Defining Business Need

Diploma in Procurement and Supply

Procurement’s contribution to added value
• They provide a procurement perspective to the work
of the team
• Initiatives for standardisation or value management
will often depend on having a constructive
relationship with suppliers
• Above all, they can provide the team with important
information in matters covered by procurement
expertise
Standardisation as a way of reducing costs (1) 
• Within an organisation, throughout the organisation
• Within an industry
• At a national level
• At an international level
Standardisation as a way of reducing costs (2) 
• A smaller risk that suppliers will misunderstand the
buyer’s requirements, as set out in the specification
• A probability that more suppliers will be willing to bid
for contracts
Standardisation as a way of reducing costs (3) 
• Standard specifications throughout the organisation
• Variety reduction
Adverse consequences of stock proliferation
Consequence Comment
Unnecessary quantities of stock Larger quantities of inventory result in higher costs of storage space
(inventory)  and stores handling costs, as well as the financing cost for the
inventory.

Unnecessary time and cost of preparing Each variant of a similar item has its own individual specifications. With
specifications for purchases a standard purchased item, standard specifications can be used.

Higher purchase costs With large numbers of purchase orders for slightly differing purchased
items, suppliers are likely to charge higher prices. There might also be
lost opportunities for bulk purchase discounts.

Variations in quality There is a risk of lower quality with some purchases, owing to the
variability associated with small volumes and multiple variants.

Waste There is a risk of higher costs of waste, owing to the obsolescence,

deterioration or damage of infrequently used items in storage.
Causes of stock proliferation
Consequence
Decentralisation of procurement
User preferences
Staff turnover
Lack of incentive to standardise
Comment
There may be several buyers within the organisation for similar
materials and parts. Each buyer might have different ideas about
specifications.
Technical and engineering personnel, or design personnel, might have
different ideas about which item is ‘right’ for projects in which they are
involved.
New staff may requisition or order items according to their own
preferences, even though similar items are already in stock. 
The individuals or functions developing product specifications might
not make the effort to establish whether similar items are already used
within the organisation, or whether the business need can be met
using generic ‘standard’ items.
Variety reduction
• Standardisation aims to reduce the number of variants (ideally
down to just one standard item) that is used to make the same
product or deliver the same service
• A feature of variety reduction is that the aim is to: 
• use standard materials or parts in the manufacture of
different products or the delivery of different services, or
the performance of different activities, or
• use the same standard parts to manufacture an item when
currently several different parts are used
Approaches to variety reduction
• A proactive approach
• A reactive approach
Implementing a programme of variety reduction (1)
• To reduce the number of products that a company makes or
services that it delivers
• To reduce the number of materials or parts that are used to
make products
• To reduce the number of materials or parts that are used to
perform activities (such as cleaning or painting)
• To reduce the range of items used to deliver services
Implementing a programme of variety reduction (2)
• The purpose for which each item of stock is used 
• How many stock items are used for similar purposes and have
similar characteristics
• The extent to which similar items could be standardised 
• The extent to which similar items can be substituted for each
other
• The range of different sizes and quality, and the extent to
which these variants are essential
The benefits of standardisation and variety reduction
• A smaller range of inventory items
• A reduction in inventory levels and the costs of storage and stores handling
• Reduced risks of obsolescence and deterioration due to slow-moving stock
items
• Standard specifications for the standard item, simplifying the procurement
process
• (Probably) lower purchase prices
• (Possibly) a smaller number of suppliers 
• (Possibly) more effective quality control, since there are fewer different
items of stock to inspect on delivery
Definition of value
• A commercial organisation uses its resources to make
and sell products or services that it can sell to
customers at a profit. For the company, the added
value from its operations can be defined as the profit
that it makes
• A not-for-profit organisation uses its resources to
provide services or products that are of benefit. Value
can be defined as the benefits that its products or
services provide
Value and components of a product or service

Each partu has Each functio

A product or
a particnl ar adds to the Each part
n and its
service is made
functio in value of the functio has a
up from
the product end-product or cost
separate parts
or service service
Value from the buyer’s perspective
A product or The product as a
service has one
n or whole, and eachn
more functios f or of its functios ,
the end user has a value for the
end user
The total perceived
value is the price
that the customer
would be willing to
pay for it
Use value and esteem value
For example, a purse has a use value and an esteem value.
• Its use is to hold cards and money.
• Another aspect of use is convenience in handling it. Does it
open easily?  Is it easy to find items that are held inside? Does
it hold enough items?
• Esteem value comes from the materials that have been used to
make the purse, the way in which it has been fashioned
(including its colour perhaps) and any brand name attached to
it.
The objective of value analysis (1)
• The aim is not to reduce costs in whatever ways are
possible
• The aim is to reduce costs but without any loss in
value
The objective of value analysis (2)
VA is an approach to:
• eliminating unnecessary costs that do not add value to the
product or service
• eliminating any functions that might exist in the product or
service that no longer add value
• creating the same value but in a different way that reduces cost
but without reducing value 
• in addition to reducing costs, possibly finding ways of improving
value in features of the product, but at no extra cost.
Selecting projects for value analysis
Issue to consider Comment
Which products or services have the biggest As a general guide, the larger the total cost of the product or
potential for cost savings service, the bigger the potential for cost savings.

Which products or services have a high total As a general guide, items that have a high cost relative to their
cost in relation to value? value might offer opportunities for cost savings through use of
cheaper alternative materials or processes.

Suggestions Stakeholders (design staff, production staff, suppliers) might be

asked for suggestions for the project.

Where has nothing changed for a long time? If something has not changed for a long time, some aspects of it
might now be out-of-date and inappropriate, unwanted or
inefficient.
The potential for cost savings
Aspects of value for investigation (1)
Possible area for analysis
What does the product, service or process This question can be asked about a
do?
Product or machine reliability
Maintenance and repair procedures
Comment
product, service or process as a whole
item, and can also be asked about each of
its component parts. What value is created
by the item’s performance?
Can this be improved (adding to use value)
without any addition to cost?
Is the cost of maintenance and repairs high
relative to cost? Is there scope for cost
reduction without loss of efficiency or
effectiveness?
Aspects of value for investigation (2)
Possible area for Comment
analysis
Product packaging What are the functions of the product packaging? Can the
packaging be changed without any loss in the performance of
this function? For example, might it be possible to switch from
one type of storage container to another cheaper type of
container, without loss of storage efficiency?
Product safety Can the safety feature in the product or service be improved at
no extra cost?
Product distribution Are there ways of distributing the product more easily and
cheaply, for example by changing the size of containers for
transportation?
Value analysis procedure: stages in a VA project
1. Information
2. Function analysis
3. Creative
4. Evaluation
5. Development
6. Presentation
Function analysis
• Primary functions are the functions that
define the product’s core purpose.
• Secondary functions are support functions.
They may be a necessary part of the product’s
function, but they are not themselves the
primary function.
Creative phase (1)
• Can a feature of the product or service be eliminated without
loss of value? Are there some features of the product or
service that do not affect what the customer is willing to pay?
If it does not affect customers’ attitude to price, it does not
create any value and can be eliminated.
• Can a feature of an operation be eliminated or reduced
without loss of value? For example, would it be possible to
carry out less testing, or to relax tolerances?
• Can a function of the product or service be provided in a
different way and at less cost, without any loss of value?
Creative phase (2)
• Can current components be substituted or replaced with
standard components?
• Can the sequence of steps to produce an item be altered, to
make the production process more efficient and less costly?
• Can different materials be used that improve the function of
the product, at no extra cost?
• Might it be possible to re-design an item to reduce its cost
without any loss in value?
Evaluation phase
• What cost savings are expected from the proposed
change?
• What are the risks that these cost savings will not be
achieved?
• What is the risk that the change will result in some
loss of value?
Cost function analysis (1)
• Identify the product’s components (or subassemblies
for complex products)
• Identify the product functions and express these as a
verb and noun 
• Estimate the costs of the component (or subassembly)
and compare the relative cost of each (as a percentage
of the total component cost)
Cost function analysis (2)
• Estimate the value of each component (ie the value to
customers) so that the component cost is allocated
appropriately between the product functions to which it
contributes. This calls for the use of judgement.
• Calculate the cost of each function and evaluate the relative
cost of all functions
• Consider and investigate improvements to reduce costs or add
value: ask the basic questions in VA – eliminate, reduce,
simplify, modify, standardise?
Illustration of cost function analysis (1)
Functio and n
cost of functio
Nail holds wood down Stamping:
Head of nail
(Value =nhigh) Cost 0.007g

Functio: Diameter of nail

Nail grips wood Raw material:
Hold wood (Value = high) Cost 0.008
against wood Roughness of nail

Sharp point of nail

Nail cuts through wood Cuttin in to wood:
(Value = medium) Cost 0.006
Pressure from blow

Total cost per nail:

n
0.021
Illustration of cost function analysis (2)
Categories of customer reaction to product features: Kano model
Category of reaction Comment

Reverse quality Occasionally, a function or feature of a product or service might trigger customer dissatisfaction.
These functions, which should be uncommon, have a negative value and should be eliminated.

Indifferent quality These are product functions or features that are neither good nor bad. Customers are unaware of
them, and do not appreciate them. A VA approach might be to look for ways of reducing the cost of
these functions or features, since changes are unlikely to affect customer perceptions of value. 

‘Must be’ quality: basic These are functions that the product must have, and that customers take for granted. If a product
features does not perform the function well, customers will be extremely dissatisfied.

One-dimensional quality: These are product functions that can generate customer satisfaction when they are performed well,
performance features but customer dissatisfaction if they perform badly.

Attractive quality: the ‘wow’ These are features or functions that create customer satisfaction when they are provided, but do not
factor create dissatisfaction if they are not.
The objective of value engineering (1)
• To deliver the planned value at the lowest cost,
and/or
• To identify ways of increasing value without extra
cost, or at an additional cost that is less than the
additional value created.
The objective of value engineering (2)
• Value engineering is concerned with longer-term
issues for product design and specification.
• Value engineering should consider the whole life
costs of the product.
The objective of value engineering (3)
• The function or functions of the product that meet customer
requirements are identified.
• Customer requirements for ‘esteem’ should be considered, as
well as practical use.
• A monetary value for each function (ie what customers will
pay) is established.
• The task of VE is to design a product that provides the
required functions at a lifetime cost that is less than their
monetary value.
Stages in implementation of value engineering 
Selectio of ne w A fir m
i gh t apply VE analysis to all new products.
products for analysis Otherwise it should focus on high-cost products

The VE project begins. The VE team should gather informatio n for analysis.
Informatio
n g atheringn Much of this informatio
n shoul d be r eadily available; for example the draft
specificatio
n s f or the planned product, and n its expected cost and selling price.

Each functio of the pl anned pr oduct is analysed, perhaps using function

analysis and cost
n functio anal y sis. The main objective
n of this stage is to identify
Functio anal y sis the product’s high-cost elements, conduct a functioal anal y sis of these and
assess the relatio
n s hi p be tween cost and ‘worth’ (use and esteem value)

At this stage, the team look for ways of achieving the planned functions
for the product at lower cost, eliminatin
g i pr oduct features that do not
Creative add sufficen t value, and looking for ways of addingn more value for
lower additioal c ost or no extra cost

Ideas
n and suggestios ar e evaluated, and the
Evaluatio
n best optio
n s ar e selected for recommendatio
n

The selected optio

n s ar e developed in detail, for
Development
m
presentatio
n t o the product design decision-makers

The recommended product design is presented and a

Presentatio
n decision is taken to accept or reject the recommendatio
n s .
The VE project ends

The recommended changes that have been accepted

Implementatio
n are included in new specificatio
n s for the product.
Value engineering and target pricing
Initia pr oduct des i gn After VE project
Target
price Direct materials and
Direct materials and
components
components Target
direct
costs
Direct labour cost
Direct labour cost

Overhead costs
Overhead costs
Target profit
Profit
Summary: value analysis/value engineering 
• Eliminating excessive costs of product features and functions
that do not add value
• Designing products to use components with lower tolerances
that are less expensive, without loss of perceived value
• Standardising the use of components and parts across the
entire organisation in order to achieve variety reduction and
lower purchase prices and procurement costs
• Changing the packaging for a product, to reduce costs while
still protecting the product
• Altering production processes to reduce production cycle
times, saving labour costs.
Providing guidance to internal stakeholders on implementation
• Procurement staff should monitor the use of components
within the organisation, and identify opportunities for
standardisation. Where such opportunities are thought to
exist, the procurement function should encourage user
departments to adopt standardisation and amend their
product specifications accordingly.
• Procurement staff are also well placed to monitor the success
or failure of value analysis or value engineering initiatives,
particularly with regard to the costs of direct materials and
components. Have the intended cost savings been achieved?