Requires high investments on facilities which are already available

at supplier’s plant.
2. The company does not have facilities to make it and there are more
profitable opportunities for investing company’s capital.
3. Existing facilities of the company can be used more economically
to make other parts.
4. The skill of personnel employed by the company is not readily
adaptable to make the part.
5. Patent or other legal barriers prevent the company for making the
part.
6. Demand for the part is either temporary or seasonal.
Stages of Make or Buy Decision:

1. Planning Stage
2. Evaluation Stage
3. Analysing Stage
4. Selecting Stage
APPROACHES FOR MAKE OR BUY DECISION:
1. Simple cost analysis
2. Economic analysis
3. Break-even analysis

There are three alternatives available to meet the demand of a particular

product. They are as follows:
(a) Manufacturing the product by using process A
(b) Manufacturing the product by using process B
(c) Buying the product

The details are as given in the following table:

Manufacturing Manufacturing
Cost elements the product by the product by Buy
Process A Process B
Fixed cost/year (Rs.) 5,00,000 6,00,000 -----
Variable/unit (Rs.) 175 150 -----
Purchase price/unit ----- ----- 125
(Rs.)

The annual demand of the product is 8,000 units. Should the company
make the product using process A or process B or buy it?

Solution:
Annual cost of process A = FC + VC × Volume
= 5,00,000 + 175 × 8,000 = Rs. 19,00,000
Annual cost of process B = FC + VC × Volume
= 6,00,000 + 150 × 8,000 = Rs. 18,00,000
Annual cost of buy = Purchase price/unit × Volume
= 125 × 8,000 = Rs. 10,00,000

Since the annual cost of buy option is the minimum among all the
alternatives, the company should buy the product.