Foreword
We have discussed value committee and value analysis in Part 1 of "Cutting Costs through Value Concept", another important part of the value concept is value engineering which is used, by challenging accepted principles, methods, production process, materials, components, packaging, etc., to cut costs on existing and new products.
Value Engineering
Value engineering (VE) is used through the stages of concept development, product design, and pilot production testing. The focus here is on the value of the new product to the customers. In the absence of a mandated target cost, the product cost is then the aggregate of all cost elements. There are two objectives to be achieved by the value committee:
- to design the product to meet the requirements of the customers, and
- to ensure that the new product is fit for manufacturing, i.e. design for manufacturing (DFM) aiming at the simplification of products, and the manufacture of common parts, processes, and modules to be used.
During different stages of new product development, the leading role of the value committee members changes. When it is at the concept development stage, the sales and marketing representatives will play the leading role in presenting the committee the current market environment, competitor's product, and customer's expectation, etc. They will also throw in questions such as: how can we do this better?; how do we differentiate from our competitors' products?, etc. During the product design stage, the designers and engineers will play a major role, with other members throwing in questions and objective criticism to fine tune the product design. Finally, operations and production pick up the lead as new product is tested.
When a company employs target costing as a tool for cost reduction and control, VE would become the process to drive down the product cost until it meets the target cost.
A simple example of target costing is illustrated as follows:| Target market price of a new product | $120 |
| Target margin % | 25% |
| Target cost ($120 x 75%) | $90 |
| Estimated current cost | $110 |
| Target cost reduction ($110-90) | $20 |
In view of a mandate for cost reduction, VE's focus now shifts. If quality is to maintain, then the perceived value has to be sacrificed and vice versa. The value committee has to vigorously explore the possibilities of the product design that is cheaper to manufacture, the elimination and/or combination of some production processes and production steps, a reduction of some product features, less expensive component parts, a reduction of product durability, a change of packaging or packaging materials in order to cut costs. It requires an appraisal in the form of critical questions such as:
- Can we simplify the design? This involves the creation of a new design that uses fewer parts or has few features. Furthermore, simple design is usually easier to manufacture and assemble.
- Can we shorten the design time? If the design expense or its capitalized expense is allocated as part of new product costs, then a shorter design period normally incurs less expense. A short design cycle is also beneficial for product testing since any problems uncovered can be quickly fixed and incorporated in the new product. In addition, if the design cycle is shortened, new product can be launched sooner. This may enhance competitiveness.
- Can we eliminate some functions from the production process? This involves a detailed review of the manufacturing process. For example, if preventive measures on quality suffice, it may eliminate some steps on interim quality inspection. This may reduce the labor cost.
- Can we combine steps? A detailed review of the production process may reveal some production processes can be consolidated. This is known as process centering. By consolidating of some processes, one can eliminate the transfer and queue time, resulting in production expediting. This may also reduce the chance of material damage during movement and transfer.
- Are specifications too tight? The component parts of a product may be designed to have extremely tight tolerance. Such tolerance may be expensive. If customers cannot tell the difference or do not care about the extreme tolerance, it may be worth to reduce the tolerance to cut cost.
- Can we eliminate unnecessary features? This involves asking participants (as a customer) which product features are really needed and which are superfluous. Ask them to rank the features with value of 1 to 10 (or 1 to 5) and determine if some features can be eliminated or reduced.
- Can we substitute parts? The committee members are encouraged to use brainstorming to search for less expensive components. If some of the components are outsourced, this may be the most rewarding channel to cut cost. Nevertheless, make sure any changes of components and parts are reviewed for any related change in the design or production process to avoid possible increase in other costs.
- Can we tear down competing products? Competitors may use new techniques or materials that significantly reduce cost. Arrange a tear down room in which engineers can dismantle and examine competing products. Evaluate the cost and function of each component.
Several other constructive questions can be raised. When these questions are "challenged" by objective criticism, cost reduction ideas can be fertilized. These ideas would be evaluated and tested. This VE process would continue until the expected product cost meets the target cost required.
Conclusion
When sales volume does not meet the company's target, the sales department often criticizes the design, serviceability or price of products they are selling. They would complain that they are asked to sell products that have not really been developed for the markets they are intended to compete in. Similarly, production department criticize designers for failing to design products which is fit for manufacturing or can be economically made in the plant available. The value concept establishes a better understanding of the inter-relationship between supportive functions and between employees in different cost originating areas. The whole concept depends on the development and application of an attitude of "challenge" and a constructively critical evaluation of all the elements of costs associated with products, services, and components.
When a company decides to adopt the value concept, in-house training should be arranged to enhance common dialogue among committee members. The success or failure of employing the value concept also pivots on the chairperson of the value committee who should endeavor to build the team spirit among members to ensure common goals and mutual accountability are obtained.
Value analysis and value engineering have been with us for over half a century, yet they are still being used as one-shot analyses in many companies. Conversely, value concept should be employed as a continual cost reduction technique. The merits of using value concept are not confined to profit improvement and cost reduction, the most rewarding phase is when employees from different departments find themselves enjoying the accomplishment by pooling their knowledge and ideas which give them a sense of pride and satisfaction.
About the author
A seasoned manager, having employment with several medium to large corporations, multinational and listed companies and with several years of management and financial experience in China; specialized in cost control, resources management, and project assessment; and with in-depth knowledge and practice in the PRC tax and labour law and regulations.
Email: lokleo@gmail.com
Reference
Peter Fatharly, The Value Concept, Management Techniques, Pp. 145-155, Coles Publishing Co. Ltd. 1980
Steven M. Bragg, Cost Reduction Analysis, John Wiley & Sons Inc. 2010
Tokeo Yoshikawa, John Innes, and Falconer Mitchell, Strategic Value Analysis:
Organize Your Company for Strategic Success, Prentice Hall, Pearson Education Limited, 2002