What is Value Analysis?
Value analysis (VA) is a tool to enhance cost efficiency by evaluating the functionality of a product or a process in relation to its cost. It helps identify and eliminate unnecessary costs incurred while making a product or conducting a business function.
- Value analysis is a systematic method aimed to enhance an item’s value and utility. The item could be a product or a process.
- It carries techniques to systematically identify areas of avoidable costs in a product or service. The analysis is also applied to the various components and functions of the subject in question.
- Another part of this tool involves removing these unnecessary costs without compromising the quality and efficiency of a product, service or process.
- The value analysis team undertakes extensive research, identifies problem areas, devises innovative ways to do away with extra cost, or enhances the product/processes’ functionality at the same cost.
How does Value Analysis Work?
Cost reduction helps a business spend less on expenses which leaves it with more profit at the end of a year. As such, businesses devise innovative ways to bring cost reduction while ensuring that the quality of their products, services or processes is not compromised.
Value Analysis is a method to achieve cost reduction by analyzing the utility or value of a product, service or process in relation to the cost incurred on it. In the process, the value analysis team conducts a thorough examination of different segments or components of a product/service/process and identifies areas of avoidable costs. It then comes up with innovative ways to enable cost reduction. The solutions are then implemented to enhance profits by reducing costs.
For example, value analysis of a wall clock will involve applying different methods to break down a wall clock’s functions and the cost involved at various stages to bring in those functions. The team will analyze the functions of the wall clock for customers, which will be to see the time and add to the beauty of their homes.
Based on function analysis, a classification between necessary and unnecessary functions will become possible. The business can achieve cost-reduction by getting rid of unnecessary functions that add to the cost but are neither improving quality nor enhancing customer satisfaction. Not only does it help in cost-saving, but it will make the product available to the customer at a lower price.
The analysis involves more complex steps, which we will study under the steps of value analysis.
Steps of Value Analysis
#1 – Familiarization to gain information
The first step involves the team familiarizing itself with the process, product or service that requires value analysis. Each component is studied in detail, keeping in mind the goals of the department and the organization. Other details could be how much loss it incurred or profit it attained in the last quarter, people employed to carry out the process, etc.
The team also takes down all the costs involved at all levels. It is like the research stage in which the team also documents competitor related information regarding cost and function to favour comparisons.
#2 – Analysis to identify problem areas
Once the team has all the relevant information in place, it gets into the analysis. The analysis is focused on breaking down the functions of the subject in question. Usually, a product or a process serves two sets of functions, primary and secondary. The primary function of the wall clock was to see the time. Its secondary function was adding to the beauty of the house. There could be several functions that all need to be studied from the point of view of customer satisfaction.
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Functions have a weightage and a cost. A detailed analysis is done regarding how a particular function meets customer requirements and also the cost related to that function. In this process, the value analysis team compiles a list of all the functions in descending order of their utility. The cost incurred on these functions is mentioned alongside. Some formulas like cost-benefit ratios are applied to give weight to the study. The most unnecessary function which will have the least utility can be removed.
#3 – Innovation
In this stage, the team starts searching for alternative ways that allow reduction, change, or modifications in the existing components and functions. This stage thus emphasizes producing new ideas and finding alternative ways of accomplishing the basic and secondary functions.
The underlying idea behind innovation focusses on delivering the said process or product at a reduced cost without compromising its quality. In other cases, it focusses on bringing in some investment like automation while suggesting lay off for cost-cutting.
Sometimes, the team suggests enhancing the quality for greater profits at a lower cost by replacing a component. For example, replacing the clock’s wooden digits with cheaper but similar-looking ceramic ones could make the product available at a cheaper rate. It could increase its sales and help the business make greater profits at a lesser cost.
#4 – Evaluation and Selection
The evaluation phase estimates the value of each idea generated during the innovation phase and selects the best. Evaluation involves checking on the feasibility and cost of various ideas presented. It also measures the value of the best alternative. Cash flow analysis or break-even point are some of the techniques which may be used for this.
The evaluation phase may be carried out via qualitative analysis or quantitative analysis. The overall process involves computing the cost and picking up the most feasible idea based on quantitative or qualitative analysis.
The alternative that brings in cost reduction without compromising the quality will be selected. Many additional details are looked at like organizational goals, constraints, customer preference, competitor analysis, impact on the pollution, law abidance, etc.
#5 – Implementation, Monitoring and Corrective Actions
The next step involves implementing the selected alternative. Over the course of months or as defined in the report, the performance of the alternative implemented will be constantly monitored and documented. Any deviations from plans will need to be rectified to ensure high performance. Companies usually monitor the performance very carefully and make it a permanent practice upon the initial implementation’s success.
Over the years, value analysis and value engineering have come to be understood as similar terms as both involve an in-depth analysis to help reduce costs. One salient feature of value engineering compared to value analysis is that the former is usually undertaken at the design stage of new or old projects and products.
Now that we have understood the steps to conduct value analysis let us look at some examples to understand the process better.
The production process of a lead pencil was analyzed using the value analysis technique to reduce cost. Wood and paint were found to be the two most expensive elements in producing the pencil, which shared 37.5% of the pencil’s total cost.
A round-shaped design for the pencil was suggested instead of the hexagonal-shaped design to reduce the manufacturing time and manufacturing cost. Normal paints were suggested instead of glitter paints, which were expensive and additional care was required to be taken while applying them on wood.
With the suggested design changes, the production cost of each pencil was reduced by 25%.
A bank is incurring extra cost at a particular branch. At the same time, it is getting complaints from customers about not adding a self-help desk. The value analysis team evaluated all the bank processes, such as banking services, technology maintenance, staff duties and roles, and relative costs.
It was discovered that the bank had employed two extra people than the required capacity and yet could not address customer problems due to confusion in roles. The team suggested introducing a help desk and employing the two extra employees at the desk to guide and help the customers. In a year, the branch’s profit grew by 30% at the same cost while receiving a positive response from its customers.
This has been a guide to what is Value Analysis and its meaning. Here we discuss steps, examples, and how does it work, along with key takeaways. You may learn more about financing from the following articles –