Editor's Note: Take a look at our featured best practice, Organization Design Toolkit (103-slide PowerPoint presentation). Recent McKinsey research surveyed a large set of global executives and suggests that many companies, these days, are in a nearly permanent state of organizational flux. A rise in efforts in Organizational Design is attributed to the accelerating pace of structural change generated by market [read more]
With Proper Value Analysis, Cost Reduction Is Guaranteed
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What is Value Analysis?
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 method of working. 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):
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.
1. 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 be one that gives the impression that its cost is too high or that it does not do its function well. All brainstorming ideas are put on a white board. All ideas are acceptable.
The value analyst should always be aware of functions, not of products, shapes, or processes. The main function is what the item does, is that which 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.
2. 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 a 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.
It is not important that the individual costs assigned are 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.
3. Inject creativity, conduct 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 produces really original ideas, a method that helped creativity. These conditions and procedures are stated below and need strict adherence:
- 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.)
- 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.”
- Members of the group state loudly any solution to the problem they can think of. It is very important that they do not 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 brain storm.)
- The leader registers all ideas on paper, a flip chart, white board or a blackboard.
- When the session has finalized, if there is any doubt what was meant by an idea, the leader clarifies the idea with the help of members. He does not analyze or discard any idea.
This finalizes the brainstorm.
The evaluation should be done after an interval, at best about two days after the brainstorm, to allow the group to gain perspective.
Now the group analyzes each idea. They group similar ideas. When evaluating, do not think why the idea would not work, why it is not possible.
Develop each idea, making it more practical, making it function better. Estimate a very approximate cost for each idea and investigate carefully ideas with an apparently low cost. When an idea is canceled, that should be based on facts, not opinions.
5. Identify barriers and eliminate them tactfully.
Barriers are excuses or preconceived ideas that cannot be substantiated with numbers, facts, detailed and precise information or experimental evidence. Barriers can be honest beliefs. Normally there is gold behind a barrier. Now select the two to four ideas having the lowest cost.
Obtain information for analyzing and developing an idea. Do not work in isolation. Once the group has advanced as far as it can on its own, make contact with specialists. This may be necessary in the selection and also during the development of ideas. The value analyst is a coordinator of specialists, of groups of experts in other companies (Pay them for their contribution in some manner.)
Obtain information from the best source, not the nearest or most accessible one. Do not take into account an answer by a person or specialist that lies outside his field of expertise. The use of specialists is a powerful way of tearing down barriers. Avoid generalizations. Do not accept second hand information. Ask for copies of documents.
6. Develop the two to four ideas selected.
Make a real effort to develop the ideas of lowest cost that do the main function. Make tests, prototypes, get quotes of cost. Estimate costs of short term alternatives, of long term alternatives and of any new ideas produced during the evaluation.
At the end of this process, the idea of least cost should have been identified. Ask yourself: Would I spend my own money on this solution? If not, modify it.
7. Make the recommendation.
If you work in an organization or enterprise, be sure that the person really interested in applying the solution gets to see it. Present the final solution in writing, on a single sheet of paper, to the person that should implement it. Give a copy to his boss. This sheet should state the savings, costs and a detailed plan for implementing the idea. It should have all the information needed so that a person that does not know this subject can understand it and do it.
The value analysis group should not itself implement the idea, if this is outside its normal area of work.
8. Implement the idea and follow up.
Value analysis is not a method of controlling the work of others or of investigating errors.
Normally the amount of work to implement an idea is greater than the amount of work needed to produce the idea. Therefore it is a good procedure to let the people that implement the idea get most of the praise and merit. That produces excellent relations.
Obtain that the group that implements the idea informs of the savings produced and, if possible, benefits from these savings. If needed, help them to establish the way the implementation will be checked and the savings calculated.
It is good to have a recorder on the cross-functional team to write the minutes. A Captain is appointed to lead the discussion. Assignments are given to all members with due dates for replies. Always solicit Suppliers. They are the specialists in their field. Get your suppliers involved. Consider using a Supplier Day Conference for an item or commodity to gather ideas and collaborate with your suppliers.
Cost Reduction is assured using this approach.
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About Charles IntrieriCharles 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 (email@example.com). Charles also has a presentation Why Lean Fails in a Company? available for free download here.
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