ABC and Value Analysis

A Presentation on ABC and Value Analysis
By: Neha Kumari (7) Sr. Smita Parmar (18) Sarita Kumari (12) Samar Vivek Tigga
(54)
Group - 7 PGDM Semester II Xavier Institute of Management Jabalpur
Roushan Kumar (53) Faculty Soni Tiru (19)Advisor

5/21/2013
Prof. Mehul Chauhan Xavier Institute Of management 1
ABC Analysis
5/21/2013
Xavier Institute Of management
Introduction
ABC Analysis is a basic analytical materials management tool. ABC Analysis may be applied to any branch of management with ease and success. It calls the top management to place its efforts where the results will be the greatest. The ABC Analysis goes by its name. it always controls the best, then better and lastly the good. Its genesis lies in the characteristic distribution of anything which can be measured in monetary terms. Its importance lies in the determination of priority which enables the management to exercise control over the subjects according to the priority fixed for the purpose.
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Cont.
In materials management as a tool ABC Analysis has gained considerable importance and can be applied to almost all the areas in the department needing selective control. ABC stands for activity-based costing. In inventory or stock management, it's a method of stock control. It's basic assumption is that not all stock is equally valuable, therefore doesn't need the same kind of attention.
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ABC ANALYSIS
One of the widely used technique for inventory control is ABC(always better control) analysis. It is an approach to inventory control that classes inventory by its usage value. Example: In Product Cost Controlling (CO-PC), you can use ABC analysis to obtain an overview of the production orders in a plant that incur the highest actual costs. Example: the best customers who yield highest revenue are given the 'A' rating, are usually serviced by the sales manager, and receive most attention. 'B' and 'C' customers warrant progressively less attention and are InXavier accounting, 5/21/2013 Institute Of management 5
Cont..
inventory items based on a user-specified valuation criterion. "ABC" refers to the rankings you assign your items as a result of this analysis, where "A" items are ranked higher than "B" items, and so on. Generally, a relatively small proportion of the total range of items contained in an inventory will account for a large proportion of the total usage value. This phenomenon is known as the Pareto law.
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A general law found to operate in many situations that indicates that 20 percent of something causes 80 per cent of something else, often used in inventory management (20 per cent of products produce 80 per cent of sales value). Extending Paretos principle to inventory, it is always possible and necessary to separate vital few from trivial many of the stock items for their effective controls. ABC classification is done as follows:
Class A items are those 20 per cent or so of high-usage value items which account for around 80 per cent of the total usage value. Class B items are those of medium-usage value, usually the next 30 per cent of items which often account for around 10 per cent of the total usage value.
Class C items are those low-usage value items which, although comprising around 50 percent of the total types of items stocked, probably account for only around 10 per cent of the total usage value of the operation
CATEGORY % OF ITEMS %OF ANNUAL CONSUMPTION VALUE
10-20
70-80
B C
20-30 60-70
10-25 5-15
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Advantages of ABC Analysis

1.
Helps to concentrate all efforts. Produces rewarding results. A category items Careful attention is paid at every step. C category may be dispensed with in the recordkeeping system as well. Most effective method that helpful in many ways
2.
3.
4.
5.
DEVELOPING AN ABC ANALYSIS
List each item carried in an inventory by number.
Calculate the annual volume of usage and per unit cost of each item.
Multiply each items annual volume of usage with its per unit cost. (annual volume of usage ) x (Its Cost per unit)
Compute each items % of total inventory in terms of annual usage(Rs).
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Cont..
Select the top 20 per cent of all items which have highest rupee % and classify as class A items. Select the next 30 per cent of all items which have next highest % and classify as class B items. The next 50 per cent of all items with lowest rupee % are classified into class C items
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Inventory costs
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A items
High consumption value Very strict control
B items
Moderate value Moderate control
C items
Low consumption value Low control
No safety stock
Frequent ordering
Low safety stock

Once in 3 weeks
High safety stock

Bulk ordering once in 6 months Minimum value analysis Rough estimates for planning
Rigorous value analysis Accurate forecast in materials planning
Moderate value analysis Estimate based on past data on present plans
Weekly control statements

Maximum efforts to reduce lead time
Monthly control reports

Moderate efforts
Quarterly control reports

Minimum clerical efforts
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Limitations
ABC analysis of inventory control suffers with certain limitations:
Proper standardization and codification is required for effectively carrying out ABC analysis.
periodic review and updating the inventory position is a constant headache of a materials manager who if solely depends of ABC Analysis for inventory control. C items become more important than even A items requiring more, rather constant, attention.
Sometimes
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In such a situation the whole approach may get revised defeating the very purpose of ABC Analysis which is primarily based on monetary value of the item under analysis ignoring other important factors.
The base of ABC Analysis is grading of the items The gradation of items is obviously done on the basis of V. (Vital) E. (Essential) and D. (Desirable) but sometimes even items of negligible monetary value may be vital (V) or essential.
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Value Engineering Or Value Analysis
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VALUE AND VALUE ANALYSIS
Value is itself is some what difficult to define. It means different things to different people. Also, it is often confused with the cost and price of a product or service.
Value is the least cost that can accomplish reliably a function or a service. This implies that in achieving reduced cost, the quality and performance of the item are maintained. It follows, therefore, that value analysis is a technique which builds Value into an item.
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Introduction
Value Analysis aims at a systematic identification and elimination of unnecessary costs resulting in the increased use of alternatives, less expensive material, cheaper designs, less costly methods of manufacturing etc. to provide the same performance, quality and efficiency and in a decrease of overall unit costs and consequently greater profits.
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Contd..
Value Analysis is a cost reduction technique and perhaps the most potent of all such techniques. Value Analysis (VA) is also known as Value Engineering (VE), Value Assurance and Value Management (VM). It is an approach for improvement in the performance of products, systems and reduction of costs without affecting the function.
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Contd..
VALUE ANALYSIS is a systematic approach to segregate the different parts of the VALUE, and eliminate by gradual process those parts of UNNECESSARY COSTS, which, neither. a) increase the function, nor b) provide esteem or ego satisfaction nor c) enable the resaleability nor d) provide sentimental attachment or urge to possess.
Definition
Value Analysis is the organised and systematic study of every element of cost in a part, material or service to make certain it fulfills its function at the lowest possible cost; it employs techniques which identify the functions the user wants from a product or service; it establishes by comparison the appropriate cost for each function; then it causes the required knowledge, creativity and initiative to be used to provide each function for the lowest cost.
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History..
During the second world war, one of the most serious problems faced by companies engaged in the war effort was the shortage of materials. This led to experimenting with substitutes, quite often in very unorthodox ways. In many cases. The experiments clicked and surprisingly there were a large number of instances where the substitutes were much cheaper and functioned more efficiently than the original material. After the war, Harry Erlicher, the vice president of purchasing, general electric co. (U.S.A.) felt that this problem of finding out substitute could be done in a more scientific way and as a deliberate approach, rather than by an ad-hoc crisis approach.
Cont. He entrusted this job to a team of engineers headed by Lawrence mile In fact it was miles who coined the term value analysis and its synonym, value engineering. This team under his stewardship pioneered this technique and perfected it and, it is said, saved their company 200 million over a period of 17 years. In America, the technique is very widely used and is given a great deal of importance.
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Cont..
L.D. Miles, the father of this concept, wrote in 1961, a book, Techniques of Value Analysis and Engineering. Navy Bureau of ships was the first organisation to use VA in 1954. Society for American Value Engineers (SAVE) was established in1959. In India, now we have Indian Value Engineering Society (INVEST) to create awareness of this approach and to propagate this concept.
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APPLICATION OF VALUE ANALYSIS

Value analysis can be applied universally, i.e., to everything materials, methods, processes, services, etc., where it is intended to bring about economics. One should naturally start with items where the maximum annual saving can be achieved. This immediately suggests that items whose total annual consumption in Rupees is high should receive top priorities in the application of Value Analysis. In the same manner, scarce materials, imported materials, or those difficult to obtain should also receive the attention of the value analyst.
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Bearing this in mind, Value Analysis can be systematically applied to categories of items, such as those listed below in order to bring about substantial cost reduction :
1. Capital goods plant, equipment, machinery, tools and appliances;

2. Raw and semi-processed material, including fuel; 3. Sub-contracted parts, components, sub-assemblies, etc;
4. Purchased parts, components, sub-assemblies, etc.,

5. Maintenance, repairs, and operational items;
6. Finishing items such as paints, oils, varnishes, etc. 7. Packing materials and packaging; 8. Printing and Stationery items; 9. Miscellaneous items of regular consumptions; 10. Power, water supply, compressed air, steam and other utilities(services) and 11. Materials handling and transportation costs. As mentioned earlier, items where the saving can be substantial should obviously be taken up first. Also, items which are imported, or difficult to obtain, and monopoly items, should receive high priority.
However, even if no economy can be effected immediately by Value Analysis on any particular item, then usefulness of the technique should not be forgotten altogether. The item should be taken up again for value analysis after six months or a year.
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VAVE is a generic name given to this technique of VALUE ANALYSIS and VALUE ENGINEERING.
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The seven classes of value propounded by Artistotle are

1.
Economic Value.
2.
3.
Political Value.
Social Value.
4.
5.
Aesthetic Value.
Ethical Value.
6.
7.
Religious Value.
Judicial Value.
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The following table shows a comparative analysis and applicability of these different classes
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Value Class
Type of Actions Examples
Explanation and Analysis
Can VAVE be Applied
Economic
A product or service bought at a given price
Within a given framework and conditions alternative products or services can be found so as to serve the required function at a much lesser cost
YES
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Value Class
Can VAVE be applied
Political
People are normally wedded to a particular philosophy thereby have a certain political following and way of thinking
People have been to be changing their alliances and philosophies so as to join others in some cases even with a diagonally opposite view point, just to gain power.
Subjectivity is involved to a large extent and exact VALUE cannot be ascertained.
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Value Class
Type of Actions Examples Spending a certain amount to attend own brothers marriage (which is a major social function)
Explanation and Analysis If one is close by, he might take leave from work and join the occasion with family. If the distance is far (but within the country) he decides to join the occasion along because of travel cost and other expenses
Can VAVE be applied High subjectivity is involved and the VALUE of not joining the function cannot be evaluated.
Social
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Value Class
Can VAVE be Applied
AESTHETIC
Hobbies of individuals are involved. A Picasso painting is purchased at astronomical Price one, whereas a diamond studded gold ring is bought by the other
For the other person the painting may not be worth that amount and he feels that the decision was foolish.
Value cannot be judged as the functional requirement cannot be qualified in general. The individual has spent his money and that is his lookout
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Value Class
Type of Action examples Secret information not to be revealed An employee of one organization should not work simultaneously for competitor, etc.
Explanation and Can VAVE be Analysis Applied It has been observed that there is a class of patriots who can lay their life for the nation ,but at the same time there are others who pass on secret security information to other countries , etc, Highly subjective criteria hence VALUE of ethics cannot be judged.
Ethical
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Value Class
Can VAVE be Applied
Religious
Communalism and values prevailing, A person following a particular religion forces other to convert to his own religion but he does not want to change his own religious
For gains some people change over to a particular religion (both for cash & kind in return). It is easy to convert some but a bit difficult to convert some other.
Purely based On individuals own look and his own value system.
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Value Class
Type of Actions examples Judges lay a certain penalty for given crime like Rs. 50,000/- or three months R.I.
Explanation and Analysis For the same type of cases the penalty amount and the equivalent R.I. period changes. The same person committing the same crime a second time will have a more severe punishment.
Can VAVE be Applied For case to se the details are different and hence no fixed amount
Judicial
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From the above table, it can be clearly seen that Value Analysis effort can be very effectively made when it concerns the Economic Value. In other cases it should be left to the individuals, who are the best judges in their own cases. The only scope in these cases is that when it concerns an organization's need, a better approach would be that a team of experts decide about the VALUE of these decisions, wherever possible, so that the subjectivity can be reduced, if not completely eliminated.
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Why Use Value Analysis
In reality, a complex number of reasons exists that necessitate the structured approach of value analysis as a means of logical cost reduction. These reasons can be divided into two key sources: those that lie within the business and
1.
2.
those that are stimulated by the market for the product or service.
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Within the business: Design related issues
The major reasons why VA exercises are conducted actually originate from the design process itself and the lack of control systems concerning reviews of product performance once the product has entered the production stage.
The VA process is also a means of learning from past mistakes and constantly refining the ability to create right first time designs in less time for the business which is a source of competitive advantage.
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Market induced Reasons

There are many modern competitive trends and pressures that make the VA approach a valuable activity within any business. These pressures include: Pricing Practice II. The Advent of E-Commerce III. Reducing Complexity IV. New Technology and Materials V. Environmentalism
I.
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Types of Value
1. Use Value: Properties which accomplish a use, a work or a service. 2. Esteem Value: Properties which make the ownership of the object very desirable.
3. Cost Value: Properties which are the sum of the labour, materials, overheads and other costs required to produce that object.
4. Exchange Value: Properties that make the object possible of being trades for other items.
Types of function
It is the use value of a product- its functional utility. Functions can be of two types:
a)
Basic functions Secondary functions
b)
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Value Engineering Job Plan

Value analysis (VA) process is also called VA job plan. Mudge proposes the job plan in the following seven steps: 1) General Phase 2) Information Phase 3) Function Phase 4) Creation Phase 5) Evaluation Phase 6) Investigation Phase 7) Recommendation Phase
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General Phase
It is the most demanding phase of VA Job plan. Some typical beliefs, habits and attitudes are given below:- it will set a nasty precedent - it wont work - cost too much - The Public wont touch it - It is impracticable - The Production Dept. will have none of this - Why change it-it works - There is no other source of supply - That is not our responsibility - Its company policy
Information Phase

Here project is studied in detail and all important facts are gathered and considered. In this phase, facts which are in the form of technical specification or environmental specification are considered. Also, the engineering drawings, production sample, production data are all kept in mind. The cost data and work specifications are secured. Consumer preference are jotted down. Development and testing are studied. Quantities and scraps are taken into account.
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Function Phase

Here the product is defined in terms of its function, in terms of its performance expectation. These functions are co-related with costs and their worth.
Product
Function
Tea Cup
Light Bulb Gas Lighter Mirror Brake
Hold Tea (liquid)

Emit Light Provide Ignition Reflect Light Arrest motion
Evaluation Phase
Creative ideas generated during the above phase are screened for their feasibility, cost effectiveness and practicability at this stage. For this purpose, ideas are further refined or combined together. Cost of all ideas and savings resulting from their implementations are studied.
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Investigation Phase
It is a virtual extension of the previous phase. Ideas accepted are here converted into acceptable and workable solutions to perform the desired functions at the least cost. It may be necessary to standardize, to consult vendors and specialists ,and to use specialty products, processes and procedures.
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Recommendation Phase
It is the ultimate phase of VA. Finally selected alternative here in presented for implementation on acceptance.
Acceptance is the key to success of VA.

Sometimes acceptance is the result of presentation or
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Functional Requirement Establishment The nerve center of Value Engineering approach is the
understanding of the FUNCTION of an item, Product or Service.
Functional Analysis-An item is purchased only because it performs some specific function. A customer need, to be fulfilled by performance of functions is initially established. This may come from the customers awareness or a need or the development of a need in the customer by industry.
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Cont
Thus, in every case, a product or operation will include Primary (Basic Function) and Secondary Functions. As related to Value Engineering, functions are described with only two words, a VERB form and a Noun form e.g. Provide Light, Cut Paper, Provide Energy etc.
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Organisatonal Aspect Of Value Analysis
Value analysis requires support from the top management, and it needs team work. The value analysis function can be organized as per the needs of the organisation, its size, operation ,product line etc. It can be administered by staff at the corporate office or it may be run on decentralized basis or a balanced combination of both.
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Cont..
This is effective when manufacturing units are set up on product basis and are autonomous cost and profit centers. Value analysis also has some restrictions too..
Its endorsement at top level leads to acceptance at lower level. It is also affected by the management level to which it reports.
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Benefit From The Value Analysis

There are several direct and indirect benefits which can accrue from the introduction and practices of value analysis: A reduction in cost of existing product or systems.

Prevention of unnecessary cost in new products or system. The introduction of value analysis leads to overall cost consciousness and a general attitude change towards cost Products value get improved and quest for new material and processes get encouraged
Cont.
System relating to cost and estimating usually benefit from reorganisation necessitated by the wider use of cost information. A greater profit can accrue by a greater return of investment. It is very important tool in contrasts and it is good to have a value engineering Clause to encourage a contractor to reduce the cost.
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CONCLUSION
Value analysis is a technique with immense possibilities, and systematically employed, it can achieve great economies and increased efficiency. Although good results have been obtained in several individual cases in some industries, only a large scale and systematic application of this technique in all industries, and in defence production, can result in substantial economies on a national scale.
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Cont.
This valuable technique, if systematically employed, promises rich dividends,and, among other things, enables greater use of indigenous raw materials and equipment by import substitution. It is, therefore, of special significance to a developing country like India which has adopted a programme of rapid industrialization in the face of paucity of foreign exchange and other handicaps.
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Cases..
A manufacturer of domestic water heaters conducted a VA analysis. It found that the customer derived value from the cost efficiency and reliability of the product. In addition, the company found that the largest source of failures resulted from internal moving parts that failed frequently. The VA exercise resulted in a decrease in these moving parts (valves etc.) and a replacement of other problem items with more cost-effective alternatives. The reliability of the product has resulted in no complaints from customers and a reduction of moving parts to only three parts.
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Cont..
A lighting company has achieved savings of 6 times the costs of its value analysis exercises. One product has achieved a 250% increase in sales over its predecessor. Now the company has trained over 15% of its workforce in VA techniques.
Toy Company redesigned a model product, as a result of a VA exercise, and reduced the many different metal fasteners with just one type creating a saving for the company and the supplier.
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Reference
S.A. Chunawalla, D.R Patel (2005), Production and Operation management, Himalaya Publication, Mumbai. http://www.productivity.in/knowledgebase/Value%20An alysis/g.%20Value%20analysis%20and%20Value%20en gineering.pdf
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ABC and Value Analysis

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A Presentation on ABC and Value Analysis

Roushan Kumar (53) Faculty Soni Tiru (19)Advisor

Prof. Mehul Chauhan Xavier Institute Of management 1

Xavier Institute Of management

Xavier Institute Of management

Xavier Institute Of management

Xavier Institute Of management

Xavier Institute Of management

Advantages of ABC Analysis

DEVELOPING AN ABC ANALYSIS

List each item carried in an inventory by number.

Compute each items % of total inventory in terms of annual usage(Rs).

Xavier Institute Of management

Xavier Institute Of management

Xavier Institute Of management

Low safety stock

High safety stock

Rigorous value analysis Accurate forecast in materials planning

Moderate value analysis Estimate based on past data on present plans

Weekly control statements

Monthly control reports

Quarterly control reports

Xavier Institute Of management

Xavier Institute Of management

Xavier Institute Of management

Value Engineering Or Value Analysis

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VALUE AND VALUE ANALYSIS

Xavier Institute Of management

Xavier Institute Of management

Xavier Institute Of management

Xavier Institute Of management

Xavier Institute Of management

Xavier Institute Of management

APPLICATION OF VALUE ANALYSIS

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1. Capital goods plant, equipment, machinery, tools and appliances;

4. Purchased parts, components, sub-assemblies, etc.,

Xavier Institute Of management

Xavier Institute Of management

The seven classes of value propounded by Artistotle are

Xavier Institute Of management

Xavier Institute Of management

Type of Actions Examples

Explanation and Analysis

Can VAVE be Applied

A product or service bought at a given price

Xavier Institute Of management

Type of Actions Examples

Explanation and Analysis

Can VAVE be applied

Subjectivity is involved to a large extent and exact VALUE cannot be ascertained.

Xavier Institute Of management

Xavier Institute Of management

Type of Actions Examples

Explanation and Analysis

Can VAVE be Applied

Xavier Institute Of management

Xavier Institute Of management

Type of Actions Examples

Explanation and Analysis

Can VAVE be Applied

Xavier Institute Of management