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A presentation by

Ahmad Tariq Bhatti


FCMA, FPA, MA (Economics), BSc
Dubai, United Arab Emirates

Value
Analysis,
How???

Value Analysis

Value Analysis was developed after WW-II in USA at


General Electric (GE) in 1947. Because of WW-II,
there were shortages of skilled labor, raw materials,
and component parts at GE.
Lawrence D. Miles, Jerry Leftow, and Harry Erlicher
at GE looked for acceptable substitutes. They noticed
that these substitutions often reduced costs,
improved product, or both. This led them to the
discovery of a systematic process for cost reduction
without compromising on the desired quality of
products. They named their process as VALUE
ANALYSIS.
Value Analysis

Techniques of Value Analysis and Engineering tells you


why so much unnecessary cost exists in everything we do. .
. how to identify, clarify, and separate costs which bear
no relationship to customers' needs or desires. . . how
to place a dollars-and-cents value on different
customer functions. . . how to divide a problem into
"mind-sized" steps, each one of which is solvable and the
sum of which solves the major problem.
- Lawrence D. Miles
[An excerpt from his book
Value Analysis and Engineering 3/e, 1989]

Value Analysis

Value: The ratio between a function for customer satisfaction and the cost
of that function. It is the least cost that can achieve reliably a function or a
service.
Value of a product = Performance of the function / Cost
Need: Something that is necessary or desired by a customer
Function: The effect produced by a product or by one of its elements, in
order to satisfy customer needs.
Value Analysis: A systematic process that is used to increase the value of
an object that is achieved by providing required functions of a product
at lowest overall cost consistent with achieving the required quality,
performance and market acceptance.
VA team refers to a team/group/committee of cross-functional
technicians who follow a stated workplan to accomplish VA objectives.
The object can be a product, a system, a process, a procedure, a plan, a
machine, equipment, tool , a service or a method of working.
Value Analysis

The aim of VE is to obtain target cost without compromising on the


quality of a product by:
Identifying improved product designs that reduce products cost
Eliminating unnecessary functions that increase the products
costs
VE requires the use of Functional Analysis (FA). FA is an analysis
of the relationships between product functions, their perceived
value to the customer and their cost of provision. The process
involves decomposing the product into its many elements or
attributes.
For instance, in the case of automobiles, functions might be
consist of style, comfort, operability, reliability, quality and
attractiveness etc., etc.

Value Analysis

What is it? (a pencil)


What is it used for? (writing and making marks)
What is the main function of this product? (making marks, writing)
What is the method, material or procedure that was used to realize
the main function? (a graphite stick & wood)
What are the corresponding secondary functions? (transfer
graphite to paper and facilitate holding the graphite)
What does the item cost and how can we distribute the cost of
realizing the main function into each secondary function?
Comparing these costs to an item of a similar function, how much
should each function cost and what must be the total cost?

Important Note

Focus your VA on the main function, because, during the analysis, the
secondary functions may change. The group/committee/team may
choose different secondary functions to realize the main function.
Value Analysis

For many of the worlds leading companies, including names


like Hewlett Packard, Sony, Panasonic, Toyota, Nissan,
and Ford, VA process of design review has provided major
business returns.
The key to realizing these returns is through using
knowledge of:
the customer requirements,
the costs of the product,
manufacturing process &
the costs associated with failures due to poor or
inadequate product design.
All these inputs to VA process are vital if decisions regarding
product and process re-design are to yield lower costs and
enhanced customer value.
Value Analysis

A systematicanalysisthat identifies andselectsthebest valuealternatives


fordesigns,materials, processes, andsystems. Itproceedsby repeatedly
asking, "Can thecostof an object be reduced

or eliminated, without diminishing


theeffectiveness,requiredquality,
customersatisfaction or market acceptability?
VA is applied to the existing products whereas VE is applied to the products in
the making at design stages. They are also alternatively used. Both
techniques/processes give same results of adding value to products/services.
Therefore, they are also referred as Value Management Techniques (VMTs).
At the very heart of VA process review is a concern to identify and eliminate
product and service features that add no true value to the customer or the
product but incur cost to the process of manufacturing or provision of the
service.
Value Analysis

Organized cost reduction analysis by which accountants analyze costs in


products or procedures, the ranking of their elements/parts in a
descending order of their magnitude and in informed challenge to each,
starting with the most important.
Development, as practiced in many companies, where it follows the
realization of a design and combining through the specifications to
remove costs by substituting standards and relaxing tolerances and
finishes.
Purchasing analysis which systematically searches for cheaper boughtout components or services, probably by seeking alternatives or a fresh
basis for price negotiation.
Method study - The part of work that examines and analyses work of any
kind in a disciplined manner that leads to improvement in efficient,
effective and economic methods.
Value Analysis

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Functions may be broken down into a


hierarchy, starting with a basic or main
function, for which the customer believes
they are paying, and then followed by
secondary functions, which support that
basic function.
For example, a coat may have a use function
of making you warm (i.e. basic or main
function) and an aesthetic function of
looking smart, attractive and charming.
Value Analysis

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The product or process may be broken down into


components, which can be associated with the functions
they support. The value of the product or process then may
be increased by improving or replacing individual
components. This also applies to the whole item being
analyzed, which may be completely replaced with a more
cost efficient and effective solution.
Although this is a simple-sounding process, it can be quite
difficult in practice, as it requires both an in-depth analysis
of a product or a process to be improved and an
innovative/creative approach to finding the best
alternatives.
Value Analysis

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VA process is based on the application of a systematic workplan that


may be divided into 7 steps as mentioned below:

Selection & Orientation,


Analysis,
Recording Ideas,
Innovation/Creativity,
Evaluation,
Recommendations, and
Implementation and monitoring.
The application of VA process needs to make use of basic techniques such as Matrices,
Pareto chart, PERT technique and Gantt diagrams, etc., in most of the VA stages.

Value Analysis

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#
1.

Stage

Description

To select those critical areas where a potential for cost


reductions is expected.
SELECTION &
ORIENTATION Use the common Paretos ABC analysis.
General scope, restrictions and aims of the study is defined.

Examine the data at a VA group/team meeting.


Record the minutes of each brainstorming session.
Apply the Tests for Value.
Propose further action.

2.

ANALYSIS

3.

RECORDING
IDEAS

Write down the minutes of analyses meetings and circulate


them to group/team members for further queries.
It includes the agenda for the next meeting.

INNOVATION/
CREATIVITY

Arrange team meetings in order to discuss the ideas


analyzed and any new information obtained.
Think upon practical measures for reducing costs and
increasing value.

4.

Value Analysis

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#
5.

Stage

Description

EVALUATION

Investigate suggestions for reducing costs and to make


them practical and acceptable to client management.
Obtain definite prices and costs in order to estimate cost
reductions accurately.

6.

Recommend cost reductions to client management.


Present the recommendations in a comprehensive report.
RECOMMENDATIONS
Recommend a member to act as an implementation
consultant for VA recommendations.

7.

Implement the recommendations accepted by the


company management. Monitor the results as suggested
IMPLEMENTATION
in VA report.
& MONITORING
Jot down the feedback of the management upon
completion of VA assignment.
Value Analysis

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1.

A high customer orientation, focusing on those aspects of the


product/service that better satisfy customer needs.

2.

Allows enormous cost reductions by eliminating functions that do not


satisfy customer requirements/needs.

3.

VA improves profitability of products.

4.

New ideas that arise from the creativity/innovation phase, may add
radical changes.

5.

VA provides a process to systematically improve the existing goods and


services. It builds value into a product or service.

6.

VA process is used to offer a higher performing product or service to a


customer at a minimal cost.
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8.

VA process is, therefore, one of the key features of a business that


understands and seeks to achieve TQM in all that it does to satisfy
customers.

9.

VA process often allows to root out practices that have grown out of date
and can be replaced with more modern approaches.

10. VA can uncover design flaws that not only operate inefficiently but also
create problems. In the case of a product, this could mean a high rate of
malfunctioning items, creating customer complaints and warranty claims
that put a strain on personnel and inventory departments.

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Avoid making generalizations and superficial statements it is


important to be precise at every moment.
Collect, determine and examine all costs involved only when one is
cost conscious, will it be possible to determine the value of the thing
being assessed.
Make use of information from the best possible sources.
It is possible that two different VA consultants may give different sets
of recommendations still both be correct. There can be challenges in
the selection of the best alternatives.

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Abbreviation

Description

FA

Functional Analysis

GE

General Electric

TQM

VA

Value Analysis

VE

Value Engineering

VMTs

Total Quality Management

Value Management Techniques

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1.
2.
3.
4.

Value Analysis and Engineering 3/e by Lawrence D. Miles


Management & Cost Accounting by Colin Drury 5/e (pg. 892)
Cima Official Terminology
Management Accounting Handbook by CIMA
(2/e, edited by Colin Drury)
5. Cima Kaplan Publishing for Paper P2 (pg. 205)
6. www.businessdictionary.com

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Thank
You!
Ahmad Tariq
Bhatti
FCMA, FPA, MA (Economics), BSc
Dubai, United Arab Emirates
Contact details:
At.bhatty@gmail.com

Th
e
En
d.
Value Analysis

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