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What Is a Value Analysis?

Editor's Note: Take a look at our featured best practice, Digital Transformation: Value Creation & Analysis (21-slide PowerPoint presentation). Most organizations recognize the significant potential in creating value through Digital Transformation. However, they may struggle with the question of exactly how much value they can create and where within the organization the value will come from. This presentation deals with the various [read more]

Also, if you are interested in becoming an expert on Value Creation, take a look at Flevy's Value Creation Frameworks offering here. This is a curated collection of best practice frameworks based on the thought leadership of leading consulting firms, academics, and recognized subject matter experts. By learning and applying these concepts, you can you stay ahead of the curve. Full details here.

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It is an orderly and creative method to increase the value of an item. This ” item” can be a product, a system, a process, a procedure, a plan, a machine, equipment, tool, a service, or a working method. Value Analysis, also called Functional Analysis was created by L.D. Miles of General Electric Company.

The value of an item is how well the item does its function divided by the cost of the item (In value analysis value is not just another word for cost):

Value of an Item = Performance of Its Function / Cost

  • An item that does its function better than another, has more value. Between two items that perform their function equally well, the one that costs less is more valuable.
  • The “performance of its function” could include that it is beautiful (where needed).
  • Do not be surprised if as a result of value analysis the cost of an item is less than half of its previous cost.

Select the item to be studied and form a cross-functional study group team:

  • To value analyze anything, we form a study group of 4 to 6 persons, preferably each with different knowledge, with different backgrounds (cross-functional). They meet in a room free from interruptions.
  • Then we select the item to be studied. The item should give the impression that its cost is too high or that it does not do its function well. All brainstorming ideas are put on a whiteboard. All ideas are acceptable.

Value Analysis

The value analyst should always be aware of functions, not of products, shapes, or processes. The main function is what the item does: somebody wanted to archive by creating the item. Express this function (if possible) with just two words, a verb, and a noun.

If the item is composed of various parts, it is useful to ask for the function of each part, and how they contribute to the main function of the item.

Do not be distracted by mere aggregate functions such as the rubber on a pencil’s end or the ice-producing part of a refrigerator. These were functions added since it was economical or easy to do so. They have no relationship with the main function.

Gather Information

Find the main function and the secondary functions of an item. Get the cost of realizing each function. The attitude of a value analyst should be critical, aggressive, nonconformist, never satisfied with what she/he receives for the money given. The first action of the group should be to gather all the information about the item. Ask the best specialist of the field, not the person most accessible. Get the detail of costs. Collect drawings, specifications, all the written data on the item. Don’t be satisfied with verbal information.

For a pencil, for instance:

  • What is it? (a pencil)
  • What is it for? (make permanent marks)
  • What is the main function? (make marks, write lines)
  • What is the method, material, or procedure that was used to realize the main function? (a graphite stick and 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 and the total cost?

(This example, the pencil, is already a high-value item).

Center the attention of the value analysis group on the main function, because, during the analysis, the secondary functions may change. The group may choose different secondary functions to realize the main function.

The individual costs assigned don’t have to be imprecise. Because even an imprecise numerical value is much better than an expression such as “very costly” or “of low cost”. Use Pareto’s 80/20 principle for cost analysis… That means 20% of the items are 80% of the total costs. Focus on these 20% first.

Measure the value of the way each secondary function is realized, is materialized:

  • Does it contribute value? (Is there something that does not contribute value?)
  • Is the cost in proportion to the function realized.
  • Does it need all its parts, elements, procedures?
  • Is there something better to do the same function?
  • Is there a standard part that can do the function?

Investigate the cost of a function. Put a dollar sign on tolerances and strict specifications. See what’s thought to be necessary and which somebody put in, just to be on the safe side. Remember: All that does not contribute to the main function is waste and should be eliminated.

Creativity (the Brainstorming Session)

The objective is to find a better way to do the main function. We try to find a different material, or concept, or process, or design idea, that realizes the main function.
People looked for conditions under which the human mind produced really original ideas, which helped creativity. These conditions and procedures are stated below and need strict adherence:

  1. State the main function clearly and shortly on paper or a blackboard (verb and noun), so that the group can fix their attention on it. State it without mentioning the physical object or the specific process. (Do not state secondary or aggregate functions).
  2. The leader of the group says “We begin now” and when the ideas do not flow so fast anymore (about 15 to 20 min.) The leader says “That’s all”.
  3. Members of the group state loudly any solution to the problem they can think of. They mustn’t analyze their own thoughts or those of others. They should not smile or react when exotic, improbable, or senseless ideas are stated. They should not criticize or speak with others. They should only let their imagination run wild and state ideas. An idea can be inspired by a previous idea. (If no rare ideas are stated, then the members are analyzing, not making a brainstorm).
  4. The leader registers all ideas on paper, a flipchart, a whiteboard, or a blackboard.
  5. When the session has finalized, if there is any doubt about what was meant by an idea, the leader clarifies the idea with the help of members. He does not analyze or discard any idea.

Summary: Value Analysis (VA) is a method of retaining the function of anything, but reducing the cost by investigating alternatives. You never jeopardize quality with VA.

101-slide PowerPoint presentation
This presentation provides an in-depth discussion on Value Creation. Maximizing shareholder value is the strategic management philosophy driving countless organizations. The thinking here is the organization should first and foremost consider the interests of shareholders when making management [read more]

Want to Achieve Excellence in Value Creation?

Gain the knowledge and develop the expertise to become an expert in Value Creation. Our frameworks are based on the thought leadership of leading consulting firms, academics, and recognized subject matter experts. Click here for full details.

Since the early 1990s, organizations have relied on Value-Based Management (VBM) and other Value Creation frameworks to analyze and drive business performance and shareholder value. After all, maximizing shareholder value is the #1 priority for any publicly-owned company—and a top priority for most others.

But, how do we create Value?

Over the years, Value Creation Thinking has evolved from VBM to more inclusive models.

Learn about our Value Creation Best Practice Frameworks here.

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About Charles Intrieri

Charles Intrieri is subject matter expert on Cost Reduction, Supply Chain, and 3rd Party Logistics. He is also an author on Flevy (view his documents materials). Managing his own consultancy for the past 25 years, Charles has helped dozens of clients achieve leaner and more efficient operations. You can connect with him here on LinkedIn or email him directly (cmiconsulting93@gmail.com). Charles also has a presentation Why Lean Fails in a Company? available for free download here.



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