PROJECT SYSTEM MANAGEMENT

ASSIGNMENT

Topic: Value Analysis for Cost Reduction

Abstract- The aim of this study is to analyze the prospect of cost reduction through value
analysis technique. Manufacturing process of conventional lead pencil is analyzed to apply
the value analysis technique in order to reduce cost. Value analysis is the study of existing
process to reduce the cost incurred on the manufacturing of a product through process
reengineering or design alteration without reducing the performance of the product regarding
to its basic functions. This study focuses on the design alteration of the lead pencil by
changing materials used for manufacturing of the pencil. This study presents the functional
and cost analysis of lead pencil and ideas are proposed to reduce the cost of manufacturing
per product. Through newly proposed ideas, cost saving per pencil is expected to be 25% of
the previous manufacturing cost.

INTRODUCTION

Value Engineering establishes the relationship between worth and cost of a product by
analyzing its functions to determine the best value. When a product performs its required
functions consistently at a lowest life cycle cost while maintaining the quality termed as best
value of that product. Value engineering is the set of actions performed while the product is
in design & development stage. On the contrary, value analysis is a procedure adopted for the
cost reduction and process improvement for the existing product. Value of a product is
defined by the ratio of the functions performed by the product to the cost of that product. It
has been proved that Value analysis is capable of reducing costs by 25% to 45% or even
more without affecting its quality. There is a wide view among professional practitioners and
scholars of the application of some managerial tools in the field of Value Management (VM).
This is part of the concept of Value Analysis (VA) in itself, which leaves the application of
the methodologies up to individual criteria with enough freedom for its adaptation to contexts
and objectives. Despite the benefits of such freedom in the application of the methods and
tools in the disciplines of Value Management, Value Analysis, and Functional Analysis (FA),
such “liberty” has led to settled variations in the practice of some of those methods. This
reality can be found in many papers presented in different professional conferences across
continents and in some existing literature, especially in given examples of real applications.
Although most professional practitioners can differentiate and understand such subtle or
evident divergences in practices, new comers to the discipline of Value Management may
find it difficult to comprehend how such divergences can exist. This opens the discussion
about the desired standard application of some methods, which this paper aims to touch. My
individual practice and the observation of other professionals’ practices in many documented
applications have helped me develop my own methodologies in my value management
entrepreneurial and consulting activities. That will be explored in this article.
The manufacturing process at lead pencil roughly includes cutting and shaping of wood,
inserting lead into wood, painting of wood and printing of wood and finally fixation of the
metal cap along with the eraser. A survey is conducted to gather the data about current
costing of the pencil to explore the areas where improvement is possible along with the
functional analysis of the various parts and processes to study their importance in the process.
In the technical terminology of the value engineering, this phase is known as orientation
phase.
In order to reduce the cost incurred on the manufacturing of the lead pencil, the detailed study
of current costing is undertaken to identify the possible areas of improvement. The overall
study showed that the small design aspects are capable of producing significant impact on the
cost of manufacturing and are need to be carefully studied. The ideas presented in this
manuscript propose slight change in the design of the product through changing the shape and
paint used during manufacturing of the pencil. The potential of the ideas is also explored in
this text through expected reduction in the cost of manufacturing. Further, the existing and
newly proposed costs are compared to estimate the cost saving per piece. The process of cost
reduction through value analysis is explained step by step through this manuscript.

CONCEPTS AND LITERATURE REVIEW

The following literature review of concepts is restricted to the disciplines of Value

Management, Value Analysis and Value Engineering (VE). As most literature repeats the
same
ideas and definitions in a very short range of variations, this review will focus on the best
known and disseminated texts. In the same way, this literature review will only focus on
aspects
that are relevant to the purpose of this article, leaving out many issues related to the
methodologies around value analysis, and therefore subjected to the readers own research in
order to complete the full vision of the entire subject.
A. The concept of value the main pathfinder of Value Analysis, had in his day questioned the
future application of the concept in business: “The basic question is: what do we really have
in
Value Analysis? What we have is a tremendous problem solving system.” In Miles’s
opinion, value had to go on a new and different path in supporting business development,
rather than keeping its action, as at the time, exclusively in the field of “cost reduction”. He
continued on his new vision for value analysis: “It becomes essential that we in Value
Analysis
work to help modify the management of areas into which the work will go. At the same time,
we must further change our approaches in Value Analysis so that we are modifying the
seed and the soil together without taking the strength out of the problem-solving approach”.
This would mean, at that time, going one dimension further ahead in value analyses.
Many other professional practitioners and scholars have brought this issue up to the public
and professional level, including into the standardization arena. Before going any further in
pursuit of how value analysis has evolved or is yet evolving, we need to understand what
value is or may be. Generally, value is understood as expressing the worth of something. But
a closer look into the existing literature can reveal different types of value, as Jensen has
identified: (i)economic value – or value as exchange; (ii) use value – or value as utility; (iii)
cultural value – or value as meaning and sign; and, (iv) perception value – or value as
experience. Cross-disciplinary research proves those findings. To Smith any “good” had two
different meanings, one expressing the utility of the same particular object, “value in use”,
and the other, the power that the possession of the object conveys to purchase other goods,
“value in exchange”. It was the first to differentiate between a use value and an exchange
value of goods. (Politics, Book . According to Kopytoff , this is what defines a “commodity”:
“an item with use value that also has exchange value”. The consumer or user is at the center
of this inter-relation of different types of value in the same good, leading value to be
understood as a perception function, represented by the equation “customer perceived
value=perceived benefits/perceived sacrifice”, as referred by Ravald and Gronroos . Another
way to view the issue, supported by
Anderson, Narus and Kumar, is that “customer perceived value=customer benefits–customer
sacrifices”, arguing that this is easier to be understood by individuals and businesses. We
should note that perceived value differs from “desired value”, where the last represents what
the customer wants to happen and the first represents what the customer has obtained or that
it has happened. According to Flint, Woodruff and Gardial, desire value can take two aspects:
value in use and possession value.

VALUE ENGINEERING AND VALUE ANALYSIS

According to the Society of American Value Engineering (SAVE) "value engineering is the
systematic application of recognized techniques which identify the function of a product or
services, establish a monetary value for the function and provide the necessary function
reliably at the lowest overall cost.
The objective of value analysis is not only to degrade or cheaper the products but to improve
its value by reducing cost. Value analysis is applied to the existing product in order to
improve its value. Whereas, Value Engineering is applied to the product at the design stage
and therefore ensures prevention rather than elimination. The value analysis should be
applied at the proper time and correct phase of product life cycle to get expected results.

METHODOLOGY USED IN VALUE ANALYSIS IMPLEMENTATION

In Value Analysis process, we must use & understand many quality tools which will simplify
the concept and result. They help us better in controlling the process of product planning and
quality level at internal as well as external end.
Now a day’s,Value Analysis used in different sectors to improve the overall efficiency and
net profit without sacrificing the product value, quality and customer satisfaction level. In this
concept the first step is to identify the assembly and then the best possible area where the
product quality level is low or production time is more as per our requirement which results
in rejection of complete assembly at customer end. The selection of process various steps
need to be followed:
 Pareto analysis graph of the external failure at customer end i.e. minimum last three
month.
 Rejection Analysis can be performed by the Pareto analysis using the data based on
defect wise and part wise.
 Now the graph will help us to identify the part which has maximum rejection and
decreases net profit.
 Now we can understand easily, what is the cause of rejection at customer end.
 After selecting that part make the bar graph on monthly basis.
 Now select the part which gets the maximum rejection at customer end
 Identify the process planning of that part
 Collect design data.
 Then use quality tools and brainstorming method to be apply to solve or minimize the
manufacturing cost and overall quality issue at customer end.
 Then after problem analysis and getting appropriate solution of problem data is
presented and to maintained the system for future production.
 Check sheet for Quality control.

Value Analysis concept is completed in eight basic steps:

First step is to identify the area in case study where this system is to be applied. After
analyzing the area use various quality toolsto increase the overall efficiency of equipment &
productivity. So it could improve the overall profit & efficiency of organization.
 Fig 1. Phase of value Analysis

PHASES OF VALUE ANALYSIS

Orientation Phase :

In this phase, functional analysis of various parts and processes is carried out to segregate
them into basic and secondary functions. The segregation is done based on the individual
function and their functional contribution to assembly. Basic function is what a product or
process must do to work or sell and the customer is willing to pay for, followed by secondary
functions that support that basic function. Secondary functions can be modified or eliminated
to reduce product cost. The pencil is mainly divided into following components:-

1. Wood

2. Lead

3. Metal cap

4. Eraser

5. Paint

The functional analysis is also presented in Table. 1, based on their contribution to the
assembly.
The numbers indicated in the functional evaluation table indicate:-
 Major Performance = 3
 Medium Performance = 2
 Minor Performance = 1
 Table. 1 Functional Analysis of Parts and Processes

ii.Information Phase
In the information phase, the detailed information regarding the costing of the pencil is
gathered from the survey of the production line. The pencil manufacturing consists of overall
5 stages. As a unit, the current manufacturing cost of the pencil per piece is ₹ 4/-. Wood and
paint are the two expensive elements in the manufacturing of a pencil which share 37.5% of
the total cost of a pencil. The primary focus is kept on these two elements for the cost
reduction. The detailed costing of the parts and processes is presented in the following table.
iii.Creative Phase
This phase is concerned with, “What are the other options which could satisfy the same
functions” of the handle assembly. Many ideas are generated and discussed in the brain
storming session. Following ideas were generated during this phase.
1. Change in the design (round shape)
Instead of using the hexagonal shaped wood for the body of pencil, the round shaped design
can be incorporated to reduce the manufacturing time and thereby, manufacturing cost.
2. Eliminate glitter paint (use normal paint)
Glitter paints are expensive and great care is to be taken while applying is on the wood.
Instead of that, the normal paints can be used to save the cost.
After discussing on the ideas put forth, the function cost worth analysis is performed on the
product to estimate the effectiveness of the newly proposed ideas.
iv.Evaluation Phase
In the evaluation phase, the costing of the new ideas is done considering the monthly demand
of 5000 pieces. The percentage saving and total per order is also calculated.
 Saving per product = ₹ 1/-
 % saving per product = 25 %
 Monthly demand = 5000
 Actual monthly overall cost = ₹ 20000 /-
 New monthly overall cost = ₹ 15000/-
 Total monthly saving = ₹ 5000/-
Table. 3 Comparison of Existing and Estimated Cost

CONCLUSION
With the proposed design changes, it is expected to reduce the cost for the manufacturing of
the one piece of pencil by 25%. It is a huge reduction in the cost. The saving expected per
order is ₹ 5000 /- which will be utilized for the additional manufacturing of nearly 1700 extra
pencils. Along with the direct monetary benefit, the manufacturing process is also made
simpler which will result in the lesser production time. It will be possible to manufacture
more products with the same given time for a batch. The new design will also give the
product more aesthetic look which will be more appealing to the customers. New ideas are
also expected to achieve more customer satisfaction along with the performance
improvement and cost reduction.
REFERENCES
[1] Annappa, C. M., & Panditrao, K. S. (2014). Application of Value Engineering for Cost
Reduction of Household Furniture Product - A Case Study, 3(10), 16577–16583.
https://doi.org/10.15680/IJIRSET.2014.0310024
[2] Sevillian folding chair. (n.d.), 1–6.
[3] Analysis, F. (2012). Improving Furniture Product through Value Engineering by Function
Analysis Systems Technique ( F . A . S . T .), 1(4), 5–11.
[4] Gardas, B. B., Shimpi, N. R., & Mahajan, S. B. (2013). Value Analysis for a Mumbai
Local Train : A Case Study, 3(6), 1–3.
[5] Rohilla, K. (2017). Implementation of Value Analysis in an Indian Industry : A Case
Study, 12(1), 33–48.