Value Engineering Techniques & LCC Methods

8/12/2019 Value Engineering Techniques & LCC Methods

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Management & Development of Complex Projects

Course Code - 706

MS Project Management

Value Engineering Techniques &

LCC

Lecture # 9


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In previous Lecture, we have discussed about

Value engineering history & background

VA/VE Concept & definition

Value, value type, Mathematical expression of value

Reasons for poor value

Functions, levels of functions

Cost, direct material cost, direct labor cost, overhead cost

Life cycle cost

Summary of Previous Lecture


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Life Cycle Cost

The Life cycle cost, which is also known as cradle to

grave cost,is the total cost from acquisition of an itemto the final disposal of the same after the life of the

item. The elements of Life cycle cost can be narrated

as:

1. Acquisition cost

2. Operational cost

3. Maintenance cost

4. Repair and replacement cost

5. Salvage cost


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Project & Product Life-Cycle & LCC

Pre-Project Concept Design Imple-ment. Hand-over M U D

Product Life-Cyle

Project Life-Cyle Operational Life-Cyle

Concept Design implem. Hand-over

M A I N T E N A N C E

Concept Design implem. Hand-over

U P G R A D E

Concept

Design

Imple-ment.

Hand-over

D

I

S

PO

S

A

L

PROJECTS


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- Fuel Consumption

- Oil Consumption- Tyres Wear & Tear

- Parts Replacement

- Vehicle Depreciation

- Travel Time

- Accidents

15%

25%10%

50%

Maintenance

Components of Total Road Transport Costs


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Appreciation of Money Concept

If Rs 100 is invested in the bank at the interest rate of 10 per

cent on the first day of the year, then at the end of the year,it will become Rs 110. In other words, the present value of

Rs 110, at the end of the year, is Rs 100

YearAmount at Start

of Year Interest RateAmount at End of

Year

1 100 10 % 110

2 110 10 % 121

3 121 10 % 133.1

4 133.1 10 % 146.31


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The present value (beginning of the 1st year)

of Rs 146.31 (at the end of 4th year) is Rs

100.00. In a mathematical expression, the

factor which when multiplied by Rs 144.10 will

give Rs 100.00 is known as the PresentWorthFactor. In this case, it will be 0.6835

(100.00/146.31 = 0.6835).


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Similarly, if one wants to distribute the present value

at the beginning of the year into all the four years (asin this case), the present value has to be multiplied

with a factor which is known as the CapitalRecovery

Factor. If one has to distribute the present worth of

Rs100.00 into four equal installments, the multiplying

Capital recovery factor will be 0.3165 for the interest

rate of 10 per cent.


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Methods of Calculating Life Cycle Cost

There are two methods of calculating the Life cycle

cost. These are:

1. Present worth Method

2. Annualized Method


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Procedure of Calculating LCC ; Present Worth Method

Acquisition cost: Since the acquisition cost is in the first day

of the calendar year, it is the present worth and its Presentworth factor is 1.

Operation and maintenance cost: These costs take place

every year. Using the discount rate and the year when

operation and maintenance cost recur, find out the Present

worth factor. Multiply the costs with those factors to achieve

the present worth of the individual item.

Repair and replacement cost: These are single payments

which may happen at any time of the life cycle. Using the

discount rate and the year when repair and replacement costrecur, find out the Present worth factor. Multiply the costs with

those factors to achieve the present worth of the individual

item.


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Procedure of Calculating LCC ; Present Worth Method

Salvage value: This will happen at the end of the life

cycle. This is the only item which is an income, when allothers are expenses. Using the discount rate and the

year when it is being salvaged, find out the Present

worth factor. Multiply the salvage value with that factor

to achieve the present worth of the item.

Life cycle cost: To arrive at the Life cycle cost, addall the 3 items from last slide, then deduct item 4 from

(salvage value) that total.


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Procedure of Calculating LCC ; Annualized Method

Acquisition cost: Since the acquisition cost is in the first day of

the calendar year, it is the present worth. To get theannualized cost, it has to be multiplied by the Capital recovery

factor based on discount rate and the life of the items.

Operation and maintenance cost: These costs happen every

year. Hence, they do not require any further treatment.

Repair and replacement cost: These are single payments

which may happen at any time of the life cycle. Using the

discount rate and the year when repair and replacement cost

recur, fi nd out the Present worth factor. Multiply the costs with

those factors to achieve the present worth of the individualitem. To get the annualized cost, it has to be multiplied by the

Capital recovery factor based on discount rate and the life of

the items.


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Procedure of Calculating LCC ; Annualized Method

Salvage value: This item will happen at the end of the

life cycle. This is the only item which is an income,when all others are expenses. Using the discount rate

and the year when it is being salvaged, find out the

present worth factor. Multiply the salvage value with

that factor to achieve the Present worth of the item. Toget the annualized cost, it has to be multiplied by the

capital recovery factor based on discount rate and the

life of the items.

Life cycle cost: To arrive at the Life cycle cost, addall the 3 items from last slide, then deduct item 4 from

(salvage value) that total.


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Limitations of Life Cycle Costing

Life of the item: Determining the life of an item is difficult.

Interest rate: The interest rate may not be same every year.

Annual expenses: Annually operation and maintenance costsare assumed as the expenses occurring at the end of the year

while calculating the LCC. Intermediate expenses are not

taken into consideration.

Quality/reliability: Not considering the quality and reliability ofthe item, since the focus is only on costs. The lowest LCC item

may not be a good quality item.

Aesthetic: Not focusing on the esteem value of the item

Hence, the lowest LCC item may fail to add to the esteem of

the owner even though it provides the use value.

Comfort and safety: The comfort and safety of the customer

are not considered while determining the LCC. Hence, there is

a chance that the lowest LCC item may not provide sufficient

comfort/safety resulting in poor value to the customer.


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Following are the two types of VE / VA techniques

which are most commonly used

FUNCTIONCOSTWORTH ANALYSIS

FUNCTION ANALYSIS SYSTEM TECHNIQUE (FAST)

Value Engineering Techniques


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The Functioncostworth analysis is an excellent

tool to identify the value improvement potential in

any function.

This tool will not only help to identify the potential

but will also give some creative ideas as to how to

achieve that.

The ultimate aim of the Functioncostworth

analysis is to find out the value improvement in

various functions. Based on these findings, the team

will approach the problem.

FUNCTIONCOSTWORTH ANALYSIS


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Worth is the minimum cost of achieving a function.

Worth is an indispensable element of VE.

Worth varies with time.

Worth depends upon information.

Worth is usually determined by developing or thinking

of other methods of performing functions.

Worth is just a technique, not an absolute value.

Where an item has several functions, determine

worth of each function separately and add them to

get overall worth.

Concept of Worth


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Split the product into components and service/system into activities.

Define functions of components/activities.

Divide the total cost of product/service/system into components/

activities cost.

Processes performed to achieve particular function; cost allocated to

that function.

Component provided to achieve particular function; cost allocated to

that function.

Component accomplishes more than one function; allocation should

be based on weight, volume, surface area and length.

Hold each function in isolation of the others to do this.

Procedure for Cost Allocation


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The difference between cost and worth is known as

valuegap. It indicates the scope of possible value

improvement.

The value index is the ratio of cost by worth. In

other words, it is the cost per unit of worth. When

the index is more than one, it means there is

potential for value improvement.

Value Gap and Value Index


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Write down all functions for the project as a whole.

Divide the project into parts.

Function(s) of each part to be defined in two words.

An active verb and a measurable noun.

Apply three tests to identify the basic and secondary functions.

Is this function what users are looking for?

Yes: Basic No: Secondary

If this function is eliminated, will the item continue to do the job?

No: Basic Yes: Secondary Will the function disappear, if the design approach is changed?

No: Basic Yes: Secondary

Steps for functioncostworth analysis


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Cost of each part to be ascertained.

Cost of the part to be transformed into function.

Check whether the cost of the functions are equal to the sum

of the costs of the parts.

Assess the worth (least cost of achieving) functions. First list all functions and costs in descending order.

Then ask the following questions:

Will you pay if it is your money?

If not, what do you consider reasonable?

By whom or where a similar function is available at lower cost?

What should you do to obtain the function within that cost?

Steps for functioncostworth analysis


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Example for functioncostworth analysis


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The FAST is a Systematic Diagramming

Technique that logically identifies and visually

displays the necessary function to accommodatea design purpose

Definition of FAST


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Classic FAST

Technically Oriented FAST

Customer Oriented FAST

Different Types of FAST


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Prepare a list of all functions.

Use verb and noun to define a function.

Write each function in a small card.

Involve the whole team in the diagramming exercise.

Select the card which appears to be basic function.

Apply logical question how and why on selected

function to determine functions to right and left on thisselected function.

Functions satisfy howwhy logic are required

secondaryfunctions to be put in line.

Steps for The FAST diagram (Technically Oriented)


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Draw scope line (dotted line) on left side of basic function.

Higher order function on the left side of scope line.

All time function to be placed in right hand top corner above

critical path.

Designobjectivesis placed above the basic function. Functions that happen at the same time placed below that

function.

Right scope line (dotted) to be drawn left of function that is

suitable input to the system.

Function right to the right side of right scope line is lower

order/causative function

Steps for The FAST diagram (Technically Oriented)


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FAST diagram (Technically Oriented)


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A key point of the organized VE effort is the use of

the Job Plan. The Job Plan is the organized

problem-solving approach that separates VE from

other cost-cutting exercises. The simplest Job Plan

follows a five-step approach that is integral to VE

methodology. Key questions are answered at each

stage.

VE Job Plan


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1. Information Gathering Step

What functions are being provided?

What do the functions cost?

What are the functions worth?

What functions must be accomplished?

2. Creativity & Idea Generation

What else will perform the function?

How else may the function be performed?

3. Analyze Ideas/Evaluation & Selection

Will each idea perform the required functions?

How might each idea be made to work?

VE Job Plan Steps


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4. Development of Proposal

How will the new idea work?

Will it meet all the requirements?

How much will it cost?

What is the LCC impact?5. Presentation/ implementation & Follow-up

Why is the new idea better?

Who must be sold on the idea?

What are the advantages/disadvantages and specific

benefits!

What is needed to implement the proposal?

VE Job Plan Steps

VE J b Pl S


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VE Job Plan Steps

CREATIVITY


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Creativity is the art of imagination which brings

something new to existence.

Discovery of something that is novel, useful,

relevant, economical, significant and different from

the beaten track.

CREATIVITY

Mi ti b t C ti it


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Creativity is the preserve of geniuses

Certain people are born creative

Creativity must result in a great discovery.This always persists in their mind.

Misconceptions about Creativity

Bl k t C ti it


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Habitual block

Perceptual block

Cultural block

Emotional block

Blocks to Creativity

C ti it T h i


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Brainstorming

The pareto principle ABC analysis

Gordon technique

Attribute listing

Morphological analysis

Laddering

Creativity Techniques


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In this Lecture, we have discussed about

Life cycle cost

Appreciation of money concept

Methods of life cycle costing, Annualized Method & present

worth method

Limitation of LCC

VE Techniques; function, cost worth analysis & function

analysis system technique

Concept of worth

VE Job plan

Creativity

Summary of This Lecture


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End Note

One machine can do the work of fifty ordinary

men. No machine can do the work of one

Project Manager


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THANK YOU!

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Value Engineering Techniques & LCC Methods

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