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Value Analysis/ Value Engineering

Value is the price which we pay for a product, process, material, or service required to perform a specific function or service with the required quality and reliability. Thus, Worth you pay _____________________ Price you pay

Value =


Value of the product can be increased either by the following ways :

1. Increasing the utility , with the same cost 2. Decreasing the cost , with the same utility 3. Increasing the utility, with decreasing cost 4. A large increase in utility with a small increase in cost

Types of Values
Value means different to different people. In general , there are seven classes of value: ‡ Economic ‡ Aesthetic ‡ morale ‡ Social ‡ Political ‡ Religious ‡ Judicial

4. Economic value can be subdivided into four types . Value in measurable terms. 2.‡ 1. Exchange value ± measure which is the outcome in exchange between the products. refers to the economic value of the product/ service. Out of these. considers the functions performed by the product/ service Esteem value ± measure of properties. packaging etc which increases the sales appeal. features. . Cost value ± measure of the sum of all costs incurred in producing the product Use value ± also called functional value. 3. economic classification can only be measured .

Introduction to Value Analysis ‡ In today¶s market. . Value Engineering has proven to be sound enough in saving or reducing 10 to 15% of the investment costs ‡ The concept of Value in Value Engineering is to describe the best value or the optimum value. Today¶s Value Management has two concepts ± function and value for money.

Value Engineering and Value Analysis ‡ Value Engineering: Value Engineering is a technique applied to identify optimum value solutions during new product development. processes or services. ‡ Value Analysis: Value analysis is a technique applied to improve existing products. Value Methodology (also called Value Engineering. The objective is usually to reduce cost. Value Analysis or Value Management) . but may equally or simultaneously be to improve performance or quality.

It is always done by a specific product design (engineers) team . subcontractors.DIFFERNCE BETWEEN VALUE ANALYSIS AND VALUE ENGINEERING Value Analysis Indicates application on the product that is into manufacturing All factors come together including workers. engineers to make a team with total experience and knowledge Value Engineering Indicates application on the product at its design stage.

It may change the present stage of the product or operation It is worked out mostly with help of knowledge and experience It is a remedial process the changes are executed at the initial stages only It requires specific technical knowledge It is a preventive prcess .

‡ Value analysis/ engineering examines the design . function or reliability . method of manufacturing. material used.‡ Value Analysis aims at a systematic identification and elimination of unnecessary costs. function and cost of each and every component in order to produce it economically without decreasing its utility.

Thus it aims to produce the products with the same performance.‡ Value analysis aims at systematically analysing the normal costs involved in the manufacturing process and then eliminating them. there by reducing the overall cost of the product. resulting in increase in sales and profit proportionately. . quality and efficiency with a less overall unit cost.

Mr. many manufacturers were forced to find out substitute materials and designs for the applications desired. In 1947. . Due to the scarcity of critical materials to be obtained.History It was during the World War II that the concept of value engineering emerged by chance. Miles worked with an odd attitude to develop new ideas and search for value in the products and developed a successful methodology. Lawrence D. The General Electric Company found that many of the materials that were substituted worked out cheaper and gave much better performance than the original ones. The concept quickly spread up due to the large savings with relatively modest investments. Miles an engineer in General Electric developed a number of ideas and techniques to substitute and enable the change intentionally rather than by chance.

Value Management is the same concept. They called it Value Engineering. Navy Bureau of Ships applied the Value Analysis process to cost improvement during design.In 1954. S. the U. Value Engineering. . Value analysis. and these terms are used depending upon the application or the field in which it is being used.

INFORMATION PHASE .DEVELOPMENT PHASE .Creative Brainstorming IVV EVALUATION PHASE Analysing alternatives VI -.Present Alternatives VIII IMPLEMENTATION PHASE Expediate IX --Follow Up -.Critical Judgment IV.Project Familiarization II-III -.Develop Alternatives VII-VII-.ANALYSIS PHASE .comparison --Follow .Value Analysis Procedures ( Stages in Value Analysis) I ORIENTATION PHASE Problem identification II-.PRESENTATION PHASE .SPECULATION PHASE .

quality aspect etc is gathered. detailed cost break up. Information Phase After clearly identifying what to be accomplished. production problems. Orientation phase This stage involves identification of the problems very clearly. This phase/ stage lays down the objective ( in our context . . value) to be attained 2. all the relevant information like the technical specifications.1. manufacturing process.

Here all the possible alternatives are generated.3. . Creativity / Brainstorming stage Here the knowledge and the experience is clubbed together to analyse/ find out the ways to control cost and enhance the value of the product. It can be represented as: List and prepare ± Listing and detailed description of each functions to be performed by the product Establish ± cost of essential functions Estimate ± Worth of each essential function Determine ± Value improvement potential 4. Functional Analysis phase This phase involves the analysis and identification of functions / utility.

It thus involves : Shortlist ± Creative ideas Develop ± Ideas functionally Evaluate ± Ideas according to their relative cost reduction potential Rank ± alternatives according to their relative cost reduction potential Select ± the alternative which has the lease cost potential . Evaluation Phase In this phase. The cost of each idea/ project is estimated.5. possible alternatives developed are analysed. The ideas which promises greater savings are screened and shortlisted.

Implementation phase Here we put into practice the alternative thus chosen. Development and Presentation phase Here we : Arrange ± necessary test runs Submit ± A definite plan for action Secure ± approval for implementation 7. Training of workforce is essential during this phase to make the plan into reality. .6 .

It involves : Audit ± comparing the results with the expectations Submit ± cost savings achievement reports to the management Evaluate ± effectiveness of the approach Suggest ± Changes / corrective action . This is the last stage which compares the results with original expectations and suggests corrective action.8. Follow up phase .


When there is a need to reduce process cycle times. project or service life cycle. When there is a need to produce new ideas for marketing and procuring goods and services. When it appears that a new project or program may exceed budget expectations. When there is a need to maintain the same programs at reduced costs. At the beginning of each new product.When to apply ‡ ‡ ‡ ‡ ‡ ‡ ‡ When price competition has reduced profits. When there is a need for productivity improvement .

Purchase Management .

Purchasing is the procuring or materials. supplies. development of proper procedures. receiving. follow up to ensure proper and timely delivery. store keeping and accounting operations related to purchases. machines. maintenance and operation of a manufacturing plant. Purchasing goes beyond the activity of mere buying. It includes research and development for the proper selection of materials and sources. tools and services required for equipment. inspection to ensure both quality and quantity. methods and forms. .

A Companys Purchasing function becomes important when : ‡ Its purchased item account for a high proportion of the unit cost of the product ‡ When the prices fluctuates widely ‡ When numerous diverse items are required ‡ When the quality of the material appreciably influences the cost of manufacturing. .

Classification of Purchases ‡ ‡ ‡ ‡ ‡ ‡ Raw materials Components Consumable stores and supplies Office supplies Spares and tools Machines and equipments .

Principles of Scientific Purchasing There are six Rs in Scientific purchasing. These are : ‡ Right quality ‡ Right quantity ‡ Right price ‡ Right time of delivery ‡ Right place of delivery ‡ Right source of supply .

Objectives of Purhasing ‡ To provide an uninterrupted flow of materials. supplies etc to ensure continuous production ‡ To buy wisely and contribute to the competitiveness of the end product ‡ To maintain inventories at the optimum level ‡ To bring about better co ± ordination with other depts ‡ To develop and maintain good relations with suppliers . tools.

equipments which may reduce the manufacturing cost ‡ To train and develop purchasing personnel ‡ To achieve economy and efficiency in the activities of the purchase dept . tools.‡ To develop purchase policies and procedures ‡ To select suitable sources of supply ‡ Collect the information about the new materials.

Buying Techniques/ Tenders The following techniques are used for making purchases: ‡ Single Tender ‡ Spot quotation ‡ Open Tender ‡ Closed Tender or limited Tender .

The aim is to find price for procuring raw materials or to get a particular work done within the desired period and under specific conditions.A Tender/ quotation is in the form of a written letter or a published document ( in news papers). .

Single tender In this case. This is used under the following conditions : . tender is invited from one reliable supplier only.1.when items are required urgently .for purchasing monopolistic/ proprietary items .when quality is of extreme importance .

. The Purchases are carried out from the supplier quoting lowest rates.2. The buyer goes to the market and collects minimum of three quotation for the item. Spot quotations This system of purchasing is used when purchases are to be carried out very urgently.

3. Open Tender It is also called press tender or advertised tender. It is published in newspapers. . This technique is generally used for bulk purchases. for procuring materials of desired specifications. magazines etc. trade journals.

After negotiations. . They will regularly supply the materials to the company as and when the order is placed to them.4. they get registered with the company upon agreeing to meet the required specifications. Limited tender Representative of various sales organisations often approach various organisations to register themselves as vendors.

Purchasing procedure The following procedure is normally adopted in purchasing in case of medium sized and big companies : ‡ Recognition of the need ‡ Selection of source of supply ‡ Inviting quotations ‡ Processing the quotations ‡ Placing the order and follow up ‡ Receipt and inspection ‡ Approval of payment .

Recognition of the need Need for purchasing originates in the operating depts or in the inventory control selection. the quantity on hand etc will be specified . The purchase requisition should contain the description of the item needed. authorised inventory control clerks forward purchase requisition to the purchasing dept. When the stock of a particular material comes down to the minimum reorder level.1. the heads of depts.

Selection of supply The Purchase dept keeps a ready list of suppliers for different items needed in the factory.2. maintenance of the quality standards. ability to deliver as per the schedule. While selecting the suppliers along with the price. other relevant considerations like their ability to supply in the required volume. . financial standing etc are given prime importance.

specifications ‡ Quantity to be purchased ‡ Whether sample is to be sent with tenders ‡ Period of delivery ‡ Earnest money to be deposited. if any ‡ Terms and conditions for purchase ‡ Date.3. The request for tenders should contain the following : ‡ Quality of items to be purchased. Inviting quotations Tenders are invited from the selected suppliers. time and place for receiving and opening of the tenders .

The next step is to prepare the comparative statement. Processing the tenders On the date of opening. . at the prescribed time. purchase officer opens all the tenders received till that date.4. It helps in studying and comparing different quotations at a glance and quick decision can be taken regarding placing the order with the particular supplier. which serves as a guide in selecting the right supplier.

Therefore. It should be noted that low bidder is not always a best supplier. Placing the order and its follow up The keen to study of the comparative statement will reveal the best supplier out of the available one. sample. while selecting the supplier. reliability of the supplier etc are considered . along with the price. When everything except the price is equal.5. the firm quoting the lowest price would be selected. sales tax. specifications. other expenses like freight.

. After placing the order. The purchase order constitutes a legal document and it serves as the vendors authority to dispatch the materials and bill to the company. follow up procedure should be employed wherever the costs and the risk resulting from delayed deliveries of materials are greater than the cost of follow up procedure.After selecting the right supplier. a purchase order is despatched to him.

Receipt and Inspection A detailed inspection is carried out after the material is received. The process includes: ‡ Comparing receiving reports with the purchase order in order to find discrepancies ‡ Checking to ensure that goods received are according to desired specification ‡ To reject and return the material which are found as defects .6.

it is desirable to scrutnise the invoice with the help of purchase order and the receiving report. This is to ensure that the materials supplied are of the right quantity. Approval of payment Before approving payment to the vendor.7. . right price etc are received according to the terms contained in the purchase order. right quality.

Purchasing for a specified period 3. Market purchasing 4. Rate contract purchasing 5. Purchasing by requirements ( Hand to mouth buying) 2. Group purchasing .Methods of forecasting Different methods of Purchasing are : 1.

1. This is adopted in the following cases : . or when the companies requirements are unsteady .To fulfill the emergency production needs . Purchasing by requirements In this method. the materials are purchased whenever the need arises.Frequent purchases in small quantities are advantages when the prices are falling or unsteady.For purchasing materials which are not required frequently .

based on production planning. when the prices are low and likely to rise in the future . 3. Market Purchasing This method takes the full advantages of the prevailing market conditions and price fluctuations. and other materials required regularly for the operation are purchased in quantities sufficient for specific future period. Purchasing for a specified period In this method. the standard materials like oils. stationary. The materials are purchased in advance of future need.2.

Speculative purchasing Speculative purchasing is an attempt to gain considerable profit by buying an excess of materials when prices are considered to be at low point. it makes price trends the primary factory in buying and gives less regards to the production planning/ material requirements of the business .4. Unlike market purchasing.

5. the materials are purchased in groups or lots in one order instead of placing separate orders for each item. . 6. Rate contract pricing In this method. contracts are given to suppliers to supply the material at agreed prices for a certain period ( 2 ± 3 years). Group purchasing In this method. The contract is subjected to review with an appropriate period of notice.