Institute of Supply and Materials Management

(Incorporated by Act of Parliament No. 3 of 1981)

HO No. 09/21

COURSE: Graduate Diploma in Purchasing & Supply Chain Management

MODULE: No. 09 – Purchasing Management

SUBJECT: Value Analysis and Value Engineering

1.0 INTRODUCTION:

Value Analysis (VA) and Value Engineering (VE) are common approaches to improving products
and Processes. In both VE and VA value is usually defined from the viewpoint of the customer
who will use the products and processes. Based upon this fundamental understanding, the
common question asked in all value-based analyses is 'Does this add value to the customer? If
the answer is “No” then there is high probability that whatever “this” is (cost action, part, step
feature, tolerance) it is waste that can be reduced or eliminated.

Although the technique is applied commonly in manufacturing, value analysis has been applied
to a broad range of activities and supply related problems out side the manufacturing area.
Application range from the design of operating system to the development of corporate re-
engineering projects to the procurement of service & transportation

a. Value Engineering

VE take place in the design process before a product is in production or a process has
been implemented for the first time. VE usually entails a methodical systematic study of
all phase of this design of a given item or process in relation to the function (value) the
finished product or process is to perform. VE recognizes that the design process provides
the greater opportunity for reducing cost in a proactive manner before the cost are
committed to in the actual product or process. VE should play a key role in a new product
development.

Value analysis (VA) as defined by ID Miles of general Electric company of USA which
developed this technique in 1947 is as follows:

“An organized creative approach which has for its purpose the efficient identification of
unnecessary cost i.e. costs which constitute neither quality nor use nor appearance, nor
customer features”

Another authority in the field has defined it as follows:-

“It is the study of the design function and cost of any material, product or service, with
the object of reducing its costs through modification of design or materials specification,
manufacture by more efficient process, change in source of supply (internal or external),
elimination or incorporation into another item”.

BS 3138 (1969) defines VA as “A systematic inter-disciplinary examination of design and

other factors affecting the cost of a product or service in order to devise means of
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 achieving this specified purpose most economically at requiring standard quality and
reliability”.

A better and more economical way to do the job without reducing the quality of the
job done is simple statement of the aim of VA.

b. Value Analysis:-

If the value engineering is not possible then VA is used unlike VE, VA take place after a
product has been produced or after a process has been implemented. As such VA is
reactive & provides less opportunity to reduce total costs over the lifetime of a design or
process. However the opportunity to reduce costs is still greater in common approach in
most industries.

VE/VA Techniques although different companies stress the different variation of the
fundamental idea, two general conceptual tools are basic to the operation of a VE/VA of
programme.

 Design analysis
 Cost analysis

Both design and cost analysis focus on the same required product, part material process.
However, design analysis focuses strictly on the feature, function and for use from the
prospective of the customer. Cost analysis links the design feature to numerical value
that can be easily compared. Design feature must be coupled with cost to evaluate the
value.

c. Development of Technique:

This technique was developed as an organized technique by the General Electric

Company (GCE) in 1947 because of the substantial investment in purchased materials; VA
at GE was tied up initially to the purchasing function. In recent years VA has been
expanded to embrace associated fields of engineering, marketing, and manufacturing
etc. in 1954 US Navy adopted a modified version of General electric's VA concept in an
attempt to reduce the cost of ships and related equipment. Emphasis was in cost
avoidance during the initial design stage, and called the programme Value Engineering
(VE), although it embedded the same concepts and technique as GE’s Analysis Program.

According to Lee and Dobler “the technique of value analysis represent a potential
powerful set of tools which can be used by management in controlling materials costs.
The fundamental objective of all value analysis activities is the procurement (for
manufacture) of materials representing the best buy, in terms of synonymous with a
longstanding objective of good purchasing. The unique feature of current value analysis
programs however, lies the systematic and through approach used in attaining this
objective”.

2. BASIC APPROACHES TO VALUE ANALYSIS

Three Basic Approaches:

 Functional approach .
 Cost approach
 Commercial approach
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2.1 Functional Approach

This views the requirement in terms of the functions intended. VA attempts to obtain the
necessary function at the lowest possible costs. An example of this is given below.

A television manufacturer had designed a light weight portable TV. The designer specified
a stainless steel handle, which cost about $2.50 each. The cost was high compared to the
cost of the set, the handle was clumsy and heavy and cut into the hand of the holder. The
question was asked what would do it well? The answer was a commercially available
luggage handle that cost 22 US cents each. It added decorativeness and handling ease as
well.

Functional approach permits reasonable comparison:

 What is the part, material, and product?

 What does it do?

 What does it cost?

 What else will do what it does?

 What does that cost?

The material, the product or the part is defined in terms of its functional characteristics.
These are described in their order of relative importance, as viewed by the customer or
the market buyers encourage functional analysts when they seek from
production/engineering functional type specifications these entail the description of
performance and reliability requirement. By investigating proposals on the basis of
functional specifications the buyer solicits the creative efforts of the supplier.

2.2 Cost Approach

This accepts the product part or design concept, but within that limitation, strives for
cost reduction through more economical methods of processing and manufacture. The
cost approach involves the development of cost estimates for how much the part or
product will cost by a reasonably efficient producer incurring reasonable labour and
material costs, overheads and profit. Cost are studied and analyzed. i.e. direct cost
variable costs, semi-variable costs, and over- heads-in order to identify high cost areas.
Cost should also be studied in terms of their variance by quantity, rate of production and
load distribution, and also in terms of time. What may seem to be an unimportant
element of cost on a per unit basis may become quite significant when viewed in terms
of annual requirements.

2.3 Commercial Approach

This is the organized effort to reduced purchased materials costs, through proper
sourcing, pricing and contractual means. This exercise entails techniques of promoting
and developing new and alternate sources such as

 Varying order frequencies, and employing economic lot quantities.

 Contracting on a open-end or a blanket order basis
 Analyzing and negotiating prices through price and estimates
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  Modifying packaging, transportation routing, terms and conditions of sale with
the goal of attaining lowest cost.

The commercial approach to value analysis falls almost exclusively within the domain of
purchasing.

3. THE VALUE ANALYSIS JOB PLAN

Information 1.Define the function and price What is it ?

Phase 2.Obtain and interpret all the facts What does it do ?
What does it cost ?

Speculation 1.Generate new ideas How else can the

Phase 2.Determine alternative solutions job be done?
At what cost ?

Analysis
1.Determine and compare feasibility Is it better than that?
Phase
2. Determine and compare suitability How much better ?
3. Determine and compare costs why ?

Decision and action

Phase 1.Review key alternatives with all departments and suppliers
Concerned
2. Select best alternatives
3. Get department and managerial approvals
4. Prepare new specifications

Evaluation
1. Audit effectiveness of the selection
Phase
2. Use operating experience to effect further improvement

3.1.1. The Phases

VA Job plan involves several phases

 Information phases
 Speculation phase analytical phase
 Program planning phase
 Program evaluation phase
 Recommendation phase
 Implementation Phase

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3.1.2 Information Phase

Under this phase all pertinent facts are collected, such as cost, drawing, specification,
productions production methods, markets suppliers, etc.

3.1.3 Speculation Phase

Under this phase; generate every possible solution to the problem. Consult others who
might help. Systematically explore various materials. Encourage free use of the
imagination. Record every suggestion that seem remotely possible in this connection the
following observations are relevant;

“Let the value analysis team have a brainstorming session in this, as many suggestions as
possible must be made, and although the object is to cut the cost of performing the
function (rather than the cost of making the thing in the present form), do not look at
cost at this stage. It is also important also in brainstorming not to breathe a word of
criticism of even the most crackpot ideas not a hint, not even a quizzical facial expression
is allowed to inhibit creativity. You have got to accentuate the positive, eliminate the
negative; so that the team members share off ideas from each other. This exercise in
enthusiasm and patience should be kept up until at least half a dozen ideas preferably
many more, have been jotted down. Only one really good idea is actually wanted, but the
freewheeling creative stage, and the analytical evaluation stage, which is the phase in the
job plan”

( Baily and Farmer Managing Materials in Industry)

3.1.4 Analytical Phase

Under this monetary value of each idea is estimated. All ideas with probability of
accomplishment are developed with emphasis being placed in proportion of their value
and a program is set up to vigorously pursue ideas with most promises.

3.1.5 Program Planning Phase

Under this the job is broken down into a progression of functional areas, e.g. a fastening
job, and electrical contact job, a dust protection job, etc and a selection is made of a few
top vendors for each functional area of the product.

3.1.6. Program Evaluation Phase

Under this the top function desire is shown, and discussed and suggestions
solicited from specialists. Suggestions of specialists and the co- operation and
practical suggest ional of suppliers are obtained then the problem is thrashed out
with the suppliers and specialists and a workable idea is reached.

3.1.7 Recommendation phase

Having reached a workable idea the best value for money option,
recommendation is made to the management. This should be quite brief but
comprehensive, giving the advantages of the proposal, cost and function wise.

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 3.1.8 Implementation phase

The implementation phase is very important, as such it is crucial to involve the

Trade Union of the organization in the VA exercise. A member of VA team should
be nominated to follow up the implementation process.

4.0 VA COMMITTEE

It is practice in both small and large organizations to appoint complement committees to

carry out the VA exercise, senior representative relevant areas such as production,
engineering, purchasing, sales, general management, and also representatives of the
appropriate Trade Unions are assigned to the committee. The committee should have a
strong chairman who should be able to elicit support and cooperation from all levels of
staff to obtain proposals, consider them in all its aspects and successfully implement the
decisions.

5.0 VALUE ANALYSIS CHECK POINTS FOR THE BUYERS

5.1 VA sets up 10 test or check points for the buyers.

They are:
 Does its use contribute value?
 Is its cost proportional to its usefulness?
 Does it need all its features?
 Is there anything better for the intended use?
 Can a usable part be made by a lower cost method?
 Can a standard part to be found which can be used?
 Is it made on proper tooling, considering quantities used?
 Do materials, reasonable labour, overhead and profit equal cost?
 Will another dependable supplier provide it for less?
 Is anyone buying it for less

5.2 The National Association of Purchasing Management has suggested the following general
check list for design analysis:
First, determine the function of the item and then determine:

 Can the item be eliminated?

 If the item is not standard, can a standard item be used?
 If it is a standard item, does it completely fit the application or is it a misfit?
 Does the item have grater capacity than required?
 Can the weight be reduced?
 Is there a similar item in the inventory that could be substituted?
 Are closer tolerances as specified are necessary?
 Is unnecessary machining performed on the item?
 Are unnecessary fine finishes specified?
 Is commercial quality specified? (Commercial quality is usually most economical)
 Can you make the item more cheaply in your plant? If you are making now, can
you buy it for less?
 Is the item properly classified for shipping purpose to obtain lowest
transportation rates?
 Can cost of packaging be reduced?

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  Are suppliers being asked for suggestions to reduce cost?

6.0 CONCLUSION

At least three quarters value analysis program now undertaken is in respect of bought-
out parts and components. Process industries offer less scope for value analysis than
manufacturing industries. In face of severe competitions of the market for manufactured
goods, business enterprises have to embark on program designed and to engineer
unnecessary costs out of existing products. VA possesses great profit making potential. It
is stressed by Lee and Dobler that, if VA potential is to be realized, those responsible for
administration of the value analysis program must adopt a broad management
viewpoint. This is essential because VA is accompany-wide activity whose purpose is to
optimize returns to the total business operation. The author further stress that in its
most basic form the administrative problem becomes one of human relations and
motivation more than anything else. Management must not over look the fact that in the
long run that it is the attitude of the participants that largely determine the degree of
success achieved by any program. Value analysis concepts must be understood, accepted
and practiced by a majority of the various functional specialists involved in the
programme if such a program is to be fully effective.

References: Purchasing and Supply Management

By Donald W. Dobler & David N.Burt
Purchasing and Materials Management
By P Gopalakrishnan

Value Analysis and Value Engineering (Saman Kandanearachchi)

Question

ABC Engineering Pvt Ltd is a Construction company, well established in the industry. It carries out island
wide operation, currently involved in 10 major construction sites around the country. Purchasing Material
pool consists of around 15000 items. These items include, stationary material, building materials, Plant
and Equipment related to building construction, janitorial services to miscellaneous services, Labor
services, design and consultancy services etc.

Purchasing department of ABC Engineering Pvt Ltd, frequently call quotations for stationary materials
and Janitorial services. According to past experience of 12 months, purchasing dept has called quotations
for different stationary materials nearly 30 times. As a percentage, 30% of tender calling happened to
purchase stationary and Janitorial services. It also noted 20% of value at the moment in inventory related
to Stationary Materials. There are various Stationary Materials, nearly 150 types of different categories.

According to purchasing process of ABC, its include, receive Purchase Requisition from User Department,
Justify the Purchasing, Calling Quotation from at least 10 suppliers , Evaluate the prospective supplier and
award the tender.
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a) Explain the Value Analysis / Value Engineering Term related to ABC with an example. ( 4 Marks )
b) Briefly explain the three approaches of Value Analysis ( 6 Marks )
c) Explain the Steps of Value Analysis Job Plan to implement Value Analysis at ABC Engineering Pvt
Ltd. ( Note: You have to provide a detail answer for each steps, with solution for current
purchasing process and inventory issues at ABC ) ( 10 Marks )