School of Industrial Engineering LinkageMapúa Institute of Technology
Kinds of Value
1. Use Value – based on the properties and qualities of a product or of materials which accomplish the work or service
2. Cost Value- the sum of labor, material and various other costs required to produce a good.
3. Esteem Value – based on the properties and qualities and features and attractiveness involved in the pride and ownership of the product
4. Exchange Value - based on the properties or qualities which make the product exchangeable for something else.
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Value is often confused with cost and price
Value from the point of view of a producer is different from the point of view of the user.
A given item may have varying value to customers, depending upon the time and place of use.
The value of a glass of water to a thirsty man varies with the man’s distance from a source of supply.
The value of a ship’s compass to it’s navigator is vastly different from it’s value to a housewife
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Value is often confused with cost and price
Value from the point of view of a producer is different from the point of view of the user.
A given item may have varying value to customers, depending upon the time and place of use.
The value of a glass of water to a thirsty man varies with the man’s distance from a source of supply.
The value of a ship’s compass to it’s navigator is vastly different from it’s value to a housewife
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Value vs Worth
The word value was derived from a Latin word which had a market connotation while the worth had more of a personal connotation and was used to express the sentiment or esteem that people have for items they possess.
We use the word value to describe an average of the worth that a group of people ascribe to a product or service.
Value = sum( worth1 + worth2 +worth3)
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What is function?
The term function is defined as “that which makes a product work or sell”.
A product like a pen has the following functions:
Make marks
Remove marks
Prevent Smudges
Looks Attractive
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The value of an item is how well the item does its function divided by the cost of the item
Value = performance of its function
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What is cost?
Total cost is the sum of all efforts and expenditures made in the development, production and application of the product.
Total Cost as defined contains three basic areas of cost which must be analyzed and related to each other at all times.
The area of production cost can be broken into three distinct areas of cost : material, labor and overhead
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Unnecessary Costs
Are those costs which do not meaningfully contribute to the product to which they accrue.
Reasons for unnecessary costs are the following:
Lack of Information: Caused by the non-accumulation of accurate and detailed facts regarding costs and specification
- Lack of ideas: Caused by insufficient use and application of background knowledge, industrial knowledge, the skills of company and industrial specialists, standards, creative thinking and time.
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Unnecessary Costs
Wrong Honest Beliefs: These may result from the above conditions as well as from the ready acceptance of opinion, hearsay, half truths, speculation, and theories for whole facts without justification or verification.
Temporary Circumstances: These cause the continued application of solutions which are applicable to a temporary condition or ser of conditions has disappeared.
Habits and attitudes : The individual past experiences, beliefs and traditions cause him to establish a particular habit pattern in what he does and thinks, and habits cause him to solve similar problems in similar ways.
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What Value Analysis/ Value Engineering Is
Value Analysis is a systematic review , often periodically of products and parts to see if cost-saving design can be done.
Value Engineering, on the other hand, is usually associated with the original design stage, making it a systematic review of design before production starts.
Value Engineering may then be considered to apply before the fact, and value analysis after the fact.
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Value Analysis
A technique for eliminating all unnecessary costs from a product through an integrated application of creativity and technical skills without penalizing the usage and esteem qualities of the product and still achieving the basic function at the least cost.
Value results from the orderly utilization of alternative materials, new processes, and abilities of specialized suppliers. It focuses engineering, manufacturing, and purchasing attention on one objective- equivalent performance for lower cost.
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Value Analysis therefore, is a functionally- oriented scientific method of accomplishing the required function at the lowest possible cost.
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What Value Engineering/ Value Analysis Is Not
Value Analysis is not the conventional cost-cutting method. In the minds of those involved in the control of cost, cost-cutting would mean attacking things as they are to reduce the cost.
Value Engineering approach is exactly the opposite. Products/ Services are not designed or reviewed for the sake of merely cutting cost.
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What Value Engineering/ Value Analysis Is Not
Value analysis is not a substitute for conventional cost-reduction methods. Rather, it is a completely different procedure for accomplishing far greater results. It improves the effectiveness of work that has been subjected to traditional cost accounting process.
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When to use it
Use Value Analysis to analyze and understand the detail of specific situations.
Use it to find a focus on key areas for innovation.
Use it in reverse (called Value Engineering) to identify specific solutions to detail problems.
It is particularly suited to physical and mechanical problems, but can also be used in other areas.
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How to use it
Identify and prioritize functions
Identify the item to be analysed and the customers for whom it is produced.
List the basic functions (the things for which the customer is paying). Note that there are usually very few basic functions.
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How to use it
Identify the secondary functions by asking ‘How is this achieved?’ or ‘What other functions support the basic functions?’.
Determine the relative importance of each function, preferably by asking a representative sample of customers (who will always surprise you with what they prefer).
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How to use it
Analyze contributing functions
Find the components of the item being analyzed that are used to provide the key functions. Again, the question ‘How’ can come in very useful here.
Measure the cost of each component as accurately as possible, including all material and production costs.
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How to use it
Seek improvements
Eliminate or reduce the cost of components that add little value, especially high-cost components.
Enhance the value added by components that contribute significantly to functions that are particularly important to customers.
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Example
In analyzing a pen, the following table is used to connect components with the functions to which they contribute and hence identify areas of focus.
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Value Engineering Objectives
VE is an organized effort to get more of your money.
It applies recognized techniques and tests to measure value and thus eliminate unnecessary costs in design, development and manufacturing.
It differs from cost control because it is directed toward analyzing value not costs.
In other words, VE is concerned with finding the lowest cost to achieve a required function.
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Consumer Value = Performance / Price
1. In measuring consumer value, performance features of the product selected should be identified.
Example: Ice tray
2. Through Value Measurement Techniques each performance features shall be assigned with corresponding weight (%).
Example:
Quality/ Reliability (QR)- 20%
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Consumer Value
3. The consumer should rate the product based on each performance feature or the ability of the product to satisfy the need of the user.
4. The weightings (30%, 50%, 20%) are multiplied to the rating.
5. Compute the Consumer Value
6. Calculate the relative normalized value of each product.
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A $5.95 5 1.5 3 0.48 4.9%
B $1.00 3 3.5 4 3.45 35.5%
C $1.45 4.5 4.5 5 3.17 32.6%
D $3.25 1.5 5 3.5 1.12 11.5%
E $1.7 9 2 3 3 1.51 15.5%
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Retailers Value
The value of a product to a retailer may differ significantly from the value of a product to consumer.
The retailer is primarily interested in the financial return from his investments.
Retailers are interested in merchandise that they can sell quickly at a good profit.
Retailers want maximum income from minimum investment.
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Retailers Value
In the same example, suppose the store might sell a total of 1000 units in time ( t) and that sales wil be apportioned by the relative value of each item. Therefore the estimated income for each brand would be:
Brand Rel. C.V(%) Sales in time (t) Price Income
A 4.9 49 $5.95 $291.55
B 35.5 355 $1.00 $355.50
C 32.6 326 $1.45 $472.70
D 11.5 115 $3.25 $ 373.75
E 15.5 155 $1.79 $277.45
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Retailers Value
The expenses during this period would be equal to the fixed and variable costs for the quarter. Let’s assume that they are equal to the retail purchase price of an item times an overhead burden rate.
In this case, the purchase price is half the sales price
Burden rate of 30% for seasonal products and 18% for non-seasonal products.
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Price Rate(%) Expense to Retailer(%)
A 2.975 36 198.25 93.3 15.5
B 0.500 36 241.40 113.6 18.9
C 0.725 36 321.44 151.26 25.2
D 1.625 18 220.51 153.24 25.5
E 0.895 36 188.67 88.78 14.9
Note: